What You Should Know About Chargebacks
Reduce online payment fraud to sustain the health of your ecommerce business
Anyone who has worked in the world of e-commerce is well aware of what chargebacks are. Simply put, it’s when a customer disputes an online purchase—that they deem to be invalid—and the credit card company issues a refund to the original form of payment.
Seems pretty innocent so far, right? Let’s take a closer look.
You’ve got three players involved in this process: the customer, the retailer, and the bank. Customers, however, have the easiest job here. All they have to do is make a dispute. Then it’s up to the retailer and the bank to hash it out on behalf of the customer.
In all reality, while this may sound like an organized process with well-intended checks and balances in place, chargebacks oftentimes put retailers on the defensive right from the very start, giving them no option but to either accept a dispute or refute it with evidence. And that takes time and effort, which, as you may have guessed, can have a negative long-term impact (and cost) on your business.
Unfortunately, the other downside here is that once customers realize just how easy it is to make a chargeback and recoup their money, there’s nothing really stopping them from doing it over and over again. In fact, they are nine times more likely to do so.
You might as well think of this like a “tipping point” that turns what should normally be considered to be a simple, corrective transaction into a potential source of widespread fraud—something that’s been shown to cost global businesses up to 1.8% in revenue every year. After all, every time a chargeback happens, retailers are charged a fee, regardless of the outcome of the dispute. (And it adds up fast!)
What are the main causes of chargebacks?
There are a number of reasons why chargebacks occur—some can be avoided while others are, for all intents and purposes, out of your control. Here are the most common:
- Returns and Cancelled Transactions: These are, more often than not, the most legitimate chargebacks, either stemming from a customer being unhappy with a product purchased or having a second thought after initiating a purchase.
- Affiliate Fraud: This happens when savvy affiliate marketers allow many fraudulent transactions to happen on their sites in order to boost their own commissions. Typically, they’ll cash out on those commissions before a retailer ever catches on.
- Delivery Issues: A lot of things can happen between the moment a customer purchases something online and when they actually receive it. There could be shipping delays, damaged packaging, products broken upon arrival, the wrong product shipped, and a number of other things that could negatively impact the customer experience and, thus, give them plenty of reason to request their money back.
- Authorization and Processing Issues: These are errors that happen on your payment processor’s side of things—primarily when the processor can’t authorize a transaction — and can be avoided with the right systems and solutions in place to minimize error.
The complete list of why a customer may request a chargeback is actually endless. Some reasons are 100% valid while others skew far into fraud territory. Therefore, generally speaking, we can organize chargebacks into three primary categories:
- Criminal Fraud: Unfortunately, this is something that has likely happened to all of us at some point in time. Here’s the scenario. Someone steals your credit card or gets access to your credit card details, makes a purchase online, has that purchase delivered to them, and then later on, when you’re reviewing your credit card statement, you see an erroneous charge and request a chargeback. In this case, the fraudster gets something for free, you get your money back, and the retailer takes a loss in terms of both revenue and a product that will never be returned.
- Merchant Error: This encapsulates any time a merchant or retailer does not live up to its service-level agreement with customers. Whether packages were lost, incorrect items were delivered, or simply the customer experience was subpar in any way. Obviously, things happen, but it’s up to retailers to ensure that all systems in place can deliver on the same, consistent customer experience with every transaction.
- Friendly Fraud: Since when is fraud ever really friendly? The truth is, it’s not. This is just a nice way of referring to when a customer disputes legitimate charges. In some cases, they may have simply forgotten about the purchase or a purchase was made by someone else (with authorized access to their card) without them knowing it. Then, there are other customers who simply don’t want to pay for an order. The latter is the least “friendly” of this lot.
(Chargebacks911, February 2019)
Why are chargebacks so problematic?
In many ways, you could say that chargebacks are worse than simple fraud. Why? First off, the fees alone really start to add up. In 2018, for example, for every $1 in fraud from online chargebacks, e-commerce businesses lost $2.94. And this delta grows more and more every year.
Additionally, as merchants and retailers incur more chargebacks, banks and credit card companies begin to apply penalties (typically in the form of higher processing fees). While perhaps an increase of 0.5-1% may seem small on paper, that seemingly small increase in fees amounts to less revenue for retailers with every purchase—and, again, that adds up fast.
Furthermore, for merchants that have fallen prey to growing chargeback activity, many credit card companies will either suspend a retailer’s ability to fight chargebacks or, even worse, put them on a chargeback monitoring program. If the situation gets out of hand, they could choose to decline processing payments for that retailer altogether, which gives customers one less payment method to choose from and, thus, negatively impacts the overall customer experience.
Chargebacks, in essence, can become a vicious cycle if not put in check immediately and can also quickly start to eat into a business’s bottom line. Unfortunately, this, too, comes at a time when online businesses will lose up to $130 billion in payment fraud between 2018 and 2023. Therefore, the stakes are high; retailers must nip the chargeback problem in the bud.
Reducing fraud requires the right solutions
There are a number of solutions that can help minimize the risk of fraud and chargebacks. This includes implementing 3D secure, fraud detection monitoring, address verification services, credit card verification code validation, and beyond.
Why try to figure this out all by yourself when you can work with a partner like Nexway that, as your Merchant of Record, already has all of these solutions in place to help you run a more successful, efficient, and profitable e-commerce business?
Don’t try to combat fraud all on your own. Let Nexway help. Contact us today to learn more.
The Nexway Team
