Chargebacks are getting more expensive and harder to detect as friendly fraud rises, with cost now the biggest chargeback-related problem for half of online retailers. Over-correcting by treating returning customers as fraudsters backfires: U.S. ecommerce businesses were expected to lose $157 billion to false declines in 2023. Retailers can adapt by reviewing their customer experience for chargeback triggers, using AI-based fraud tools that learn what good orders look like, and tracking card-brand rule changes such as American Express shifting CID-mismatch liability away from merchants in April 2024.
Chargebacks–payment disputes filed by customers because of real or alleged fraud–have always been a costly challenge for ecommerce businesses, but how chargebacks affect businesses is changing.
Costs are now the biggest chargeback-related problem for half of online retailers because chargebacks are increasingly expensive. At the same time, fraud that leads to chargebacks is getting harder to detect because the nature of fraud is evolving. More previously trustworthy consumers are committing friendly fraud, now a “significant or moderate concern” for more than half of businesses.
Understanding the underlying trends fueling chargebacks now can help retailers update their prevention and management strategies to meet the moment. Knowing what new resources are available can also help online sellers successfully avoid or dispute chargebacks to reduce fraud and control costs.
A recent report found that friendly fraud rates in 2023 reached levels similar to those in 2020, when there was a spike in e-commerce-friendly fraud driven by layoffs and economic uncertainty. The same report found that three-quarters of consumers assume that chargebacks and merchant refund requests are the same, meaning many shoppers who file chargebacks instead of return requests don’t realize they’re committing fraud.
Prevention is the ideal way to deal with chargebacks, but treating returning customers as potential fraudsters to avoid friendly fraud can create more significant problems. Many businesses already err on caution so much that they decline a high volume of good orders. U.S. based ecommerce businesses were expected to lose $157 billion to false declines in 2023, while global ecommerce losses to fraud were expected to reach $48 billion. Among U.S. and Canadian online shoppers who took part in an ecommerce shopping survey, ClearSale found that 13% had experienced online fraud in the past year, but 18% experienced a decline.
False declines deprive businesses of order revenue, creating a profoundly negative customer experience. More than a third of those consumers (37%) will boycott a site after a false decline, and 25% will complain on social media about the site, creating ongoing lifetime value losses and higher customer acquisition costs.
Once a chargeback is filed, the only alternative to paying it and the associated fee is to dispute it. However, this requires employee time and resources to respond within the card issuer’s time limit, which varies by card company. Depending on the amount of the chargeback and the resources required to dispute it, businesses may lose money in the short term by fighting chargebacks.
However, over time, a high chargeback ratio can prompt banks to charge businesses higher transaction processing fees, withhold cash reserves, or close accounts with minimal notice. As a result, fighting chargebacks is a necessity, even if the process can’t recoup all the losses a chargeback creates.
American Express is changing its CID mismatch policy in April 2024. At that point, the liability for approved CNP orders with a CID mismatch will shift to Amex rather than the business. Amex says it’s making this change because CID data entry errors often cause customers to abandon carts rather than re-enter their data, so the liability shift will create a better customer experience and help businesses approve more orders. As of this writing, there’s no word from Visa, Mastercard, or Bank of America on any plans for similar changes.
Because there’s been so much discussion in the media about how generative AI (GenAI) can help solve business problems, it’s worth addressing here. The short answer to questions about the role of AI in fraud prevention is that AI has already been a part of advanced anti-fraud solutions for some time now. When AI is trained on specific data sets, it can quickly “learn” what good orders look like and what aspects of an order or customer profile pose a higher fraud risk within a context that can include market, vertical, time of year, type of product, and much more. These AI-based solutions are faster and more accurate than rules-based ones that use static data, which tend to generate a high rate of false positives.
As for GenAI, it’s too early to apply this technology to fraud prevention with a high degree of confidence. Concerns about GenAI’s accuracy, its propensity to generate false or made-up results, and the potential for exposure of protected information must be addressed before this technology finds its place in the fraud-prevention toolbox.
The specifics of fighting chargebacks will change as fraud tactics, prevention tools, and card brand rules evolve. However, there are three general practices that retailers and other online businesses can adopt and adapt over time to reduce chargebacks and challenge them more effectively.
Customers sometimes file chargebacks because it’s faster and easier to request with their card company than requesting a return or refund from a business. In fact, most consumers don’t allow brands to address their concerns first. To avoid chargebacks of convenience, ensure customers can easily find return information and support.
Providing delivery tracking and confirmation can reduce chargebacks based on non-delivery claims, and making sure your business name appears accurately on credit card statements can reduce chargebacks based on misunderstandings.
AI-powered order screening tools can help identify fraud risks from new and returning customers in real time. This matters because, as we’re seeing with the uptick in friendly fraud, formerly good customers can go wrong, and relying on static rules or internal approved lists can expose your business to this type of fraud. Expert review of orders that score high on fraud risk can verify fraud attempts and avoid false declines. Both of which are important for revenue and customer retention. If you don’t have the in-house resources to contesting chargebacks, consider working with a third-party mitigation service provider to handle them.
To ensure smooth and successful chargeback management, it is crucial for businesses to stay updated with the latest developments in the chargeback space. Keeping track of bulletins and press announcements from major card issuers and digital wallet providers can help businesses understand the current chargeback disputation requirements, processes, and deadlines.
Preventing chargebacks and disputing them effectively can be immensely beneficial for businesses as it can help them increase revenue by approving more orders. In the long run, proper chargeback management can also assist businesses in keeping transaction processing rates low, delivering a good customer experience, and earning more lifetime value from customers.
Original article at: https://ecommercefastlane.com/whats-changing-with-chargebacks-and-how-can-businesses-adapt/
Chargebacks are becoming more expensive, with cost now the biggest chargeback-related problem for half of online retailers. They are also harder to detect because more previously trustworthy consumers are committing friendly fraud, now a significant or moderate concern for more than half of businesses.
Treating returning customers as potential fraudsters leads to declining good orders. U.S. ecommerce businesses were expected to lose $157 billion to false declines in 2023, and false declines drive negative customer experiences, with more than a third of affected shoppers boycotting a site and a quarter complaining on social media.
A mismatch between a card's CID (or CVV) and the number a customer enters often causes a decline because the merchant is liable if the order is approved and later disputed. As of April 2024, American Express shifted the liability for approved card-not-present orders with a CID mismatch to Amex rather than the business, to reduce cart abandonment and help merchants approve more orders.
AI has been part of advanced anti-fraud solutions for some time. Trained on specific data sets, it quickly learns what good orders look like and which order or customer traits raise fraud risk within a given market, vertical, season, or product type, making it faster and more accurate than rules-based tools that produce more false positives.
Not yet with high confidence. Concerns about generative AI's accuracy, its tendency to produce false or made-up results, and the potential exposure of protected information need to be resolved before it has a reliable place in the fraud-prevention toolbox.
Review the customer experience for chargeback triggers, such as making return information and support easy to find, providing delivery tracking and confirmation, and ensuring the business name appears accurately on card statements. Because many shoppers file chargebacks instead of asking for a refund, removing those friction points reduces disputes of convenience.