Chargeback protection: how behind-the-scenes automation can help merchants minimize fraud-related overheads

Stopping fraud can be complex, time-consuming and expensive. Get it wrong and it can add significant operational overheads, diminish brand value and drive-up chargeback losses. Merchants often operate in a vacuum of information, understaffed and in the dark. It’s true of third-party fraud as much as it is friendly fraud and even the process of dealing with legitimate cardholder disputes.

Stopping fraud can be complex, time-consuming and expensive. Get it wrong and it can add significant operational overheads, diminish brand value and drive-up chargeback losses. Merchants often operate in a vacuum of information, understaffed and in the dark. It’s true of third-party fraud as much as it is friendly fraud and even the process of dealing with legitimate cardholder disputes.

The answer is to align with payment partners that build automated protections and streamlined workflows to help their customers. This can save merchants time and money and free up staff to do what they should be doing—growing the business.

A moving target

E-commerce fraud is on the rise. Global e-commerce losses to online payment fraud were estimated at $20bn in 2021, up 14% on the previous year.¹ Yet in an age of burner phones, deepfakes, spoofed IP addresses and stolen identities, it can be a huge challenge for retailers to discern good from bad transactions.

Many merchants try their best, perhaps using data verification services, or even Googling customer names and looking up home addresses on Zillow. But these processes are time-consuming, and error- and bias-prone. Merchants can sometimes feel like they’re fighting a losing battle. Every additional risk control they introduce, the fraudster responds in kind. If a retailer bans international orders, scammers might use a freight forwarding address. If a merchant blacklists an email or phone number, the fraudster could simply use a new, stolen one. And so the cat-and-mouse game continues.

Analysis paralysis

Getting order reviews wrong could result in major losses. If an approved transaction turns out to be fraudulent, the merchant loses both the potential funds from the sale and the shipped item. A single transaction that ends up as a chargeback can wipe out the profits from five, 10 or 20+ orders, depending on the industry and the merchant.

Because of the heavy financial consequences of getting reviews wrong, many merchants err on the side of caution, turning away potentially legitimate customers. Others may go to extreme lengths to prove a customer’s identity, such as by calling them direct to prove they made a purchase. This analysis paralysis can delay shipments and negatively impact the brand. It’s simply not acceptable in a world of Amazon Prime and streamlined e-commerce. Yet what are the alternatives? Rush orders through and merchants will simply increase the chances of approving a bad order or declining a good one.

Those that hire in-house risk prevention agents to manually verify all suspicious transactions, may also be burdened—with excessive operational costs and problems of scale during busy periods. It’s a lose-lose all round.

Managing dispute overload

Merchants also experience potential fraud headaches from legitimate customers following a purchase. Transaction disputes are easy for consumers to file with the major card providers, leading to a potential deluge for retailers to handle. Some are legitimate—the item wasn’t delivered, or arrived tarnished or not as described. Sometimes the consumer believes fraud is at play, if they don’t recognize an order. And sometimes legitimate customers commit friendly fraud—filing dubious complaints against merchants in a criminal attempt to get out of paying for their order.

Whatever the reason, the merchant must respond. If they ignore or provide a weak response to a dispute, the cardholder’s bank will rule in favor of the consumer. The resulting chargeback may mean the merchant loses both the money from the sale and the shipped item.

The challenge is that responding to the mounting volume of disputes can be a major administrative burden. Every bank has their own version of the dispute form, and cardholders are entitled to file up to 180 days after purchase, meaning merchants without proper order and shipment documentation will find it even more time-consuming to respond.

In this situation there are few good options for the retailer. Staff may spend hours filling out dispute forms only to find the bank rules in the favor of the cardholder. Or they could let through all small transaction disputes and accept a certain level of monetary loss. It’s another lose-lose resulting in financial damage and excessive operational overheads.