More Anti-Chargeback Firepower

 

Lauri Giesen

 

Merchant acquirers and their vendors have always used technology in their long-running war against chargebacks, but today’s weapons and tactics are getting more sophisticated. Knowing when to retreat remains an important way to control costs.

 

Chargebacks: few words are dreaded more by retailers and merchant acquirers. It’s not just the obvious cost of paying refunds to customers who claim they never received the merchandise they ordered or that it was faulty. Even when the retailer is able to prove the questioned purchase is valid, the cost of disputing the chargeback may be higher than the actual cost of the transaction itself.

“Chargebacks have been a major problem for retailers for years. Whether it is fraud, friendly fraud, customers not understanding what a purchase on their card bill is, or poor customer service, it all adds to the cost of doing business for the retailer,” says Jeff Liesendahl, chief executive of Itasca, Ill.-based Accertify Inc., a subsidiary of American Express Co. that recently has expanded its fraud-prevention services to include a product that automates the processing of chargebacks.

Most experts say the number of actual chargebacks has remained stable or declined slightly in recent years. According to Visa Inc., chargebacks currently represent only about 0.037% of total Visa transaction volume in the United States. Chargebacks correspond to a little less than half of credit card fraud losses, with the remainder of fraud resulting in merchants automatically reversing the charge after a customer complaint, according to Visa.

“On one hand, we are seeing more fraudsters in the market and that results in a greater number of chargebacks. But on the other hand, we’re doing a better job as an industry of educating retailers on how to avoid chargebacks down the road and how to handle them once they are received,” says Chris Doheney, director of independent businesses and mid-merchant disputes for Toronto-based acquirer Moneris Solutions Corp.

Significant Burden

But the number of chargebacks itself does not tell the story. As online sales grow, new chargeback problems are created. One example is the growth in sales of software or games that are not only purchased but also delivered online. With these digital products, it is often more difficult to prove that the customer received the goods than when they walk out the door with them or sign with a delivery service.

And there are other costs associated with handling chargebacks besides the cost of fraud. Liesendahl estimates that as much as 3% to 4% of retailers’ total revenues are consumed with the costs of dealing with chargebacks, and he adds, “The amount varies like crazy.”

Online retailers and those with high average tickets tend to have more chargebacks than other retailers. But individual merchants can experience significant chargeback variances during different times of the year or if problems occur. “In the travel world, there can be huge spikes in chargebacks when there is a strike or Web-site problems,” Liesendahl says.

There has been an uptick in chargebacks for merchants selling expensive goods, according to Jamie Landheer, senior vice president and director of relationship management for merchant services at Fifth Third Processing Solutions LLC, a big Cincinnati-based acquirer.

“I don’t know if it is the economy and more customers are using chargebacks to try to default on purchases or they are just more careful about checking their statements, but there is definitely more chargebacks on high-ticket items,” she says.

The burden on retailers is significant. Not only do they have to pay back on a number of claims, but also the cost of processing and disputing all those chargebacks can be high—even if they win a high percentage of them.

“The labor cost of investigating an individual chargeback can be in the $20 to $40 range. It’s not unheard-of for a retailer to spend $50 on a $40 purchase. Even if you win the case, you lose $10,” Liesendahl says.

Knowing which chargebacks to fight and which ones to simply pay out is important to merchants. According to the latest online-fraud study conducted by CyberSource Corp., a subsidiary of Visa, online merchants are disputing between 49% and 62% of their chargebacks.

However, CyberSource found a huge variance in the percentages reported by various retailers. It found that one-third of retailers surveyed dispute 90% or more while 20% of the retailers dispute less than 10%. It also found that merchants report they win approximately 41% of the cases they dispute.

Automation Is Key

Many processors and software companies are working with merchants on two fronts to control chargebacks. First, they want to improve the data gathering at the point of sale, which can help prevent chargebacks and enable merchants to better fight those that do occur. Second, they want to automate the back-end handling of chargebacks so that retailers can win more disputes and incur less cost.

At the point of sale, merchant education is important, Fifth Third’s Landheer says. Fifth Third has been conducting a number of Webinars as well as one-on-one training sessions with retailers to make sure they are using techniques to avoid subsequent chargebacks. Much of this involves making sure merchants capture all the information they need so that if there is a chargeback, the retailer has the tools to dispute it.

One such practice, according to Moneris’s Doheney, is to use an imprinter to get an impression of a customer’s card if the magnetic stripe or POS terminal is not working correctly. Situations where store clerks manually input customer card numbers into a device often result in chargebacks and it is important to have some form of a copy of the card in case of a dispute, Doheney says.

Also as part of its chargeback-prevention effort, Moneris prompts its online merchants to use the Verified by Visa and MasterCard SecureCode authentication services. “We strongly recommend our merchants take advantage of these programs. It helps make sure they capture all the information and have the password protection to avoid disputes later,” Doheney says.

Automation is also helpful. Merchants want systems that can help gather all the chargebacks, sort them by the issue that caused the dispute, identify which ones are unwinnable so they can be paid out without spending a lot of time on them, and gather information necessary to fight chargebacks that appear to be good transactions. Plus, automation systems that spot trends in chargebacks can help retailers avoid future claims.

Accertify’s service, for example, downloads all the chargebacks for a given retailer and automatically reviews them, pinpointing which ones look like certain losers for the merchant.

