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5 Warning Signs of Chargeback Fraud (and 5 Ways to Fight It)

posted on: Tue Feb 24 2015

Chargeback FraudFraud can sneak under your radar. But it’s no small thing. In fact, fraud costs businesses $100 billion each year (that’s greater than the GDPs of more than 100 countries around the world). And when it comes to ecommerce, fraud is the number one cause of chargebacks.

However, there are ways you can prevent fraudulent chargebacks from sneaking up on you. First, be alert for these warning signs:

  • Your chargeback rate is above 0.5% (50 basis points)
  • Your decline rate is higher than 1%
  • You manually review more than 10% of orders
  • Your refund rate is more than 1%
  • You start to experience higher affiliate turnover

A word of warning, however. Many merchants don’t see these warning signs until it’s too late. Why? The warning signs get masked by a phenomenon called “chargeback lag.” Chargeback lag refers to the 60-90 day (or more) delay between the time when a chargeback is actually incurred and when it is finally reported. If chargebacks are being caused by fraud, that lag can mean a nasty surprise later on. What look like record sales and profits in October, November and December turn into big losses, lost merchandise, and possibly even penalties from your payments processor in January, February and March.

What’s the best way to fight back? Simple. Avoid fraudulent chargebacks in the first place. A good fraud prevention solution, like Kount Complete™, will do that by delivering these five capabilities:

  1. Ability to dial in your most profitable chargeback rate. You should be able to precisely balance how many borderline orders you approve versus the higher number of chargebacks those approvals will generate. The result is that the revenue generated by borderline approvals consistently exceeds the chargeback costs of those borderline approvals. All the while staying under processor chargeback thresholds.
  2. Split-second analysis/decisions using real-time data. Split second is important because you lose sales if you make customers wait. And real-time is critical, because fraudsters can strike fast and hard. For example, one Kount customer experienced more than 12,000 separate fraud attacks during a 72-hour blitzkrieg. Day-old data (or even minutes-old data) would have been useless in this instance.
  3. Real-time integration of best-of-breed technologies. If your technology isn’t operating in real-time on up-to-the-instant data, today’s deadly combination of bots and breaches means fraudsters can inflict massive damage in no time. In the blitzkrieg attack mentioned in #2, all the attacks were thwarted without any impact on normal order approvals because the real-time interaction of Kount technology was able to identify and block the rapidly shifting fraud techniques as they changed moment-to-moment.
  4. Simple to use. Life is hard enough. Your fraud solution should be easy. Plus, fraudsters move quickly. If you can’t respond because your fraud prevention solution is too difficult to easily update, you’ll expose your operations to fraud and/or excessive declines and manual reviews.
  5. Combination of Artificial Intelligence (AI) and human insight. Merchants don’t win by only stopping fraud. They win by approving the maximum number of orders...while safely and cost-effectively mitigating fraud. The combination of Artificial Intelligence and humans working together are vastly superior to either working alone. That’s why Kount uses the deep learning capabilities of AI to collect and process vast amounts of data, and then provides easy-to-use tools so people can apply their unique human capabilities to guide machines to the optimum business result.

Want to dive deeper? Check out Kount’s free eBook “What You Don’t Know About Chargebacks…Can Hurt You”, available for download here.