Ecommerce and Chargebacks: How to Manage and Prepare to Scale

This is a guest post by
Scott Stone, CMO at Chargeback.

Ecommerce merchants, from brand-new to industry veterans,
experience chargebacks. In 2016, ecommerce will lose $6.7
billion to fraud, according to data from LexisNexis and
eMarketer. Chargeback fraud and friendly fraud represent 71
percent of those losses.

Unfortunately, many of these same merchants are unaware
or undereducated in regards to what chargebacks are, what they
mean for business operations, and the opportunities they create
for revenue recovery.

Chargeback Basics

Every major credit card network guarantees zero-fraud
liability to its cardholders. Chargebacks are simply a
manifestation of these guarantees. A
chargeback is a transaction reversal meant to
serve as a form of consumer protection from fraudulent activity
by both merchants and identity thieves.

To initiate a chargeback, cardholders file a dispute with
their issuing bank. The merchant’s bank account is debited the
amount of the transaction right away and the cardholder is
credited the amount. If the merchant wants that money back,
it’s up to them to provide compelling evidence to disprove any
fraudulent activity associated with the transaction.
Ultimately, it’s up to the card network to rule either in favor
of the merchant or the cardholder.

Chargeback Ratio

The entities keeping a close eye on merchant chargeback
ratios are the card networks. Visa, MasterCard, American
Express, and Discover are looking for proportionate rates that
sit at or below 1 percent for a set duration. A 1 percent
chargeback rate is the industry-wide maximum acceptable
ratio.

If your chargeback ratio exceeds that 1 percent, the card
networks pass along heavy penalties and can shut down your
account. In order to determine a chargeback ratio, divide the
total number of chargebacks by the total number of transactions
during a monthly period.

Chargeback Reason Codes

Each chargeback processed by the cardholder’s issuing
bank is assigned a reason code. Chargeback reason codes
accurately represent the grounds for the cardholder’s dispute.
There are 151
reason codes across the four major card
networks. Millions of disputes processed by
Chargeback show the average breakdown of all reason codes used
in the table below.

Each business will see a unique breakdown of reason
codes, based on industry. However, if the breakdowns you see
begins to deviate from the normal distribution, it’s an
excellent indicator that some action needs to be taken.

Product or Service Reason Codes

Shipping and product misrepresentation comprise the two
main subsets of product and service reason codes. With
shipping-related codes, an increase in volume could point to
distribution partner issues and shortcomings in consumer
communication or tracking capabilities. Regarding product
misrepresentation, a large volume of reason codes here should
lead to audits of product descriptions and specifications
provided on the website.

Cancel Recurring Billing Reason Codes

A disproportionately high volume of cancel recurring
billing reason codes is a clear indicator that customer
communication regarding payments and billing requires
attention. It’s critical to honor all consumer requests for
termination of billing as well as communication regarding
upcoming billing cycles.

Fraud or No Authorization Reason Codes

If you field a disproportionately large amount of fraud
or no authorization reason codes, there could be an issue with
inadequate front-end fraud solutions. On the other hand, if
fraud or no authorization reason codes suddenly disappear
completely from the chargeback landscape, it could indicate
overly-strict front-end fraud filtering. The danger this
presents is the possibility of blocking legitimate transaction
and alienating real customers.

Merchant Options

You can choose whether or not to respond to a chargeback.
Unless  you participate in early alert notifications or
are enrolled in a similar program with the card network, you
aren’t notified of a chargeback until your monthly statement.
After you’re notified, you can decide whether or not to respond
to (i.e. ‘fight’) the chargeback.

Some merchants will only respond to chargebacks over a
specified transaction dollar amount. While others will only
respond to chargebacks coded under all reason codes other than
fraud or no authorization.

Fraud Reason Codes > Response > Loss > True
Fraud

Fraud Reason Codes > Response > Won >
Chargeback or Friendly Fraud

Non-Fraud Reason Codes > Response > Won >
Chargeback or Friendly Fraud

Non-Fraud Reason Codes > Response > Loss >
Product or Service Issues

Responding is the only way you will ascertain the true
source of the chargeback itself. While chargeback responses
result in one of two outcomes (win or loss), one of three
potential points of origin is revealed (other than product or
service issues):
true fraud, friendly fraud, or chargeback
fraud.

True Fraud: True fraud occurs when an
unauthorized individual completes a transaction with stolen
payment card information.

Friendly Fraud: Friendly fraud occurs when a
cardholder misuses chargeback rights, but without malicious
intent.

Chargeback Fraud: Chargeback fraud is the
fraudulent request for a return or refund in the form of a
chargeback.

Responding to Chargebacks

If you field a low volume of chargebacks each month, you
can manage responses in-house. Responding to chargebacks
requires looking up the associated reason code, sifting through
card network rules and regulations to determine the required
response materials, collecting said appropriate compelling
evidence, and submitting the evidence to the acquiring
bank.

In order to locate information pertaining to the
transaction and record information relevant to the reason code
provided, you need to access the following data sources:

Payment Service Provider(s)

Shopping Cart Data

Customer Service Portal

Fraud Scoring

Responding to a single chargeback can be extremely
time-consuming for small and medium-sized merchants. For those
who experience a low volume of monthly chargebacks, the time
invested in responses might not be an issue. On the other hand,
if you receive dozens of chargebacks every month and plan on
rapid growth, you should focus on the ability to scale the
chargeback response process.

Scaling Responses

In order to scale the chargeback response process, you
must create a central data warehouse. Here, all data sources
containing information relevant to transactions are aggregated
into one place. An in-house employee can use the central data
warehouse to quickly generate responses from templates crafted
specifically for the processor, reason code, and
product.

Instead of accessing multiple data sources to gather the
data required, the employee simply needs to access the central
data warehouse, locate information relevant to the transaction,
and generate the response. Pure automation of the process is
critical for rapid scaling, but deep developmental knowledge
and resources are needed to create and maintain this
automation.

By improving time spent responding to chargebacks, you
are able to improve the rate of chargeback responses as well.
You’re able to respond to all chargebacks with this approach
and not just those coded under fraud or no authorization reason
codes. This is critical, because as much as 80 percent of all
chargebacks represent chargeback fraud or friendly fraud.
Despite more than half being initially categorized as fraud or
no authorization.

Understanding what chargebacks are, the lagging
indicators they present, and how to scale the response process
ensures you are able to recover the greatest amount of revenue
possible.

Chargeback develops software designed to
help retailers prevent and manage chargeback fraud.