Most business owners know that a high chargeback ratio hurts their profit margins. They just think they can't do anything about it. But what they may not realize, is that only about 20% of chargebacks filings are because of actual theft and use of stolen credentials. However, those numbers have been increasing especially for companies that make it easy for the fraudster to get their foot in the door.
The truth is, more than 80% of the chargeback claims filed are attributed to “Friendly Fraud”. This means that your opportunities for chargeback prevention begin with your own customers.
True card-not-present fraud numbers are increasing, that’s coupled with a rise in consumer abuse of the chargeback process. Because of this, it's more important than ever to take inventory of where your company lies. Once you know your chargeback ratio, you can better evaluate what needs to be done. Then you can create a proactive strategy to manage and reduce your company's fraud incidents.
In Part 1 "Consequences of High Chargeback Ratios", we talked about what a merchant's chargeback ratios are. We also explained how a high ratio can potentially affect your business for the worse.
Here, we're going to continue that discussion by diving into the various ways merchants can fight back. We'll learn what steps you can take to help stop chargeback incidences before they happen. And we’ll address how to manage the ones you can’t avoid.
Reduce your chargeback ratio by disputing illegitimate claims.
Unfortunately, disputing a chargeback claim is a tedious process that takes not only time (about 2 hours per incidence) but also quite a bit of money. However, it is still a very important part of managing your business.
It’s critical that merchants make the effort to look into their chargebacks. Merchants must determine which ones are legitimate and which are likely a case of friendly fraud. Then, take the time to dispute the charge back claim when you believe the charge was processed for a legitimate purchase.
Merchants must be able to present what the bank considers “compelling evidence” in order to dispute a charge back. Fortunately, most of the “evidence” is automatically collected with each payment transaction. The bank uses this information to help determine if a charge is for a legitimate purchase. Because this type of information also helps to flag a purchase that is potentially fraudulent.
Every Merchant should keep detailed records of all transactions.
Records of the purchase should include any, and all information that you can acquire about the transaction. Keep a detailed merchant receipt, including purchase time and date, and any previous purchase history information you may have from the customer.
There should be a detailed description of the goods or services, including proof of delivery date. And for virtual projects, date and proof of download. Some POS systems may be configured to gather pertinent information during payment transactions. POS software can record internal and external data. This data can include IP addresses, device ID, email and billing addresses, and geolocation of the cardholder.
This way, a merchant could potentially prove that the customer made a purchase from a laptop at the cardholder's address. This is very helpful in proving that the purchase did, in fact, start at their address, for instance.
Keeping detailed records and tending to chargeback claims in a timely manner gives merchants support they need to reduce lost income. But it does not lower your total chargeback incidents. And that is the number both the bank and the card brands are concerned with.
Fortunately, there are also a few simple steps merchants can take to reduce chargebacks before they happen.
While it is important to catch fraudulent situations while they're happening, it's perhaps more significant to keep the fraud from knocking on your door in the first place. Addressing security protocols can help you achieve a more balanced chargeback ratio.
A good fraud prevention strategy uses both technical and human elements to reduce the possibility of a chargeback. It is possible to recognize anomalies in purchases in addition to recognizing real customers. This helps to differentiate between a real purchase and a possible fraudulent purchase. And it can all be accomplished by coupling in-house chargeback prevention strategies, software, machine learning, and collaboration between fraud experts and merchants.
Friendly Fraud chargeback prevention strategies start at home on your own website.
To lower your chargeback ratio, you must begin with chargeback prevention. As we know, friendly fraud stems largely from customer satisfaction. With that in mind, there are some proactive steps that help reduce the chance a customer will be unhappy.
The first task begins with both your product and product descriptions. Often, the customer commits “friendly” fraud because they feel the product is unsatisfactory or not accurately represented on the website. Be as detailed as possible, but also be thoughtful when creating product descriptions.
Make sure the customer knows what they're getting and gets what they thought they were getting. If your product is a download or service, make sure it delivers what it promises.
Lack of communication is a large contributor to consumer initiated chargebacks.
