Chargeback Prevention

FAQ: Ethoca Chargeback Alerts

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Table of Contents

  1. What are the effects of chargebacks?
  2. What is a chargeback prevention alert?
  3. What is Ethoca?
  4. What are the benefits of chargeback alerts?
  5. Is Ethoca the only company that provides these notifications?
  6. Why let a chargeback management company handle alerts for you?
  7. How long does it take to set up chargeback alerts?
  8. How many chargebacks can be prevented by alerts? 
  9. Are chargeback alerts the best way to prevent chargebacks?
  10. How much do chargeback alerts cost?

Merchants should always be looking for ways to reduce the number of chargebacks they get. Whether they're legitimate or not, excessive chargebacks can get a merchant cut off by their bank or payment processor. Even simple disputes that a merchant could easily resolve directly with the customer, if given the opportunity, can turn into chargebacks that have a lasting negative effect on a business.

Ethoca is a company that works to reduce chargebacks by intercepting cardholder disputes at their point of origin with the issuing bank, sending a chargeback prevention alert to the merchant, and giving them a chance to resolve the dispute before it moves on to the chargeback stage.

What are the effects of chargebacks?

In addition to the costs of the chargebacks themselves and their associated fees, all the major credit card networks track the ratio of chargebacks to transactions incurred by the merchants they work with, and may impose penalties on merchants with too many chargebacks.

If the ratio exceeds a certain threshold and stays there, the merchant may be added to a program like the VDMP. The merchant will be charged additional fees for each chargeback they receive, as well as a large monthly fee that increases for each successive month the merchant is in the program.

New call-to-actionTheir acquiring bank may also take various actions, including closing their merchant account, restricting their monthly processing volume, holding funds in reserve, and even listing them in a Terminated Merchant File (TMF).

Acquiring banks may even start taking these measures before a merchant reaches their threshold if it looks like they're trending in the direction of becoming high risk.

These thresholds may vary depending on the type of merchant. Smaller stores might be treated differently than big online retailers, for instance. Each credit card network also has its own bar for measuring which merchants are high-risk.

Merchants whose accounts are closed due to a high chargeback ratio may be unable to open a new merchant account with a different bank, leaving them with expensive, high-risk payment processing companies as their only option.

Unfortunately for merchants, "friendly fraud" chargebacks are becoming more common, as customers initiate chargebacks with their banks for the sake of convenience rather than attempting to resolve their issue with the merchant directly first. These customers may not realize it, but these chargebacks can have serious consequences for merchants who lack any type of chargeback protection. That's where chargeback alerts come in.

What is a chargeback prevention alert?

Chargeback prevention alerts are services that notify merchants when a cardholder has opened a dispute regarding one of their transactions, allowing the merchant to step in and resolve the issue with the customer directly and thereby prevent a chargeback.

Consider a chargeback as it happens. The cardholder approaches their bank claiming that a charge on their account is fraudulent. The bank investigates, and if they find sufficient cause, they will initiate a chargeback and reverse the transaction.

Banks that are part of a chargeback alert system will notify the alert provider before taking that final step.

The alert provider then notifies the merchant. The merchant can then stop fulfillment of the order if it hasn't already been completed and issue a refund to the cardholder, negating the need for a chargeback.

For merchants, a refund is almost always preferable to a chargeback. Refunds don't come with additional fees or threaten your merchant account. However, if the merchant has evidence that the cardholder's dispute is illegitimate, they can still choose not to issue a refund and instead fight the chargeback through representment.

What is Ethoca?

Founded in 2005 and based in Toronto, Ethoca is a global provider of technology that works with issuers and eCommerce merchants to prevent fraud, recover lost revenue, and prevent chargebacks.

Ethoca's network allows them to bring cardholder problems to merchants' attention in real time, sending chargeback prevention alerts that essentially hit the "pause" button on the chargeback process, giving merchants the chance to resolve issues without involving the acquiring bank (as seen below).

Ethoca Chargeback Alerts


What are the benefits of chargeback alerts?

The most important benefit of chargeback prevention alerts is that they give merchants a chance to deal with customer disputes in a way that doesn't count as a chargeback in the eyes of the card networks and acquiring banks.

By issuing a refund directly in response to a prevention alert, the merchant's chargeback ratio remains unchanged, and no chargeback fee is assessed.

If a merchant gets a prevention alert for a dispute that they want to fight, they can decline to issue a refund, and the request will proceed as a chargeback.

Ethoca charges a fee for every alert they issue, regardless of how the merchant opts to deal with the alert. While the fees for chargeback prevention alerts can add up, they can ultimately end up saving merchants money by helping them avoid the various costs associated with exceeding their chargeback threshold.

Is Ethoca the only company that provides these notifications?

