Peering into the chargeback black hole

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Having chargebacks have been a consistent thorn in merchants' sides for much of the past decade — and to make matters worse, while 82% of merchants say they actively dispute chargebacks, 24% have no idea what their win rate is.

There are programs to help merchants handle excessive chargebacks, but only 10% are enrolled in them, according to new research from fraud and risk management technology providers Kount and Chargebacks911.

"That's like saying I am losing 25% of my revenue and I don't know where," said Don Bush, vice president of marketing at Boise, Idaho-based Kount. "That is just terrible, and somewhat irresponsible."

But chargebacks remain a formidable nemesis for e-commerce or telephone-order merchants as they consistently struggle to determine what an optimal level of chargebacks should be at their companies, how to manage that once it is established, and how to prevent chargebacks from occurring in the first place.

In compiling data for the first time on the effect of chargebacks, Kount surveyed more than 1,000 e-commerce merchants, with 70% from the U.S. and the rest from other regions worldwide.

Kount's data indicates that of those companies saying they actively dispute chargebacks, one-fifth said they win less than 15% of their disputes and more than a third said they win less than 30%.

It's those kinds of numbers that discourage merchants from disputing chargebacks for card-not-present claims because it takes time and precision in how to present a dispute.

"Re-presentment has always been a pain in the rear for these folks because the rules for doing so change annually," Bush said. "You need to know what is good evidence and what is not acceptable evidence."

It is also common for the rules to change in presenting a dispute, Bush added. As occurred for 2018, the different coding categories for fighting a chargeback claim can change.

"There used to be dozens of codes, and you had to know those and apply them correctly, or your dispute is rejected by the bank," Bush said. "The coding choices have been narrowed down now, but you still have to know them and how to apply them."

Chargebacks continue to come from the same sources as in the past for the most part. Forty-eight percent of merchants said their chargebacks mostly stemmed from common transaction fraud, while 28% cited friendly fraud as the main source. Another 12% said merchant error was a main cause, while 7% cited account takeover.

When considering the most challenging aspects of handling a chargeback, 59% mentioned the process of disputing the claims, while 58% mentioned not being able to identify friendly fraud.

Friendly fraud — a disputed transaction coming from someone with proper access to a card account — is on the rise, because it comes in various forms that are difficult for merchants to spot and stop, Bush said. It can be criminal fraud made to look "friendly," or an innocent mistake, or it can be driven by company policies that won't allow refunds when consumers find the same product at a cheaper price.

"People will just call the bank and say they didn't order the product or service, have it taken off their card, and then go get it at the cheaper price," Bush explained.

Sometimes, it is true friendly fraud occurring within a family. Someone in the family may order some digital games or other products on a parent's credit card. The parent has no idea what it is when seeing a card statement, and asks for the charge to be taken off the bill.

Merchant error comes into play when a billing statement does not clearly define the product being purchased or the company making the sale. "If the statement doesn't say who the company is, a consumer will call the bank and ask that it be taken off, even though he may actually have bought the item," Bush said.

Nearly 80% of merchants selling only physical goods have set their target chargeback rates, or what they consider their acceptable levels, at or below 0.5%. More than half of those set the rate lower at or below 0.1%.

By comparison, less than two-thirds of merchants selling digital goods or services target a chargeback rate below 1%. Only 35% have their goals set at a chargeback rate of, or less than, 0.1%.

Setting an acceptable rate is important because it is the foundation of any fraud calculation a merchant might use in managing or cutting back losses, Bush said.

"Companies that do their homework on their margin per order, average order size, or volume of orders would be able to more easily equate losses due to chargebacks," Bush said.

If a company makes $5,000 on 100 orders, but had chargebacks on 20 of those orders, it would lose the money from the order, plus pay chargeback fees or maybe fines, Bush said. "If you end up giving $2,000 back, you've lost 40% of your potential revenue because of chargebacks," he added.

Too many merchants could be in that sort of position, but don't even realize it, Bush said.

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