Adopting features that provide more transparency in the process is an easy way to garner customers’ trust. It’ll also help to reduce the chance they'll be frustrated with the process.
Clear and continuous communication lines between merchants and customers throughout the purchase and delivery process help in numerous ways. Not only does it create a paper trail, it also goes a long way to keep customers from disputing a charge.
Consumers can actually forget they ordered a product. Or, they don't recognize the name of the business by the time they get their statement. Providing them with regular updates about the status of an order can reduce friction as well as optimize the entire purchase process.
Be sure to provide customers with an order confirmation, tracking number, and delivery time. Merchants can also empower their customers to log in and see what's happening in their own accounts.
Powerful tools help detect fraud as well as aid in chargeback prevention
Merchants need to utilize the powerful tools available to them from Visa / MasterCard to help reduce fraud and flag potentials. The card brands designed tools such as CVV and AVS to help merchants detect potentially fraudulent transactions.
CVV stands for Card Verification Value (the 3 - digit code on the back of the card). Implementing CVV requirement helps to prove the card actually exists and was not virtually duplicated. Address Verification Service, or AVS, is a feature that verifies the customer's billing address. It compares the billing address on the file for the card with the one that is being used by the purchaser. Both features help flag a potential fraud situation before it happens.
Design subscriptions services and recurring billing with integrity.
With subscription services, and therefore recurring billing, take care to make policies painfully clear to the consumer who's signing up. Display boldly that the purchase will be a “recurring transaction”. And don't forget to include the frequency of the transaction as well.
Merchants also want to display their terms for customers prominently. You don’t want to make your terms too difficult to find on your website. If you do, customers could use that to say they didn't know they were signing up for recurring billing.
Another transparency tactic is to place a checkbox on the purchase page for customers to “agree” to the terms of purchase. Only once the customer has checked the box, and essentially agreed to the terms of service, will the purchase finalize. This way, it's much more difficult for customers to say, even psychologically, that they didn't know it would be recurring.
Your company name and billing descriptor must be in alignment.
One of the most common codes applied to a chargeback filing is “customer does not recognize the merchant”. This happens when the cardholder gets their statement and cannot recognize the merchant’s descriptor on their bill. This is so avoidable it's almost ridiculous. But, unfortunately, it happens all the time.
Sometimes, merchants use a different DBA than their store name and the customer doesn't recognize it. Merchants often make the mistake of thinking they don't need website URLs or a customer service number to appear on the customer statement. This only adds to a customer's feeling that it could be a fraudulent charge.
The more merchants are transparent about who they are and how to get a hold of them, the more legitimate it feels for the customer. It also gives them the opportunity to reach out directly before deciding to make a chargeback claim.
Since friendly fraud is the largest contributor to your chargeback ratios, these steps will help prevent this type of fraud. And, in the end, have a positive impact on your overall chargeback ratios.
Don’t go it alone. Tap into the expertise and knowledge of a good merchant service provider to help with chargeback prevention.
Lastly, it is important to make sure you work with a merchant processor who is educated in the ins-and-outs of high-risk processing. There are advantages to working with a payment provider with the knowledge and experience to advise you on how best to manage chargebacks for your particular business model.
A merchant service provider with an intimate understanding of the inner workings of the financial industry is a great partner. Their knowledge allows them to better help you keep track of the continuously changing and updating Chargeback Rules and Regulations.
Merchants will need to do their part as well. Merchants should audit transactions for red flags for potential chargebacks. Keeping an open line of communication between you and your processor can help make the chargeback process a bit less painful too. Some chargeback disputes qualify for automatic representment by the acquiring bank - the bank who holds the business’s merchant account. So check with your processor and make sure the acquiring bank is involved and determine if they are possibly already handling it.
Every business is different, their risk is different, and a strategy should be tailored to each company's specific needs. There's no one-size-fits-all when it comes to chargeback management.
Managing chargebacks requires a combination of expertise and tools to create the right strategy. Beyond that, regularly survey the reporting information you've been tracking and storing in order to gauge performance.
To help create the perfect chargeback management strategy for your particular business, give the ETA Certified Payments Professionals at Bankcard International Group a call today.