Compliant chargeback cost calculation

Compliant chargeback cost calculation

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Chargebacks are something of a “necessary evil” for any retail business and occur when a customer disputes a purchase or payment. What follows is a predictable pattern: The cardholder contacts the bank to dispute a purchase, his account is credited, and the merchant sacrifices revenue.

“While chargebacks were intended to protect consumers and increase consumer trust, the process has become quite one-sided,” explains Nisha Suwali, business director of international partners at Kount, an Equifax company. “Because cardholders often find it easier to contact their bank rather than the merchant, chargebacks have become commonplace in the e-commerce market. And unfortunately, merchants are bearing the brunt both financially and reputationally.”

Becoming a “high risk” business.

Much of what constitutes direct fraud is beyond merchants’ control, making its prevalence and unpredictable and highly exploitable nature a particularly difficult pill to swallow.

Purchase regret comes with the territory in e-commerce. But the cost of living crisis and the social pressure to keep up with ever shorter trend cycles are also contributing to a notable increase in the number of people “trying their luck”. According to a study by Juniper Research, the total cost of e-commerce fraud will exceed $48 billion (£40 billion) in 2023, up from $41 billion in 2021, with the vast majority being the result of fraud friendly.

If a merchant receives a lot of chargebacks, they may be considered a high-risk business and need to find a payment provider willing to take them on

But whether the disputes are fraudulent or not, the financial consequences of chargebacks are legitimate. “Yes, merchants lose revenue from losing the product or service, but they can also incur fees, penalties, and potential fines from payment processors and card networks, not to mention the operational costs involved in managing the chargeback process,” says Suwali .

In addition to being a time- and labor-intensive process, participation fees remain non-refundable even if a merchant is able to prove that the chargeback was false.

Regardless, if a company’s monthly chargeback-to-transaction ratio is around 1% or more, alarm bells will ring loud and clear for banks. Suwali continues: “When a merchant receives many chargebacks, they may be considered a high-risk business and may even lose payment processing privileges. Of course, this can have a lasting and detrimental effect on business growth.”

For businesses in the UK and EEA, the new PSD2 regulation requires merchants to keep fraud and chargeback basis points low if they want to access exemptions that allow their customers a frictionless experience when shopping online, increasing pressure in an already difficult environment.

It begs the question: What can merchants do to ensure they reduce the number of chargebacks?

A united front

The answer, it would seem, is to adopt a multi-layered approach, starting with strong and direct communication. Suwali stresses that online businesses should have impeccable customer service and a clear refund policy to reduce confusion and encourage customers to approach them with a problem rather than their bank.

By the time merchants receive a chargeback, days, weeks, or even months may have passed, and it is usually too late for the company to resolve the dispute with the customer. While companies can rely on their systems to reduce the risk of chargebacks at the onset of criminal activity, these efforts early in the transaction cycle will not stop chargebacks where customers have intentionally decided to dispute legitimate purchases, says Suwali.

“Fraud is complex and requires companies to be constantly vigilant,” he adds. “There are multiple types of fraud, and each requires different management strategies. What works against criminal fraud may not be effective against friendly fraud.”

He suggests introducing tools that cover the entire transaction cycle, from pre to post authorization, including solutions like Kount’s. The technology can evaluate risk signals such as email addresses, shipping addresses and device IDs to detect and block pre-authorization of fraudulent activity. It is also possible for companies to intercept and deflect amicable post-authorization fraud disputes by communicating directly with the issuing bank and providing real-time data or automated resolutions.

“Although the types of fraud have changed over the years with the rise of online consumerism, the fundamentals of managing chargebacks remain the same. If a merchant does not have a clear view of their data and consumer behavior and is unable to provide evidence to counter a chargeback request, they will find themselves repeatedly impacted, financially and reputationally,” warns Suwali.

Luckily for merchants, card brands are joining the fight against friendly fraud. Visa recently launched Comelling Evidence 3.0, designed to help merchants reduce the impact of chargebacks. The update is based on the premise that if a customer has made other purchases from the merchant in question and those transactions have not been disputed, the ongoing dispute cannot constitute fraud.

Mastercard Collaboration is a further initiative aimed at resolving disputes between cardholders early in the chargeback process, opening a new line of communication between issuers, acquirers and merchants so that disputes can be handled more quickly and with less cost .

For them to work, Suwali adds, merchants will need technology that allows them to collect information from transactions and send the data to issuers in real time. “Data and analytics are key to a good chargeback management strategy. By harnessing the power of data, merchants can pinpoint the cause of chargebacks and resolve issues at the source.”

For a long time it’s been a question of “the customer is always right” and, in a way, the message is valid. However, chargebacks no longer have to be “just a cost of doing business.” Businesses can and must take a stand.

For more information, view Kount’s chargeback management solutions.

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