E-commerce has grown exponentially in recent months, providing a way for merchants to stay afloat amid the throes of the ongoing pandemic. Unfortunately, along with that growth comes an increase in fraud and chargebacks.
To talk about what online merchants need to do to manage and prevent chargebacks and fraud, PaymentsJournal sat down with Scott Adams, VP of Friendly Fraud at Kount and Raymond Pucci, Director of Merchant Services at Mercator Advisory Group.
Merchants are shifting to e-commerce….
Currently, there is an influx of merchants new to e-commerce. This stems from the fact that brick-and-mortar merchants largely closed in-person operations when the pandemic started spreading in the U.S. in March. When that occurred, e-commerce became many businesses’ only option for survival.
While some businesses have since reopened, consumers remain wary of shopping in-store and feel safer conducting their commercial activity online. This will ring true throughout the upcoming holiday season, during which less than half (43%) of consumers plan on conducting the majority of their shopping in-person.
…Which makes them vulnerable to fraud
Sophisticated fraudsters recognize the opportunities that come with newly online merchants and are eager to capitalize on any lapses in security. Even so, not all merchants recognize fraud as a threat.
“Now, all of the sudden, [e-commerce] is the only way to do business,” explained Adams. “So you have merchants that don’t understand fraud or think they won’t be defrauded coming online.” Rather, they’re thinking about how to sell their products. “In most cases, [merchants] don’t even think about fraud until it’s too late,” he added.
Friendly fraud is costly for merchants
It’s important to note that it’s not only professional fraudsters that pose a threat: friendly fraud does, too. Friendly fraud occurs when a consumer conducts a transaction, then gets their money back by claiming they never made the purchase, didn’t receive the product, or only received a portion of their order.
While friendly fraud can be attempted by a customer trying to “cheat the system,” it’s not always intentional. Another example of friendly fraud is when a cardholder doesn’t recognize a charge they made on their card and calls their bank to dispute it. In other cases, a card holder sharing access to a card with family members might not realize the purchase was made by someone else in the home.
Whether or not the fraud was intentional doesn’t change the fact that the merchant is on the hook for the cost of chargebacks, which can be steep. Mercator Advisory Group estimated that friendly fraud will cost businesses $15 billion in 2020 alone. Luckily, there are ways for merchants to prevent this from happening.
Chargeback versus fraud prevention: What’s the difference?
Fraud and chargebacks are similar, but there are some key differences that merchants should understand. In general, fraud prevention occurs during the pre-authorization process, which is when a consumer’s order and card are being authorized. Fraud prevention considers variables like transaction risk and identity verification, and results in the approval or denial of a transaction.
Chargeback prevention, on the other hand, occurs post-authorization. It enables merchants to avoid the chargeback process, which is set in motion when a customer disputes a purchase transaction. If an issuer reimburses the customer for the charge, merchants can be forced to pay chargeback fees. On top of that, merchants lose the sale and, if the item was already shipped, the merchandise itself.
For that reason, post-transaction chargeback prevention is crucial for merchants to bolster their online security, especially with the influx of e-commerce sales anticipated for the upcoming 2020 holiday season.
How can merchants prevent chargebacks and fraud?
Knowing the challenges faced by e-commerce merchants, Kount has partnered with Verifi, A Visa solution to deflect, intercept, and prevent chargebacks and fraud through the Near Real-Time Chargeback Prevention Solution.
“If there’s a chargeback, the first step is that the consumer calls the issuer,” said Adams.
But historically, there has been limited ways for merchants to share transaction information with card issuers. This solution changes that, making it easier for merchants and issuers to collaborate to prevent disputes.
Kount’s new solution provides enhanced transaction and merchant detail that gives the issuer more specific information about a customer’s transaction to review with the customer. The partnership announcement noted that Kount’s pre-authorization fraud services, bolstered by Verifi’s post-transaction, pre-dispute solutions, will now “provide issuers and customers with enhanced transaction information to prevent disputes and chargebacks at the point of inquiry.”
The partnership also makes it possible to resolve disputes more quickly, allowing merchants to provide a transaction refund before the pre-dispute escalates to a chargeback. Through Rapid Dispute Resolution (RDR), issuers can quickly understand if a merchant has issued a refund and accordingly suppress unnecessary chargebacks.
“Kount is unmatched in experience with friendly fraud prevention, and our Verifi-enhanced platform solutions fulfill the needs we have observed in the industry for years,” explained Adams. “Having those all combined in one place is an excellent way for merchants to protect themselves during the holiday season.”
Lastly, companies that attempt to manage chargebacks on their own lose valuable time and resources that could be spent building the core business. “They need an automated system to be able to stop disputes from turning into chargebacks. Once such a system is put in place, they can rest easy seeing less disputes and chargebacks and run the business as they should be,” concluded Pucci.
