The average merchant has probably experienced at least a few chargebacks by now.
Chargebacks are more than just bank-level payment reversals for merchants. They include a bevy of fees, too. They also tend to hang around far too long, take up a heap of time, and ultimately sap companies of revenue.
Businesses that aim to survive are vested in tracing chargebacks to their source. That said, focusing on only one chargeback source means ignoring the big picture.
A Multitude of Sources
Each chargeback is issued with an attached reason code to explain the purpose of the dispute. Truthfully, though, these are usually convoluted and inaccurate. If you boil it down to brass tacks, chargebacks all result from one of just three sources:
- Merchant Error: Occurs when a misstep within your internal systems leads to a policy or procedural issue for the consumer.
- First-Party Fraud: Commonly referred to as ‘friendly fraud’. It occurs when a customer accidentally or intentionally requests a chargeback without a good reason.
- Third-Party Fraud: A criminal activity involving a bad actor who impersonates a legitimate cardholder to make fraudulent purchases. This term covers all forms of identity fraud, including account takeover fraud, clean fraud, etc.
You might be asking yourself: if we can trace every chargeback back to one of these three sources, why is it such a pain to stop them from happening?
Frankly, even though there are three distinct sources, they are all interconnected. That’s part of the problem. Trying to address one or two chargeback sources, while ignoring the other, makes it harder to fight back against all three.
All Chargebacks are Linked
To borrow from Shakespeare: “when sorrows come, they come not single spies, but in battalions.” This sums up the chargeback conundrum rather succinctly, I think.
Divvying chargebacks into separate categories according to reason code is not as accurate or effective a process as you might imagine. Since chargebacks generally stem from the above sources, it’s wise to approach them holistically. Merchants need to address the core problem, rather than treating just the symptoms. After all, how one responds to an individual chargeback may determine outcomes for the many other disputes.
To illustrate, suppose that you’re an online merchant. You discover a majority of your chargebacks relate to third-person fraud, so you expend your resources hyper-focusing on limiting your exposure to this threat. By doing so, you’ve removed your eye from first-party fraud sources, which can quickly become your next big problem.
Naturally, one must consider all three sources to craft a formidable chargeback management strategy.
Pre- Versus Post-Transactional Prevention
This may sound simple, but it isn’t. The trouble with treating every chargeback source as a single entity is that it’s easy to forget the particulars. While these three chargeback sources should be considered together, they are not exactly the same thing.
For example, third-party fraud is pre-transactional, whereas first-party friendly fraud is post-transactional. You can prevent many criminal attacks by identifying bad actors before a transaction. The same tactic doesn’t work with friendly fraud, though.
Additionally, merchant error chargebacks can be pre-or post-transactional, depending on how you handled the disputed transaction. A mishandled customer dispute can lead to chargebacks just like a faulty billing descriptor, with only the order they are received being reversed.
So, how do merchants prevent pre-transactional threats and fight post-transactional fraud? A broad, far-reaching anti-fraud and chargeback management strategy is a great place to start.
Having access to reliable data can help identify potential friendly fraud triggers. This is much like how fraud tools can help predict and prevent acts of criminal fraud before they happen.
Effective chargeback analysis can provide detailed internal audits that pinpoint weaknesses built into one’s systems. It can help diagnose other areas that could be increasing the merchant’s chargeback ratio. Chargeback analysis should run concurrently with other anti-fraud methods in order to prevent and resolve issues in real-time.
So…where should merchants start?
Deploying the Right Tools to Fight All Chargebacks
The argument I’m making here is that chargebacks are a symptom of a greater problem. By treating the underlying issues that lead to criminal fraud attacks and chargebacks, merchants can better spot red flags and predict consumer behaviors that lead to friendly fraud.
The best approach is to coordinate anti-fraud methods with customer service and chargeback management efforts. One must craft functional customer profiles. These profiling tools allow merchants to eliminate or lessen their exposure to bad actors.
When paired with chargeback analysis and monitoring, the fraud tools listed below can be highly effective at mitigating risk:
- Geolocation
- Device Fingerprinting
- Velocity Limits
- Address Verification Service (AVS)
- Fraud Blacklists
- CVV Verification
- 3-D Secure Technology
Naturally, the risk factors that get prioritized will vary according to the business’s description. Still, the more tools used in tandem with each other means improved detection and targeting. This can better safeguard a merchant’s checkout process and post-transactional response. In this way, there’s less margin for error, and it also becomes a lot easier to pinpoint friendly fraud attempts.
To put this methodology into perspective: let’s again suppose that you’re an eCommerce seller. A cardholder files a chargeback against your company, claiming to have never authorized the purchase in question. However, you find out someone in their household was responsible for the transaction.
Regardless of intent, this constitutes a case of first-person fraud (specifically identified as family fraud). Without the right tools to rule out a case of third-party fraud, though, you would have no way to ascertain that fact.
Better deployment of fraud indicators will lead to better third-party fraud decisioning. In turn, better third-party fraud decisioning enables merchants to identify first-party fraud more efficiently and respond appropriately.
Third-Party Data Helps Eliminate First-Party Threats
As I mentioned above, protecting one’s business from chargebacks requires a multilayered strategy that considers each source a symptom of a more significant problem. By combining efforts against third-party fraud with prevention methods aimed at first-party fraud, merchants stand a much stronger chance of defending themselves from all sources.
Chargebacks and fraud are inextricably linked. Merchants’ solutions should be, too.
Coupling the data generated through anti-fraud measures with information produced by potential chargeback triggers allows for a greater understanding of the end-to-end customer experience. Only once merchants eliminate merchant errors—and cut out the possibility of genuine criminal activity—can they start to tackle first-party threats like friendly fraud.
