Throughout the Covid-19 pandemic, some retailers in the UK and worldwide were faced with an urgent choice: adapt, or disappear. This forced merchants to rethink their sales strategies, redesign business models, and focus on other revenue channels, including ecommerce. Data from the Center of Retail Research (CRR) shows that amid the turbulent times, UK ecommerce sales increased by 46.5 percent in 2020 to £110.6 billion. And in 2021, UK ecommerce sales hit £120.48 billion, making the UK the third largest ecommerce market in the world after the US and China.
Although the shift to ecommerce paid off by improving the bottom line for merchants and convenience for customers, most merchants noted the rise in chargeback fraud.
In a survey, 80 percent of merchants admitted to experiencing increased friendly fraud, with 68 percent citing a significant ramp up in chargeback rates after the pandemic’s start. In a different survey involving 1,500 UK consumers, 36 percent of consumers admitted they asked for refunds citing fraudulent transactions knowing too well the transaction was legitimate.
Despite this, merchants often underestimate the true cost of chargebacks and their effects on their bottom line. For each $100 charged back, merchants lose about $240 through chargeback fees, operational and labor costs, and reputation damage. In the worst case scenario, you could also lose your merchant account.
With so much at stake, merchants must take a proactive role against chargebacks. Below are best practices to mitigate chargeback risks while protecting consumers from fraud.
What are ecommerce chargebacks?
An ecommerce chargeback occurs when a customer contacts their bank and disputes a transaction. If the issuing bank approves the dispute, they file a chargeback, and the transaction amount is clawed back from the merchant’s account.
Chargebacks were designed to protect cardholders from fraud. While the system works, it has loopholes both professional fraudsters and cardholders use to shortchange merchants. Research shows that 50 percent who successfully commit friendly fraud will try it again within 60 days.
As card-not-present transactions, ecommerce sales are 81% more susceptible to fraud than card-present transactions. This is mainly because it’s easier to steal card information than a physical credit card to make unauthorized purchases. Similarly, it’s easier for a cardholder to claim they didn’t authorize the transaction or they don’t recognise it on the card statement if they didn’t have to present their card in-person at a local shop.
Reasons for ecommerce chargebacks
The main reasons for ecommerce chargebacks include:
A customer can dispute a transaction because of merchant errors. Some of these errors include:
- The charge on the card statement doesn’t match the final order price
- Duplicate charges
- The merchandise received doesn’t match the description. For instance, the item might be different in appearance or of inferior quality
Research shows that 20 to 40% of all chargebacks issued are caused by merchant error which can be avoided by implementing best practices and resolving internal problems.
Chargebacks might be a result of criminal behavior by someone besides the cardholder. Examples of such behavior include:
- A hacker steals a cardholder’s card information and uses it for purchases
- A thief steals an innocent person’s credit card and goes on a shopping spree with it
Friendly fraud is when a consumer files a false chargeback: for instance, a cardholder can charge back a transaction because:
- A family member bought merchandise using their card without telling them
- They don’t recognize the payment description on the card statement
- They forgot about the transaction
- A consumer intentionally states they didn’t initiate a payment that they did in order to get an item for free
A customer can file a dispute in any of these situations, and isn’t obliged to return the merchandise. As such, the merchant might lose the transaction amount and the merchandise. Sometimes, merchants can lose 2.5X of the original transaction amount in chargeback fraud.
How can ecommerce businesses fight chargebacks?
Although chargebacks increase by 41 percent every two years and ecommerce businesses are especially vulnerable to chargebacks, merchants have the right to fight against chargebacks and keep their revenue.
Below are strategies to fight and win against false chargebacks:
Resolve complaints through customer service
Effective and proactive customer service goes a long way toward resolving disputes. Customers often file disputes after they fail to get a refund through customer support. Displaying customer support contact information on the website and social network profiles, and having clear refund policies will prevent customers from feeling powerless and encourage communication.
Use chargeback alerts
Once a dispute is filed, a merchant who uses chargeback alerts has between 24 and 72 hours to respond to it. Before they do, they can contact the customer to dissuade them from pursuing the claim. If it’s a valid dispute, issuing a refund is better than losing a chargeback.
However, if you feel the dispute is without merit, you’ll gain information that’ll help in the dispute process and when assessing chargeback prevention strategies.
Compile compelling evidence
Merchants who choose to fight chargebacks bear the burden of presenting evidence that proves the transaction is legitimate. Compelling evidence is often a delivery form or transaction document, including:
- Pickup or delivery notifications
- Signed receipts
- Communication with the customer about the transaction
- For digital services, customer IP address, download time
- Evidence that the customer works or lives at the provided delivery address
Use the chargeback reason code as your guide to submitting the correct evidence. Different card networks use different reason code formats. However, they all fall under four categories: fraud, authorization, customer disputes, and processing errors.
After receiving a chargeback notification, you should act fast to prepare an appropriate response. The chargeback process has several stages with varied deadlines depending on the card network. To meet the deadlines and improve your chances of winning the chargeback, you should collect transaction information beforehand, properly format the documentation and send it through the correct channels. It helps to have a chargeback response template containing general information.
Track successful dispute methods
After submitting your rebuttal, the issuing bank reviews the evidence and decides whether to accept or reverse the chargeback. Although a huge portion of this process is not within your control, you can learn from every chargeback.
Take note of successful dispute attempts and replicate them. Also, tracking chargebacks can help you improve business processes and implement efficient fraud prevention strategies.
How can chargeback mitigation companies help?
Merchants can fight a chargeback themselves. However, as the volume of chargeback increases, efficiency becomes a problem. Aside from regular chargebacks, International merchants serving the UK ecommerce market should be aware of Section 75. It’s a portion of the Consumer Credit Act 1974 UK law and is similar to the U.S. Fair Credit Billing Act of 1974, albeit with some differences, including:
- Shared liability – Section 75 holds both merchants and issuers responsible for transaction disputes instead of just the merchant like the FCBA.
- Section 75 has no time limit, whereas FCBA has a 60-day deadline.
- Section 75 covers credit card purchases between £100 and £30,000
Then, there’s the option of hiring a chargeback mitigation company to handle the increased workload and help stay on top of the differences and changing regulations.
These companies are skilled and experienced in fighting card-not-present chargebacks. Moreover, the better ones have invested in infrastructure, technology, and employees needed to fight chargebacks efficiently in-line with your volumes.
A chargeback mitigation company will integrate its service to offer an efficient end-to-end solution that’ll reduce chargebacks and improve win rates.
By examining incoming chargebacks, the chargeback mitigation company will provide a perspective on common chargeback reasons and recommend actions to minimize chargebacks.
Chargebacks can burden merchants with unnecessary fees. To stand a chance of protecting their bottom line, merchants should know the following:
- Ecommerce sales were 27.6 percent of the total retail sales in February 2022, a significant increase from 19 percent before the pandemic.
- Despite the growth of alternative payment methods, many UK online shoppers use cards:
- 6 percent by deferred change/debit card
- 18 percent by credit cards
- 32 percent by debit card
- Merchants lose on average 2.5X of the original transaction amount in a chargeback claim.
- 50 percent who successfully commit friendly fraud will try it again within 60 days
- Strong Customer Authentication (SCA) as part of PSD2, helps merchants reduce instances of friendly fraud
- With Section 75 claims, the law applies whether the merchant is based in the UK or not since the UK-based bank is liable, as is the merchant.
- With a Section 75 claim, the issuer cannot automatically claw back money from the merchant like with a chargeback claim.
- International merchants aren’t always aware a Section 75 claim has been filed. Luckily, these claims don’t count towards credit card chargeback ratios.