Chargebacks hitting merchants hard — but they don’t have to

A Javelin Research & Strategy study commissioned by Verifi found that cardholder disputes and chargebacks generated $31 billion in financial losses in 2017, of which $19 billion was borne by merchants. The study also noted that for every dollar in a disputed transaction, merchants and issuing banks incur an additional $1.50 in costs due to demands on technology, personnel and external resources.

Among the most frequent sources of chargebacks are subscription billing models or free trials that incur a charge after the introductory period. These services show higher volumes of chargebacks due to the cardholder’s failure to review the policy, which states that a subscription continues after the introductory period.

Two main factors contribute to the likelihood of a chargeback, explains Monica Eaton-Cardone, co-founder of The Chargeback Company: the cash value of the purchase (how easy it would be to convert the purchase to cash through eBay, for example); and the ease of filing a chargeback (digital transactions are by far the easiest to contest and generally result in an immediate refund to the cardholder).

Card issuers will often write off disputed digital goods purchases because their value is low compared to the cost of initiating a chargeback, notes Ethoca chief product officer, Keith Briscoe. However, that can unintentionally exacerbate the problem as it teaches cardholders to assume they can easily and quickly erase any unwanted or unfamiliar charges for digital goods on their cards simply by disputing them.

“The other unintended consequence of this activity is that with higher incurred losses due to write-offs, card issuers will tighten fraud rules resulting in higher false declines,” he adds. “We have seen that digital goods businesses report some of the highest decline rates.”

There are various tools merchants can use to examine transaction parameters, including device fingerprinting solutions that help determine whether the device used is known to be associated with the consumer, explains Aite Group research director, Julie Conroy. “They can also check that the IP address is consistent with the location of the consumer, or whether the device has a history of being associated with fraudulent transactions,” she adds.

Yet fewer than half of merchants with in-house chargeback teams engage in the disputing process and those who do recover less than 15% of their funds, according to Eaton-Cardone, who acknowledges that identifying fraudulent claims is notoriously difficult.

“Most merchants claim to be unable to tell genuine claims from fraudulent and are reluctant to sacrifice the necessary time and resources to detect and combat chargeback fraud,” she continues. “It is not as simple as putting up extra fraud filters — many fraud filters end up unduly screening transactions or excessively scrubbing, filtering out threats once they have been processed. They don’t stop ‘friendly fraud’ as these consumers are legitimate.”

Merchants need to fight back with the data at their disposal, suggests Eaton-Cardone. “Valid documentation on delivery details, receipts, email communications or confirmation emails, signed contracts and photo IDs all help prove a merchant’s innocence. If a consumer claims to not recognise a transaction on their statement, the merchant can prove that it was them, remind them of what they bought and prove that it was delivered with a signed receipt.”

Conroy says her research has revealed that merchants who make it easy for consumers to contact them (for example, by including a phone number on the payment card statement or having a person answer the phone rather than an automated system) tend to have much lower chargeback rates.