The other major company that provides prevention alerts is Los Angeles-based Verifi. Both companies have a large network of issuing banks that will tip them off to cardholder disputes before they become chargebacks, and they are constantly working to expand their networks and bring more major banks into the fold.

There is considerable overlap between the two networks, but there are differences. Ethoca covers more Canadian, European, and Asian banks, while Verifi's network has more banks based in the United States.

Both companies charge a fee any time an alert is sent out, and they both require merchants to take action on an alert within 24 hours of receipt. If an alert isn't handled within that time frame, it goes through the full chargeback process, and the merchant is still required to pay the alert fee.

Download your copy of An Introductory Guide to E-Commerce Fraud PreventionSigning up for both Ethoca and Verifi gives merchants the broadest possible range of bank coverage, but because of the overlap between networks, merchants will get lots of duplicate alerts and will have to pay fees to both companies.

Whether to sign up with both companies or just one depends on where your customers are located and how important preventing chargebacks is for your business.

Why let a chargeback management company handle alerts for you?

In addition to signing up with Ethoca or Verifi directly, merchants also have the option of obtaining these services through a third-party provider such as a chargeback management company, which can integrate these alerts into the other services and software it provides. Here are a few reasons merchants might want to consider this option:

  • Working with a chargeback management company that is an authorized reseller of Verifi and Ethoca prevention alert programs means that you can get coverage from both services through a single provider.
  • When you hire a chargeback management company, you have a dedicated team that responds to chargeback prevention alerts within the required time frame. That way you never have to worry about failing to respond in time and having to pay for both the alert and the chargeback.
  • Some chargeback management companies provide an intuitive dashboard where you can manage the alerts from different networks in one portal rather than logging in to multiple systems to track your prevention alerts.
  • A chargeback management company may even offer a 100% chargeback prevention guarantee when a prevention alert is handled. This means if an alert, after issuing a refund, still turns into a chargeback, the management company will refund 100% of your alert fee.
  • A chargeback management company may charge the same fee that is charged by the alert networks themselves, providing these additional benefits at no additional cost.

How long does it take to set up chargeback alerts?

The time it takes to get set up with a chargeback alert provider depends on whether the merchant is already in business and whether they're setting up alerts for the first time or just switching providers:

  • New merchants:  45 – 60 days
  • Existing merchants setting up alerts:  20 – 30 days
  • Existing merchants switching alert providers:  No delay

To successfully enroll in the prevention alert network, the merchant must provide:

  • Merchant/Business name
  • Official registered address for the business
  • Merchant account descriptor (customer credit card statement name)
  • Merchant account number (the ID provided by your payment processor)
  • Access to merchant’s sales system (to issue refunds and resolve alerts)

How many chargebacks can be prevented by alerts? 

There are a number of factors that can influence how many chargebacks will be intercepted by prevention alerts. Among them:

  1. Transaction count: The more transactions, the better the coverage.
  2. Customer bank location: United States customers are more likely to be covered by the network than those overseas.
  3. Years in business: Established businesses can have better coverage than new merchants.

Here are some estimates based on our own internal data analysis:

 

Verifi

Ethoca

Physical Goods

21%

17%

Digital Goods

41%

30%

Digital Service

17%

33%

Subscription Industry

19%

14%


Are chargeback alerts the best way to prevent chargebacks?

Prevention alerts may be helpful, but, in our opinion, they are only a short-term solution. The best course of action is to address the root causes of your chargebacks with a comprehensive chargeback management plan.

Participating in prevention alerts can become costly over time. Here is how the cost of preventing a chargeback through prevention alerts breaks down:

Transaction Amount

$100.00

Cost of Goods

$25.00

Fulfillment Costs

$8.00

Marketing Cost

$25.00

Processing Fee

$3.50

Operations Fee

$10.00

Prevention Alert Fee

$40.00

Total Cost

$211.50

(Over 2x the cost of the Transaction Amount)


By addressing the real causes of chargebacks, you will save your company money in the long run. Follow these five basic steps to reduce the occurrence of chargebacks:

  1. Offer realistic expectations for your products and services.
  2. Provide excellent customer service by responding to phone calls and emails as soon as possible.
  3. Provide customers with terms of service and refund terms before purchases are made.
  4. Make it easy for customers to get in touch with customer service and to cancel their orders or subscriptions.
  5. Focus on the true causes of chargebacks, then deal with any internal issues that trigger them.

Prevention isn't the only route you have, though. If you feel that a chargeback is due to friendly fraud, you can recover the transaction amount by working with a chargeback management company to fight the chargeback. These companies will bring the latest tools and expertise to bear to help you fight against friendly fraud and protect your revenue.

FAQ

How much do chargeback alerts cost?

The cost of prevention alerts varies based on your individual alert count. Generally speaking, the cost ranges from $35 to $40 per alert received.


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Get the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes