Significantly Reduce Chargebacks


A risk analysis platform helps online retailer CD Baby reduce chargebacks from 2.5% to 0.07%. Payment fraud has long been a bigger problem for online retailers than their brick-­and­-mortar counterparts. Unlike an in-­person sale, online transactions do not require a customer signature. According to the Merchant Risk Council (MRC), the current acceptable rate for chargebacks, both in­-store and online, is 0.1%. Just like a cost of doing business, retailers will have to deal with some level of fraud, but once that level exceeds a certain threshold, Visa and MasterCard will dish out fines. If chargebacks get completely out of hand, retailers can lose their privilege to accept credit cards.

CD Baby, based in Portland, OR, is the largest online retailer of independent music. The company warehouses and digitizes music created by independent musicians. Recurring attacks cost CD Baby money and led the company’s controller, Christine Barnum, to conduct time-­consuming investigations to research and rectify the fraudulent orders.

Avoid the Chargeback Danger Zone

“Our chargebacks were nearing the 2.5% range, which is right around the danger zone,” explains Barnum. “We recognized the need to do something about this, because we were losing money, and I was spending nearly 40% of my time working on fraudulent transactions.” Barnum explains that fraud was occurring in three ways. First, attracted by the $.99 per download price, people were testing up to 100 stolen cards per day. Second, people would join CD Baby pretending to be artists and create an album using stolen music. They would then repeatedly purchase that album with stolen credit cards in order to fraudulently collect artist commissions. “Not only were chargebacks out of control, but we were also paying out 75% royalty payments,” says Barnum. Finally, people posing as affiliates would make purchases using stolen credit cards and collect fraudulent affiliate commissions. Because CD Baby is not a major record label, musicians do not have to be accepted by the company. Fraudsters are aware of this, and uploaded .mp3 files of any sound (i.e. a ringing telephone) in order to have something to purchase with stolen credit card numbers and receive royalty payments on the sales.

Barnum noticed a spike in fraudulent activity in February 2011 and met with CD Baby’s COO and IT director to discuss the purchase of a risk analysis solution. Barnum attended the MRC’s trade show in March 2011 and met with Kount, a fraud and risk management solutions provider. “We wanted to stop people who were placing many orders in short succession, and we wanted to be able to block transactions from being processed if we felt they were fraudulent,” says Barnum. “We wanted to be able to restrict sales, based on the device location. We wanted a flexible and scalable system, so we wouldn’t have to hard code a great deal of rules into our own back end system. Rather, we were looking for a tool that allowed us to add rules and take rules away as patterns changed and emerged.”

Not long after the MRC event, CD Baby implemented Kount Complete, a fraud detection and prevention platform for card-not-present (CNP) and online retailers. Now, CD Baby is able to capture a great deal of important transaction data (i.e. the language the browser is set to, the IP address, or the geographic location of the country). Kount reviews that data in conjunction with the email address and other identifying information. CD Baby conducts a pre-authorization with its credit card processor. Once the authorization is attempted, Kount Complete runs a risk analysis which ultimately provides CD Baby with a score from 1 to 99. Ninety-nine is the worst possible score, and CD Baby considers an acceptable score to be in the 16 to 35 range. “Based on the score, we decide whether we want to accept or deny the transaction,” says Barnum.

After implementing the Kount Complete solution, CD Baby’s chargebacks fell to .07%. “I spend maybe one hour a week on fraud-related items,” says Barnum. “We’ve definitely improved our efficiency.”

October 2012 Integrated Solutions For Retailers

By Erin Harris, associate editor

Originally published at