By Monica Eaton-Cardone
As the saying goes, knowledge is power. When it comes to tackling fraud and payment transaction disputes, data is the weapon. But even as chargebacks rise, merchants are not only struggling to stop them, but also are simultaneously straddling a knowledge gap between themselves and their financial institutions (FIs). This gap is leaving merchants without the information and the tools they need to take control of chargebacks and protect their revenues.
If merchants don't have accurate data for representment, they can't identify the origin of chargeback sources and criminal activity, and they waste their efforts fighting the wrong problems. These blind spots prevent effective mitigation of the problem.
Merchants and FIs are being failed by their reliance on disjointed processes, which are not keeping pace with the evolution of payment channels and methods in the ecommerce age. Information that is currently kept segregated and siloed out of sight of merchants could be shared, helping payment ecosystem players to stop chargebacks,
And the widening knowledge gap is leaving space for chargebacks to grow even further. The scale of the problem is frightening—not just in terms of financial loss, but also reputational damage that could hit profitability even further. In 2020 alone, chargebacks were estimated to cost an estimated $130 billion, as reported by Christina Vukova in "61+ Ecommerce Fraud Statistics to Help You Say Safe in 2020," Review 42, Dec.13, 2019. We know that making better use of data is key to solving the problem. So why isn't it being done more widely across the industry? This is not a problem just for merchants to tackle; it affects everyone, including banks and their customers. FIs can play their part by being more proactive in communicating with merchants. What's glaringly obvious to an FI may be shrouded in mystery for a merchant, especially one that's new to ecommerce. Examples include FIs advising merchants on using additional transaction details to improve authorization rates.
The 2021 Chargeback Field Report, (https://bit.ly/3fPai3F) reveals a startling finding that goes right to the heart of the problem: a third of merchants are unable to identify friendly fraud attempts from genuine claims. The report found that although merchants surveyed responded to 43 percent of chargebacks, the average net recovery rate was just 12 percent, hampered by knowledge gaps in the chargeback management process.
This is problematic for several reasons. A merchant's chargeback win rate is indicative of revenue loss and other chargeback-associated costs, along with the merchant's effectiveness at responding to chargebacks. Even if a merchant responds to a chargeback, there's no guarantee they will ultimately recover their funds.
The biggest chargeback blind spots for merchants—identifying the source of chargebacks and preventing criminal fraud—are made worse when merchants struggle to handle chargebacks in-house. What's clear from this year's Field Report is that many merchants, particularly smaller ones, just don't have the time or expertise to challenge chargebacks successfully. This leaves merchants exposed to more claims, with disastrous consequences for their profits.
Chargeback mitigation needs better data from a wider number of sources if merchants are to have a fighting chance. Third-party solution providers are linked to payment schemes and FIs across the board, with the understanding and long-standing relationships to bridge a large part of the knowledge gap.
Dedicated vendors are armed with solutions informed by years of expertise, research and detailed data, which can be parsed and analyzed much more effectively than if merchants were to attempt to do it themselves with their own limited data sets. These solutions help connect banks with merchant purchase information, which helps many inquiries to be resolved before escalating to a chargeback When all players in the payments ecosystem work together, chargebacks are tackled and subdued much more quickly and effectively than when players attempt to chase chargebacks down on their own.
Merchants no longer need to fight blindly by themselves. Encouragingly, the Field Report shows that merchants who know they need to tackle friendly fraud are increasingly looking outward and exploring new solutions and approaches. Around 20 percent of merchants are now outsourcing their chargeback management to a third-party specialist, resulting in a 23 percent average decrease in friendly fraud costs when compared to their in-house efforts. With integrated artificial intelligence and machine learning technology, this new breed of solutions helps merchants and FIs remove the manual work of investigating chargebacks by automating alerts and notifications, and warning merchants about pending disputes. Merchants can then take pre-emptive action, such as issuing refunds, which are not as financially or reputationally damaging as a chargeback would be.
Ultimately, dedicated solutions from expert providers enable chargeback management processes to become more streamlined, and safeguard more revenues, freeing up the merchant to focus more on their customers.
There's a clear link between card-not-present (CNP) transactions and chargeback abuse, because CNP transactions make it more difficult to verify cardholders' identities, and to disprove cardholders' dispute claims. In a post-COVID world, and the rise in ecommerce volumes showing no sign of slowing, merchants should use every available tool to pinpoint the source of disputes and gather as much relevant evidence as possible to support them in challenging chargebacks. The Field Report reveals that 18 percent of merchants who manage chargebacks in-house said COVID-19 was their highest business concern for 2021, compared to just 11 percent of those using third-party chargeback management. This suggests that merchants supported by professional expertise are far more confident about the post-COVID marketplace.
More collaboration and data sharing between merchants, FIs and payment schemes means greater combined power to stop chargebacks at the source. It's in everyone's interests to harness that power to detect, prevent and fight disputes at the earliest opportunity. With greater collaboration and aided by dynamic third-party solutions using cutting-edge technology, merchants get much more valuable insight into customer behavior, dispute sources, and representments, which all adds up to reduced chargeback rates and stronger cost bases. And that's good news for the whole industry.
Monica Eaton-Cardone is the COO and cofounder of Chargebacks911, a provider of comprehensive risk management solutions to the payment processing industry. It is a division of Global Risk Technologies, which manages more than 200 million transactions worldwide each month. Chargebacks911 is headquartered in Tampa Bay, Fla., and specializes in chargeback mitigation and dynamic loss prevention.
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