We are going through an unprecedented time with the COVID-19. It has affected so much more than our health, including how we work, study, play, eat and shop. It has also had a huge impact on our economy, including everything from our favorite restaurants and retailers to subscription companies and payment processors. As merchants and other subscription companies navigate this new world, they are getting hit with chargebacks from friendly fraud (when a consumer requests a refund from their bank rather than working with the merchant to resolve a situation regarding their purchase) and true fraud (when someone intentionally commits fraud through identity theft).
When a customer requests a chargeback, the cost is not a dollar-for-dollar comparison. According to recent studies, a merchant can lose an average of $2.94 in revenue for every dollar lost to fraud. Why? Because they lose more than just the sale. They also lose:
- The value of the product or service because it is not returned to the merchant
- Chargeback fees levied by the bank
- Shipping costs
- Transaction processing fees
- Time and money to dispute the charges
To find out what’s happening with chargebacks and why they are so costly for merchants, we interviewed Monica Eaton-Cardone, COO and Co-Founder of Chargebacks911.
Monica, can you tell us more about “cardholder not present” (CNP) fraud? How does that type of fraud occur and how is it different from friendly fraud?
CNP fraud refers to “card-not-present fraud.” It’s a channel for a variety of different schemes. For instance, a fraudster could use stolen cardholder information to complete an online purchase, or maybe hack into a registered user’s account on an eCommerce site. They are two totally different tactics, but both are CNP fraud.
What separates CNP fraud from friendly fraud is that, with CNP fraud, you have someone who deliberately engages in illegal activity. With friendly fraud, the person ripping you off may not even realize they did anything wrong. The cardholder filed a chargeback and might have really believed they deserved to get their money back.
What types of merchants are mostly likely to be at high risk for chargebacks?
First, I need to point out that operating in the card-not-present space at all is going to increase your chargeback risk, at least to a certain degree. That said, the real “high-risk” merchant categories include businesses like gaming, dating sites and online travel agencies. There are also specific sales models and business practices that will increase your risk; for example, direct marketing and subscription services are always going to be at a higher risk for chargebacks.
What is the difference between a debit card chargeback versus a credit card chargeback?
From the merchant’s end, the process is mostly the same, at least as far as how the chargeback is managed. The key difference is the level of risk facing the cardholder. With a credit card, the buyer’s liability is limited to no more than $50. With a debit card though, the cardholder could be liable for up to $500 in losses if they report the fraud within 60 days. Past the 60-day mark, there’s no legally mandated limit.
How has the coronavirus pandemic impacted the chargeback climate? Has it improved, gotten worse or stayed the same?
The COVID-19 outbreak really made things a lot worse, as far as chargebacks are concerned. We’ve already seen a 23% increase in filings since the crisis began, and we expect to see those figures continue to rise as the crisis drags on. The situation is especially bad for sellers in hard-hit verticals like travel and entertainment, where they could see chargeback filings multiply like crazy; one of our clients in this space has already reported a 300% increase in disputes!
On top of that, we have ongoing challenges with supply chains, delivery delays and overwhelmed customer service teams, just to name a few. These could cause trouble for merchants even long after the worst of the outbreak is over.
What has changed?
We’ve seen some response from industry players. Visa, for instance, moved to offer better monitoring of issuers who file chargebacks without conducting due diligence. They are also suspending their dispute and fraud monitoring programs for the time being in travel and entertainment MCCs.
Other card schemes are making similar moves as it becomes apparent that this will have broad ramifications in the payments space. That’s a start, but we’re going to need a much broader, more comprehensive and long-term solution.
How do these changes impact merchants? Consumers?
These changes offer much-needed relief, so they’re a net-positive development for online merchants. There’s still more to be done, though; the measures are only temporary, and are limited to those businesses in the most heavily impacted verticals. For their part, consumers really shouldn’t notice much of a change. These policy adjustments should only affect invalid disputes, meaning that no consumer with a legitimate complaint should have any trouble recovering their funds.
It seems likely that with travel restrictions in place, vacations and business trips have been postponed or canceled altogether. Have airlines, hotels and other travel-related merchants been willing to offer refunds to help reduce chargebacks?
Yes, I would say most are attempting to return money to consumers. In many cases, they are offering substitutes for cash, such as credits valid on future travel. I think that this is a great compromise. Given the situation, a lot of these merchants are facing so many cancellations and disputes, they may not have the cash on-hand to cover them. Under the rules published by Visa, credits like this are acceptable as an alternative to a cash refund.
Your website shows that only 18% of merchants win most chargeback disputes. Why is that number so low?
