Chargebacks are a growing problem for banks and merchants alike.
Shopify estimates a single chargeback incident can cost retailers, on average, $25. This is before any fines that acquirers could levy against a merchant that experiences chargeback rates over a certain threshold.
At the same time, merchants are struggling to deal with chargebacks. A February 2022 report from PYMNTS found that nearly half of merchants “say it is more challenging to manage chargebacks now than it was before the pandemic.”
In this article, we will explore the chargeback tools as well as the strategies that banks and merchants can deploy for the sake of chargeback prevention and fighting fraud.
Chargebacks do not necessarily represent fraudulent behavior. So, it’s important to distinguish between chargeback prevention and chargeback fraud prevention.
Non-fraudulent chargebacks can happen for a variety of reasons. For example, a customer might not recognize a charge to their account and have no way to investigate the source of the charge. They request a chargeback from the bank instead. This then puts the onus on the merchant and the acquirer to figure out what happened in that transaction.
Fraudulent chargebacks can happen in a variety of ways, too. For example, a customer might place an order from a merchant, receive the goods, then reach out to their bank afterward and claim that the goods were in fact never received. This is a type of first-party fraud. Again, the onus is on the merchant and the Acquirer to prove the goods were delivered.
In either case, a chargeback request indicates to the bank that something somewhere has gone wrong. The first layer of chargeback prevention, then, focuses on preempting those failures.
From there, merchants and banks can further prevent chargebacks by having the right tools and processes in place for investigating a request.
Chargeback prevention strategies
Merchants have the capability to put in place steps to help with the first layer of chargeback prevention. They are in a good position to identify the areas in the customer experience that could lead to customers making a chargeback request.
The following are recommended prevention strategies that will help mitigate chargebacks:
- Ensure contact details are easy to find. When a customer has a question about a purchase they possibly don’t remember making, they need to be able to reach that merchant directly to resolve their query. Customers won’t dig around for contact details. If there’s too much effort, they’ll simply contact the bank and dispute the charge. Make sure your contact details are available on your website and your receipts.
- Ensure your business name is clear on customers’ bank statements. Business’ legal names are not always the same as the one they ‘Trade as’. Its best to use your merchant trading name so that it appears on transactions when you process your customer payments. If you are unsure how to do this, contact your Acquirer who will be able to assist you. Additionally, you could also include your website or telephone number, so again customers will be able to contact you more easily rather than raise a chargeback.
- Have a manual process for following up on purchases. It is not practical to contact every customer after a purchase has been completed. However, you know your business and will know what looks normal and what does not. So, if the transaction is of a high value or there is something unusual about the transaction then taking an additional step to validate it could save time and money in the long run. When such a purchase comes through, contact the customer to follow up on their purchase. This is not just an opportunity to verify that the transaction is legitimate, but it could also be an upsell opportunity (e.g. airlines might follow up on a purchase to sell carry-on luggage options).
Explaining why you are doing the check is also a benefit, let your customer know you are just making sure nobody is trying to use their card details fraudulently! Would you prefer to do future business with a company that is making sure it is you and not a fraudster using your card!
I know I would.
Often, merchants will find that an improved customer experience will prevent a proportion of chargeback requests. From there, it’s a matter of having the right tools in place to recognize suspicious customer activity before, during and after payment authorization.
Chargeback prevention tools
Acquirers will have a variety of payment security tools in place, and many of these help mitigate chargeback requests. Those include:
- Address verification services.
- Customer authentication tools such as 3DS.
- CVV checks or similar tools for verifying the card used in the transaction.
- Fraud screening and fraud scoring tools.
How do fraud prevention tools work?
Fraud prevention tools can help detect fraudulent transaction activity and, if the activity is detected quickly enough, allow the bank to intervene at one of three points:
- During authorization.
Artificial Intelligence-powered risk scoring is valuable in this instance. When a payment processor can see in real time what risk each customer brings to a transaction, they can act early to block transactions and prevent chargeback fraud from taking place.
Prevent chargebacks with Featurespace’s advanced solution
Featurespace’s Adaptive Behavioral Analytics and Automated Deep Behavioral Networks are game-changing inventions that are designed to prevent a variety of fraud and scam types, including chargebacks.
These machine learning technologies give financial institutions a way to profile individual accounts against peer groups to identify the kind of behaviors that are normal and those that are anomalous.
By understanding a customer’s behaviors, analysts can approach questionable transactions with greater confidence. This can be useful in detecting chargeback fraud in a gaming environment, where the player has opportunities throughout a game to make purchases or buy upgrades.
This kind of behavioral data also helps payment processors reduce false alerts and reduce the number of genuine transactions that get blocked. We implemented ARIC™ Risk Hub for Mexico-based payment processor Mercadotecnia, Ideas y Tecnología (MIT) for this very reason.
MIT and its thousands of merchants can now make better-informed decisions when it comes to blocking transactions before or during authorization. This means reduced customer friction, and it means fewer instances of both chargeback fraud and non-fraudulent chargeback requests.
When banks have the right controls in place they, and the merchants they support, avoid chargebacks in the first place. This is the key to chargeback prevention.
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