26 September 2022
6 min read
As discussed in a previous blog post, chargeback guarantees are intended to protect customers from fraudulent payments and transactions. The chargeback guarantee is a mechanism for customers’ card providers to reclaim money from the eCommerce merchants’ bank. There are costs associated with this process (not just financial), so it is in the best interest of merchants to keep these costs to a minimum. Acceptable chargeback to transaction ratios differ between industries, but for example, the retail and travel industries have an average of 0.50% (5 chargebacks per 1000 transactions). Unfortunately, those selling digital goods and services tend to have a higher chargeback/transaction ratio.
The main goal of chargeback processes is to boost consumer confidence when using credit and debit cards. Despite these consumer guarantees, merchants can be left in the lurch. It, therefore, pays to be vigilant as the continuing growth of eCommerce leads to an increase in potential targets for fraudsters. It is estimated that a whopping 30% of chargebacks are requested using stolen card details or stolen accounts (ATO). The need to manage the entire fraud and chargeback process effectively is a necessity. But the right choice of fraud prevention must be made - so choose wisely.
One error often made by eComm merchants is to pair up with ineffective anti-fraud providers, whose inefficient and overzealous fraud systems may block too many transactions that are in fact, legitimate customers. This leads to a high false positive rate, impacting the customer UX - a cost no eComm merchants wish to meddle with. A high false positive rate can be far more costly than processing chargebacks. It is estimated that in 2021 European merchants lost €40.8 billion due to false positives - an eye-opening figure.
It’s in the best interest of every eCommerce merchant to ensure they keep their chargeback ratios to a minimum. But not just for the aforementioned reasons. Exceeding accepted chargeback thresholds can result in losing access to SCA exemptions (Transaction Risk Analysis, for example, for ‘low risk’ transactions) - something that is only possible by showing efficient measures to reduce fraud rates. This highlights further the importance of managing a positive relationship with an anti-fraud provider who can work with you to reduce fraud and chargeback ratios.
Even if fraudsters are using chargebacks as a quick way to make financial gains, most chargeback requests are made by regular consumers who do not deem themselves to be fraudsters. They can be opportunistic in their approach but customers that file a successful chargeback request are nine times more likely to request another - 40% of them will file another chargeback request within 60 days.
This false confidence can lead to a string of consumers making chargeback requests, in what is called friendly fraud. There can be some confusion as many consumers still do not understand the difference between a refund request from a merchant, and a chargeback request from an issuing bank. Nor do they know, or if they do, they sometimes do not care, about the negative financial impacts their requests may have on a merchant. So how to prevent chargebacks as a merchant?
Our Advanced fraud solution has a proven track record of providing automatic and real-time recommendations on a per transaction basis, all powered by machine learning models. But not only. We analyse all stages of the user journey, from account registration, login to use of service. We can determine if the user behind an account is a bot, a fraudster or a genuine customer. We know this through passive behavioural biometrics and digital fingerprinting. With our approach, you can understand every user’s intentions, and their device and network settings, and effectively weed out users with bad intentions from succeeding in fraudulent activities. The same approach is used to determine if dishonest customers are taking advantage of the chargeback process. And we’ve created a unique service to not only combat fraud, but chargebacks.
As we know, the chargeback guarantee process is designed to instil confidence in consumers. Naturally, there are always legitimate chargebacks to be expected, which is why it is necessary to work with companies that can manage chargebacks in an efficient way. This is where Nethone alerts can help - to help instil confidence in merchants dealing with online payments.
You can now receive alerts on challenged transactions by users (that with high probability will turn into chargebacks) from most of the world’s largest issuing banks seamlessly through Nethone Alerts. Merging two services (Ethoca and Verifi) allows for less integration, and faster reaction time to possible fraud (alerts are not only sent to our customers but leveraged in fraud prevention logic) and prevents you from receiving duplicate alerts (and additional fees), improving your customer experience.
To learn more about how to prevent chargebacks using Nethone Alerts, see our detailed blog post about this service.