Can Chargebacks be Prevented in Real Time?
One of the inevitable difficulties that comes along with accepting credit and debit transactions, particularly in an eCommerce setting, is the problem of chargebacks. When a cardholder disputes a charge on their card directly with their issuing bank, rather than contacting you as the merchant to resolve their issue, a chargeback is filed. Inexperienced merchants sometimes shrug off the issue of chargebacks, reasoning that they make up a small percentage of their overall sales, and thus aren’t worth the time and effort of confronting in a systematic way – after all, you can’t please everybody, right? In this view, chargebacks are seen as an unavoidable fact of eCommerce.
Unfortunately, chargebacks are more than simply a refund or return; the bank or payment processing company that provides your merchant account is a risk-averse institution, and chargebacks expose them to risk – which they mitigate by imposing penalties on the merchant targeted by the chargeback, in the form of chargeback fees. Worse still, if your business experiences too high a volume of chargebacks, the bank may impose more restrictive terms onto your merchant account, withholding funds in a cash reserve, increasing processing fees, or even suspending or canceling your account. This doesn’t even touch on the deeper, indirect costs resulting from chargebacks; in total, the financial losses your business experiences from chargebacks could easily be between two to three times the dollar value of the disputed charge, if not more.
In fact, a 2021 LexisNexis study revealed that every $1 of a successful fraud attack cost US merchants $3.60, which represents a 15 percent increase relative to fraud costs before the COVID-19 pandemic. As more consumers have chosen eCommerce and delivery apps over shopping trips and dining out, the opportunity for fraud has soared – and merchants need the ability to respond rapidly to these issues as they arise in order to protect the health and profitability of their businesses. The traditional method for handling the problem of chargebacks involves waiting to be notified that a chargeback has been filed, and then challenging the claim within the 45-day window allowed by the issuing bank. This approach has the disadvantage of being slow and reactive; however, there are now tools available to merchants that offer the ability to create a proactive chargeback defense, responding to chargebacks in real time.
One of the simplest ways to increase your responsiveness to chargebacks is through the use of chargeback alerts. A chargeback alert service functions like an early warning system, sending you advance information when a cardholder initiates the chargeback process. When you use a chargeback alert service, the card issuer informs a third-party service that a chargeback is pending, but has not completed the process of being filed, and the alert service notifies you, the merchant, of the details of the disputed transaction. At that point, you have a window of 24-72 hours in which to resolve the issue with the cardholder (most likely by refunding the transaction), giving you the opportunity to prevent the chargeback from being filed. Even if this results in the loss of a sale or merchandise, a refund is essentially always less expensive than a chargeback.
What’s even faster than responding to a chargeback before it’s filed? Stopping fraudulent transactions that will result in chargebacks before they can be completed. This is where fraud detection software comes into play. These programs analyze large sets of data and utilize machine learning to detect patterns that indicate fraudulent behaviors in real time, noticing and blocking fraudsters, payment abusers, and bots without any direct action on the part of the merchant. Automated payment fraud monitoring and prevention tools can help filter out not only traditional fraud attacks by identity thieves, but can also reduce so-called “friendly fraud,” in which legitimate transactions initiated by authorized cardholders are subjected to chargebacks, either mistakenly or with fraudulent intent. By using machine learning, fraud detection software can block fraudulent transactions with great accuracy – less than 1 percent false positives – and without the need for a manual review process. The pattern recognition abilities of these machine learning systems also help to provide legitimate customers with a more personalized and frictionless shopping experience. With the tools available to eCommerce merchants today, disputing a chargeback filed with a cardholder’s issuing bank should be the last resort, not the first line of defense, in chargeback prevention. By using automated fraud detection software to stop fraudulent transactions before they can be completed, and working with a chargeback alert service to resolve disputes before chargebacks are fully processed, you can dramatically reduce the number of chargebacks on your merchant account’s record while reducing the amount of time you need to devote to gathering evidence and disputing chargebacks. Instead, you can invest that time where it belongs: building and growing your business.
Please contact Durango Merchant Services now to learn more about our chargeback prevention services!”