“The last thing a retailer wants to do is spend money on claims they can’t win,” Liesendahl says. The system may also identify chargebacks that may be winnable, but the size of the ticket does not justify the effort.

The Accertify system is programmed to deal with the various rules from all the different payment networks. That can be a difficult process because of the different policies each network has regarding such issues as the amount of time a retailer has to respond to a chargeback, Liesendahl says.

This system can either be configured to identify those chargebacks that a retailer needs to look into and send them to the retailer’s own agents for investigation, along with more information related to each chargeback, or an Accertify agent can be employed to conduct the investigation for the retailer. “It’s the same platform either way,” Liesendahl says.

Accertify is selling its service to retailers that are customers of its parent company, American Express. However, the system works on all payments networks, not just AmEx. Liesendahl says the system can reduce merchant spending on chargebacks by 20% to 50%.

Various processors also have their own systems to help automate the practice of processing chargebacks for their merchants. Moneris has a system it uses in Canada that has analytics tools with built-in intelligence to review, sort, and respond to different types of chargebacks. Moneris is considering implementing the system in the U.S. as well, where the processor has a big operation based in Schaumburg, Ill.

In many cases, a payments processor can identify and deal with chargebacks so that the retailer never sees many of them. “We can sort out chargebacks where a refund was already made or if there is missing information that we can supply to settle the dispute. Often we can settle the claim before the retailer has to even see it,” says Fifth Third’s Landheer.

Another form of automation that has been helping to ease the burden of chargebacks is electronic signature capture. Retailers that have deployed systems that automate the capture and storage of credit card signatures have a real edge in dealing with chargebacks, Landheer says.

Many merchants keep paper signature receipts in drawers, which can be hard to find and retrieve within the timeframes allowed. Those with signature capture can typically locate and produce the signature verification quickly and then have a better chance of winning a dispute, Landheer explains.

‘Stop the Pattern’

One retailer that has been aggressively dealing with chargebacks is Electronic Arts, a developer and marketer of video games. While most of Electronic Arts’ products previously had been sold through game shops, such as GameStop, the firm has become more aggressive in recent years in selling games directly online.

Chargebacks are particularly problematic for Electronic Arts because it not only sells its games online, but also delivers them online and often has to prove that the customer in question received a game. So-called friendly fraud is also a problem for Electronic Arts because minors often use their parents’ credit cards without permission to purchase games. Parents dispute the charges when the bills arrive.

Redwood City, Calif.-based Electronic Arts has been using automated systems to separate the true fraud from the friendly fraud. The first claims are usually refunded without dispute. Dealing with the second type is trickier.

Electronic Arts is adjusting its point-of-purchase programs to make it more difficult for an unauthorized person to purchase games. It has also been working to gather more data so that in an event a child uses his or her parent’s card, there is documentation showing where the game went and that it was accepted and even used.

Nelson Ho, fraud manager at Electronic Arts, says there is a balancing act with chargebacks. The firm does not want to exceed chargeback allowances set by Visa and MasterCard, which would cause it to be fined. But extremely low chargeback numbers aren’t good either.

“If our numbers start to get too low, it often means we are denying product to good customers. Ideally, we’d like chargeback numbers of 0.7% to 0.8%,” Ho says.

One issue with using software is to decide whether to proceed with disputes on small amounts. Liesendahl argues that the cost is often too high to dispute chargebacks for low amounts and automated systems should separate the small-ticket claims for automatic payout. Some retailers, however, disagree with that notion.

Ho argues that if customers figure out a retailer is not disputing low-value chargebacks, they will begin to file more chargeback requests.

“You have to stop the pattern,” he says. “Each $2 transaction adds up if you get a lot of them. It might cost you more to dispute a small transaction than it would just to pay it out, but you save money in the long run if you refuse to pay when you know you’re right.”

Landheer, however, notes that a number of Fifth Third Processing’s merchants have a policy of not fighting any chargebacks under a very low threshold—typically $5 to $10. “Merchants have to decide for themselves what they want to do but I have not seen any influx of chargebacks of $4.99 for retailers that have set a $5 threshold,” she says.

Less Time

Some of the card networks have been changing the rules to make handling chargebacks easier, though in some cases timelines may be shorter. Discover Financial Services, for example, has changed the timeline for chargebacks from 180 days for service-related chargebacks and 365 days for fraud-related ones to 120 days for both. It has also reduced the reason codes from 37 to 24. These changes are effective April 2012.

Visa also made changes that were effective in April. For one thing, card issuers may now submit information collected from the cardholder electronically rather than having to obtain written signatures, as was the case under the old rules.

While these changes are intended to make the process more efficient for retailers and issuers alike, not everyone sees an improvement. Reducing the number of categories is not as significant as it appears, Landheer says, because the vast majority of chargebacks are already focused on only four or five categories.

And sometimes rules changes can make it more confusing for merchants. “We work to keep our retailers up to speed on new rules. Sometimes they change the time retailers have to respond to a chargeback and if they are not up to date on the rules, retailers can miss out on the opportunity to dispute a chargeback,” she says.

In any case, one thing seems clear: The chargeback war probably can’t be won. Mitigating losses is possible, but only with constant upgrades in weaponry and frequent assessment of tactics.