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.
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.
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.
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.
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).
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.
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.
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.
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:
To successfully enroll in the prevention alert network, the merchant must provide:
There are a number of factors that can influence how many chargebacks will be intercepted by prevention alerts. Among them:
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% |
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:
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.
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