By Monica Eaton Cardone, Co-Founder & COO, Chargebacks911
The 2020 holiday season is now behind us. Everyone in the card-not-present retail space is probably looking forward to a bit of relaxation during the slow period in the early months of the year. Unfortunately, when it comes to chargebacks, the main event is just around the corner.
We can think of the first quarter of the new year as “chargeback season.” This is because chargebacks are most common during the 45-to-60 days following a purchase. So, with a surge in purchases in November and December, we can anticipate an accompanying increase in chargeback activity from late January through the beginning of March.
Now, it’s important to distinguish between returns and chargebacks. Consumers are expected to return at least $57 billion worth of merchandise purchased throughout the holiday season, which sounds like a disaster for retailers. It could present opportunities, though; according to the National Retail Federation, 77 percent of shoppers say they are likely to make additional purchases while processing a return.
No one looks forward to returned merchandise. However, a return still beats a chargeback, any day.
Friendly Fraud Attacks Hammering the CNP Market
With each chargeback, a merchant loses a share of revenue, as well as the costs of transaction processing, shipping costs, and any merchandise shipped. They also get hit with an added fee assessed by the bank. Plus, each chargeback filed counts against the merchant’s chargeback ratio, which could carry serious consequences over time.
Criminals anticipate that merchants will be occupied with sales through the holidays, as well as returns in the following weeks. Many try to time their attacks to take advantage of the situation. Of course, not all chargebacks are the product of criminal activity. In fact, 60-80 percent of all chargebacks are probable cases of friendly fraud.
Friendly fraud occurs when the actual cardholder requests a chargeback without a valid reason to do so. It happens for a variety of reasons; buyer’s remorse is a common trigger, as are products or services that don’t match the customer’s expectations. Of course, there is a minority of buyers who intentionally engage in “cyber shoplifting” by making a purchase with the intent to file a chargeback later.
This reliable, annual pattern is nothing new in the card-not-present space. However, the lockdowns resulting from the Covid-19 pandemic have aggravated the matter.
Cardholders will request an astonishing 615 million chargebacks in 2021, breaking the all-time record for the practice.
There’s really never been a better time to operate in the card-not-present space. However, merchants must be able to contend with the threat posed by chargebacks, or else they may see their profitability melt away.
The key here is to identify chargebacks by their unique source. Merchants can’t rely on reason codes to do this, as reason codes could easily conceal friendly fraud. Instead, we have to reckon with the fact that all chargebacks are tied to one of three fundamental sources: merchant error, criminal fraud, or friendly fraud. Each calls for a unique strategy to manage threats.
Threat Source #1: Merchant Error
Any number of missteps in design, marketing, policy, fulfillment, or customer service can lead to a chargeback. Merchants should examine every facet of the business, paying special attention to common chargeback triggers:
- Is customer service contact information easily visible?
- Does every customer inquiry get a prompt response?
- Is live help available across every channel (phone, email, and social media)?
- Is live service available 24 hours a day?
- Are the terms of service fair and comprehensive?
- Is all necessary paperwork submitted in a timely fashion?
- Are customers informed about what to expect in terms of shipping?
- With recurring charges, does the merchant send advance notice before charging the card?
- Do product descriptions give an accurate picture of what customers should expect from goods?
Threat Source #2: Criminal Fraud
This one is self-explanatory. Criminals can use a variety of tactics to pull off fraud attacks, including account takeover, identity theft, and synthetic fraud (just to name a few). Often, the first sign merchants have that they are the target of criminal fraud is a chargeback filed by the legitimate customer who gets a bill for goods they never received. Merchants can reduce their risk by adopting a comprehensive, multilayer fraud management strategy.
A good strategy employs multiple complimentary tools, including CVV verification, address verification, geolocation, velocity limits, fraud blacklists, and more. These should also be backed by fraud scoring, which can develop a detailed risk profile for each transaction, allowing for simple, up-or-down decisioning.
Threat Source #3: Friendly Fraud
There are some steps merchants can take to manage friendly fraud. For instance, using delivery confirmation for big-ticket items can help provide greater accountability. Also, ensuring that the billing descriptors appearing on customers’ statements are accurate and that they include a brief product description, plus the merchant’s name and contact information, can help customers identify purchases. That said, part of the problem with friendly fraud is that it’s post-transactional; there’s no reliable way to prevent friendly fraud.
The best course of action is to eliminate the possibility of chargebacks resulting from errors or criminal activity, then challenge all remaining chargebacks through the representment process. Of course, tactical chargeback representment is a complex, time-consuming procedure demanding expertise that may be outside the scope of the average merchant. In these cases, we always recommend seeking help from a third-party chargeback management service.
Post-Holiday Chargebacks are Coming
Chargebacks are going to threaten merchants in most verticals throughout the first months of the year. Post-holiday chargebacks are the reality of operating in the card-not-present space. That doesn’t mean they need to be written-off as a “cost of doing business,” though.
With effective planning and a solid chargeback strategy in place, merchants have the power to stop chargebacks in their tracks and make 2021 the best year yet for the card-not-present market. Really, they can’t afford not to do so.
Monica Eaton-Cardone is an international entrepreneur, speaker, and author. She possesses more than two decades of experience in the e-commerce space as both a merchant and service provider, and is one of the world's leading experts on payments and consumer disputes. Monica is the Co-Founder and COO of Chargebacks911® (https://chargebacks911.com/), a global risk mitigation firm helping online merchants optimize their profitability through chargeback management. Chargebacks911 has more than 350 employees globally, with offices in North America and Europe.