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The state of chargebacks and how to deal with an unfriendly payment chargeback system


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According to the recently launched The State of Chargebacks Report, 82% of organisations are disputing chargebacks today. What are the biggest challenges when it comes to this issue?

Disputing chargebacks has been an area of frustration for many years. Merchants are at the mercy of policy, compliance, and inconsistent application of the rules applying to chargeback resolutions. Kount’s survey found that the two biggest issues that businesses face when dealing with chargebacks are disputing them (59%) and being able to identify friendly fraud (58%). These issues occur when merchants dispute chargebacks, a process known as representment.

The challenge really starts with filing the proper data when disputing a chargeback and the consistent application of the policies by the banking personnel. Low win rates, additional operational requirements, and the overall burden of conducting the tedious process are all part of the frustration. Friendly fraud is also a major source of frustration, as merchants struggle to cope with dishonest customers and a payment chargeback system that favors cardholders. Other challenges cited by respondents include:

  • Reducing chargeback rates (50%)
  • The balancing act of reducing fraud and chargebacks without negatively impacting sales or causing false positives (42%)
  • The cost of chargebacks (39%)
  • Lack of expertise or strategy with chargeback management (21%)
  • Not having enough resources (21%)

What are the main sources of chargebacks?

While the main source of chargebacks may vary from one vertical segment to another, CNP (card-not-present) fraud is the biggest source of chargebacks among survey respondents (48%), followed by friendly fraud (28%), account takeover fraud (7%), and merchant error (4%). One troubling part of the report is that 12% of respondents did not know the cause of the majority of their chargebacks. If they are not able to properly detect the issue within certain circumstances, they will have a hard time identifying how to reduce chargebacks.

Does the channel chosen for processing transactions have any influence in this matter?

Yes and no. Chargebacks can affect merchants regardless of channel or device, whether the transaction was made on a tablet, desktop, iPhone, Android, or game player. That said, some industries see high chargeback rates and these segments may have customers with a higher preference for a certain type of device. For instance, online games companies may see higher mobile device usage. This means they need to deploy techniques designed to determine the type of device, using best practices for identifying the user and validate the transaction. While the survey found that fraud is the reason for a majority of chargebacks, there are many other reasons why a merchant might see them, including:

  • Services Not Provided or Merchandise Not Received
  • Cancelled Recurring Transaction
  • Not as Described or Defective Merchandise
  • Counterfeit Transaction
  • Declined Authorization
  • No Authorization
  • Expired Card
  • Incorrect Currency or Transaction Code or Domestic Transaction.

Is there any ecommerce segment particularly most affected by chargebacks? If yes, is there any explanation for this?

Traditionally, we have seen certain segments such as online games and gaming, adult, and digital goods companies suffering higher rates of chargebacks. This is primarily due to the nature of their business. Buyer’s remorse, the ease of calling the bank and denying a charge, and merchant policies, all exacerbate chargebacks. Consumers are more comfortable calling and disputing a charge today than ever before.

Organizations in the Financial Services and Education/Training industries have some of the highest chargeback rates, with around 40% reporting a chargeback rate that exceeds one percent (39% and 43%, respectively). However, as noted, any merchant selling goods, whether in-store or online, can be affected by chargebacks. Preventing fraud and its associated side effects is the smart way for merchants to combat this issue and lower chargeback rates.

What is Kount’s approach to fraud management in order to help organizations within the ecommerce sector better protect their businesses?

We trust that prevention is the best plan of action. Merchants can avoid fees associated with chargebacks by having a comprehensive fraud prevention system. Between CNP fraud, friendly fraud and account takeover fraud, a whopping 83% of businesses’ chargebacks are due to fraud, so stopping fraud before it occurs is key. Even in cases that do not involve criminal fraud, comprehensive fraud prevention services like Kount can support representment with extensive data that provides compelling evidence essential to win chargeback representment.

Fighting chargebacks is not a once-a-month task or a discrete event that takes place at a single point in time. There are multiple prevention and interception “catch points” where one can act to reduce chargebacks. Rules and regulations change rapidly and often merchants do not have the staff or resources to dispute chargebacks, so they don’t try or have very low win rates when they engage in representment. For this reason, Kount has partnered with Chargebacks911 to help merchants win and recover revenue that is rightfully theirs. We invite the readers to access this link for learn more about one of our successful business cases which involved a recovery of USD 400,000 in the first 90 days.

Kount’s software incorporates five aspects into its chargeback protection:

  1. Superior Fraud Screening and Analytics. Collects and analyzes hundreds of data points per transaction, using multiple, integrated technologies to detect fraud.
  2. Real-time Data. Checks borderline transactions against third party data and capitalizes on Big Data in real-time to separate the good from the bad.
  3. Advanced AI (artificial intelligence) and Machine Learning. Automates insights from Big Data to reduce manual reviews, cut operating costs, and approve more of merchants’ borderline—but valid—orders.
  4. Expert Human Intelligence. Responds to adaptable human adversaries in a tailored manner for one’s specific business.
  5. Chargeback Alerts. Intercepts “bad” transactions even after they have been approved, so one can avoid product losses and chargeback fees.

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