Holiday Payments and Chargebacks: How Shared Data Can Help Retailers

by Matthew Katz 0

The holiday shopping season is officially upon us – and increased sales can also mean more chargeback headaches for merchants and issuers.

With Black Friday and Cyber Monday now behind us, retailers have officially entered the year’s most crucial period, when the bulk of their sales are conducted.

Trends show that most purchases are being made online and via mobile nowadays. A report by Adobe Holiday Insights revealed that last year’s U.S. holiday sales for the months of November and December grew eight times faster online than in stores, and predicted that the 2017 holiday season will be the first to break $100 Billion in online sales. The latest estimates seem to indeed confirm this trend, as Black Friday week total of U.K. online sales are expected to reach £7 billion this year, a 164% increase on 2014.

The downside of this e-commerce boom is that it also brings an equally substantial rise in instances of fraud. In addition to the sales lost due to incomplete information and billing confusion, many more are due to so-called “friendly fraud,” in which customers dispute genuine transactions and obtain a refund for purchases they actually made. All of this adds up to costly chargebacks for merchants.

The LexisNexis True Cost of Fraud Study 2016 found that roughly 28% of total fraud losses were the result of such friendly fraud and chargebacks, with “true fraud” only responsible for around 23% of those losses.

As consumers come to grips with the debt they’ve incurred during the holiday period – especially via transactions bought in the heat of the moment on Black Friday/Cyber Monday – they often experience buyer’s remorse and contact their issuing bank directly to get some of those charges reversed. This is part of the reason why merchants experience the highest instances of friendly fraud following the holiday period, which can make January a particularly miserable month for many businesses.

Sometimes, however, these cardholder services disputes arise from a genuine concern by the shopper, and that can be a sign that their account details may have been compromised. It is important that merchants and issuers investigate such claims carefully, yet they must also balance the potential losses in deciding what resources to allocate toward such investigation.

Furthermore, some customers end up disputing legitimate transactions due to confusion, as happens when a merchant’s name as it appears on a billing statement doesn’t match their trading name. All these scenarios combined lead to compounded loss of revenue, merchandise, and shipping costs to merchants – in addition to fines and fees applied by their acquiring banks, as well as being faced with the potential long-term damage to customer relations that such disputes can lead to. And customers, it seems, are getting increasingly confident in approaching issuers to ask for such charges to be reversed.

“Consumer awareness of their chargeback rights has increased over the past five years,” says Julie Conroy, research director for Boston-based analyst firm Aite Group. “We’ve seen a doubling of the search term ‘chargeback’ on Google for the past five years,” she adds.

 While the term ‘friendly fraud’ may seem innocuous, this increasing problem has a high impact on the business community, with current estimates suggesting that financial impact of chargebacks could reach close to $30 billion globally by 2020. In fact, according to a 2015 report by Javelin Research on the impact of fraud and chargebacks, management of the issue consumes a significant percentage of resources (between 13% and 20%) within organizations.

Shared data is key to stopping such fraud before it starts, as issuers neglect to include merchants early in the dispute process and tend to generate an unnecessarily high chargeback volume. But how can merchants effectively provide such reliable data to issuers, especially in cases of friendly fraud in which the customer card numbers, names, and addresses all appear to be legitimate?

 Unfortunately, consumer acts are written with very few provisions to protect merchants. The best way to avoid such problems spiraling out of control is for merchants and issuers to collaborate and share the right information, in the right place, at the right time, working with customers to resolve disputes at the earliest possible stage.

Banks and merchants are discovering very quickly that the most effective way to combat online fraud is to develop machine learning programs – leveraging large datasets – to enable the extraction of transaction insights. To combat fraud, the fact is that the relevant data is already constantly being collated via multiple channels. This data, once shared between bank, merchant and customer, can become a powerful tool to prevent fraud.

“I’ve been hearing from e-commerce merchants that friendly fraud is just going through the roof, representing as much as 75% of all their card-not-present chargebacks. Yet shared data can be beneficial in multiple fraud scenarios, and friendly fraud is no exception,” says Conroy.

Apart from the goods or services in dispute, detailed information on the cardholders transaction history, previous disputes filed, refunds issued and account delinquency are also readily available to merchants and issuers investigating any disputed transaction.

Armed with granular and contextual information – such as type of device used to make a purchase, as well as name, username, IP address, location, phone number and email address included in the merchant’s customer profile – provide immediate and accurate answers to a transaction query for a quick and painless resolution.

With this robust information to hand, issuers can quickly determine if a particular transaction should be flagged as a compromised account or as a legitimate transaction. Data sharing can thus greatly benefit issuer and merchant, preventing sales loss and costly chargebacks, loss of merchandise, and fees. In the long term, tangible benefits include increased customer confidence and increased profits for the merchant, as well as saving banks the time and expense associated with running call center investigations and back office operations to facilitate the chargeback process.

Such leveraging of data not only boost merchants’ bottom line and saves operational costs for issuers, but also helps to preserve consumer confidence and build loyalty. Real-time data sharing has great potential to resolve disputes the moment they occur, with the added bonus of significantly discouraging people to try and “game” the system. The shared feedback loop between merchant, cardholder, and issuer makes for a better sales experience for all parties, and brings seasonal cheer for both retailers and their customers.

About Matthew Katz, CEO

Matthew Katz, Verifi’s founder, started the company after developing the first customized solution that systematically identifies multiple types of payment risk. In his current role as Chief Executive Officer, Mr. Katz continues to drive Verifi’s vision as the company further diversifies its product offerings, extending into many verticals and markets within the payment industry

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