It is the result of a few converging trends. First, there is the year-over-year increase in chargeback volume, and we can attribute much of that to friendly fraud. Then there’s the fact that many merchants simply don’t bother disputing chargebacks. They can’t distinguish friendly fraud from legitimate chargebacks, or don’t see it as worth the time and energy necessary to do so.
Individual merchants who do engage in disputes are still fighting an uphill battle. They’re trying to investigate and identify the true source of each chargeback but have limited data insight. They are really fighting with one hand tied behind their back on this front.
How can merchants reduce the number of chargebacks?
This is one of the really core questions. Unfortunately, there’s no simple, straightforward solution we can apply across the board.
First, merchants need to be able to distinguish between the three fundamental chargebacks sources: merchant error, criminal fraud, and friendly fraud. Each type of chargeback demands a different approach. For instance, you need a multilayer strategy for criminal fraud, incorporating a variety of tools like CVV verification, 3-D Secure, and geolocation. With merchant error, businesses can adopt best practices to optimize their customer experience, order fulfillment, and service channels.
Friendly fraud is more difficult though. It’s post-transactional, meaning it appears to be legitimate right up until the moment the customer files a dispute. For friendly fraud, the best approach is to engage in tactical representment, which will hopefully provide a disincentive for future friendly fraud attacks.
What is the best way to educate consumers about the risks and costs associated with friendly fraud?
We need to have an open, frank conversation about the best ways to reach consumers, but we’ll need the cooperation of banks and card networks to do it. Many financial institutions have knowledge bases on their sites where they include materials for customer education. This would be a prime opportunity to offer educational materials direct to cardholders. Banks could also be more transparent about the chargeback process with consumers. When a customer wants to file a dispute, the bank could clarify to the customer what that means, as well as the potential ramifications.
What is Visa’s COVID-19 dispute monitoring program?
With the COVID-19 Dispute Monitoring Program, Visa is trying to help relieve the pressure imposed on some of the most at-risk business verticals. The program imposes clear guidelines for issuers in order for a dispute to be considered valid, and any invalid disputes will be rejected. Plus, issuers who file excessive invalid disputes could be forced to pay additional fees and may even lose the right to file disputes under certain reason codes.
It’s important to note, though, that this is a temporary measure that only applies for the time being, and it only works for transactions in select MCCs. The program is limited to transactions involving airline, entertainment, lodging, transportation, and travel services merchants.
Is Mastercard doing something similar for its merchants?
Mastercard has not yet cleared any material on their COVID-19 dispute response for publication. However, I know that they’ve taken some similar measures.
All the card schemes recognize that this is a hard time for everyone. They want to make things as fair as possible, and that some processes that work under normal circumstances have to be thrown out the window when a crisis emerges.
What is Chargebacks911’s role in merchant chargebacks? Where does your company fit in?
Chargebacks911 occupies a central role in the chargeback space. First, we work on behalf of merchants to help them prevent disputes and fight illegitimate chargebacks, leading to a long-term net reduction in dispute issuances. We also work with acquirers to provide chargeback mitigation services for their clients.
In addition to our work with merchants and acquirers, we’re also involved in conversations with card networks about changes to the chargeback process. We are advocates for change in the payments space, and we take our role as lobbyists for a modern, standardized chargeback process seriously.
Once the pandemic is over, do you foresee chargebacks returning to their previous state, or getting better or worse?
There will be some temporary relief once the worst of this crisis passes. However, we’ll never go back to things as they were before COVID-19. Chargebacks have been on a consistent upward trend for years. And, with widespread adoption of digital sales channels, you can bet that chargeback abuse is going to accelerate. That’s why it’s more important than ever that merchants take chargeback management seriously, especially in the most vulnerable, high-risk verticals like subscription sales.
What is your best piece of advice for subscription merchants to prevent chargebacks?
The most important thing is to be transparent. Disclose to the customer up-front that you’re going to store their payment credentials and explain how that information will be stored and used. Clarify to your customer what to expect from you before completing the initial sale and make your terms of service clear and easy to find. Also, be sure to identify any transaction using an appropriate billing indicator, so that customers don’t see your charge on their statement and suspect fraud.
Chargebacks also recommends that merchants take the following steps to prevent fraudulent activity:
- Notify customers before charging for recurring payments like subscription fees
- Making sure the billing descriptor is easily recognizable, so a shopper doesn’t file a claim because they don’t recognize the charge on their statement
- Using delivery confirmation
- Keep a well-organized paper trail of all transactions
- Communicating regularly with customers
- Giving refunds and allowing cancellations as soon as they’re requested
- Be vigilant in watching for suspicious behavior
For information about chargebacks, visit Chargebacks911.com.