How To Protect Your Margin Against Chargebacks At Peak Shopping

By: Monica Eaton-Cardone

Preparing for logistics, traffic surges and stock shortages during peak shopping periods is one thing, but ecommerce merchants often fail to prepare for chargebacks that follow impulse spending. This article will discuss how to protect your margin against online retail chargebacks during peak shopping.

Economic uncertainty has hit the retail industry hard in the first half of 2017. The impact of major political movements and the surprise election being called in April led to more cautious consumers reining in their spending. Fortunately for retailers, monetary worries typically get overlooked at certain points in the year: peak shopping days.

There are a number of times throughout the year when sales transactions go through the roof and retailers can boost their overall annual outlook. In previous years, the biggest shopping days in the UK habitually fell during December, coinciding with the Christmas shopping-spree period. However, it’s been predicted that 2017 will see November sales overtake December, thanks to days such as Black Friday and Cyber Monday.

This year the UK will reportedly spend a record £20 billion online, displacing December as the traditional peak trading month.

With the evolving retail scene and new peak shopping periods cropping up each year – most notably with the extension of Black Friday to “Black Fiveday” (Thursday – Monday at the end of November) – most retailers will jump on the bandwagon to maximise the opportunity to enhance slowing sales. Though we see another trend happening which often doesn’t hit hard until after these peak sales days.

The fraud challenge

Retailers are understandably eager to promote sales on peak sales days to take advantage of high consumer spending, as customers leave their inhibitions at the door and dive into an online world of discounts. None (hopefully) go into this period blind, preparing for rapidly depleting stock, increased Web traffic and planning logistics carefully, yet retailers often overlook the potential for mass chargebacks after the event.

Chargebacks differ from traditional refunds in one simple way: rather than contact the business for a refund, the consumer goes over the merchant’s head and asks the bank to forcibly remove funds from the business’s bank account. If the bank feels the cardholder’s request is valid, the funds will be removed from the merchant’s account and returned to the consumer.

The process is intended to protect the consumer against fraudulent transactions, however illegitimate chargebacks are increasing at an alarming rate. Each year the burden of mitigation is getting heavier and unnecessarily falls on retailers to defend their revenue.

It is a challenge for retailers not just to thwart fraud but to even spot it to begin with. It can take multiple forms: a cardholder discovering an unauthorised transaction and filing a chargeback, is only the start.

A big problem for retailers is that friendly fraud is on the rise. This increasingly favoured form of fraud sees cardholders exploiting loopholes in the chargeback process, using illegitimate chargebacks to steal from the merchant. It is criminal behaviour but it is becoming normalised.

Chargebacks are one of many risks threatening online retail success, but they also happen to be the most dangerous. If left unchecked, chargebacks steal profits and threaten business longevity. During busy shopping periods, chargebacks hold higher risk as the retailer will see more transactions happening, increasing the likelihood of fraudulent activity.

Customer demand rises as consumers are overcome with the fear missing out on peak shopping day sales, resulting in less thought going in to purchases. Neuromarketing expert Philippe Aime explains that a number of cognitive biases are in play on big sale days, urging customers to think in a way that deviates from logical thinking – hence, displacing rational worries about their economic state to take part in commercial holidays.

A combination of strategic marketing and anchoring previously higher prices to alluringly lower levels creates fear in consumers: a fear that others will find remarkable deals before they do.

Instant regret

Once stories of booming sales are over, the regret begins. The regret of excessive spending will force some shoppers to consider returning the products that were oh-so-tempting just days (or hours) earlier. If customers cannot easily return items, they will go to their bank and instigate a chargeback to get funds reimbursed.

Generally speaking, retailers will be hit with a huge amount of chargebacks 60 to 90 days after a large sales period. The number of chargebacks can ultimately threaten to decimate seasonal profits. Not only will merchants be stuck refunding the purchase, but they will have to pay fees on top of that, and they may not even recover the disputed item(s).

Overall, an illegitimate chargeback can cost retailers a large amount of income each year – chargebacks are an £80 billion global issue and continue to rise by up to 20 percent each year!

Retailers may think that going straight to the bank to recover funds is an unnecessary complication in the customer refund process, yet a huge 86 per cent of cardholders will initiate a chargeback without ever allowing a merchant the opportunity to resolve their claim.

However, a retailer can prevent the vast amount of chargebacks by simply ensuring that their delivery driver requests signed evidence of the order completion from customers. From those who pretend their purchase never arrived, to those claiming that they have no idea that the purchase was made to begin with, having proof that the consumer has accepted the purchase upon delivery could save merchants hundreds of thousands in friendly fraud charges.

Encouraging irregular spending habits

Buyer’s remorse isn’t the only overlooked risk for merchants during peak shopping periods. Most merchants will have an anti-fraud system in place to protect both consumers and themselves. Unfortunately for merchants, legacy systems often aren’t able to keep up with the escalation in irregular spending habits that occur on these days.

Most anti-fraud technology works by observing patterns in consumer spending. During a high transaction period, a consumer, who may have comparatively little spending, can spend significantly larger amounts in just a short space of time. This defies their typical behaviour as a consumer and starts to cause issues with the fraud detection software.

With orders coming in from both new and previously less active consumers, a retailer’s fraud software can struggle to tell the genuine orders from the fraudulent ones. If fraudulent purchases are going under the radar, consumers will have no choice but to file a chargeback once they see these errors on their credit and debit card bills.

The bad news for retailers is that these returns can be extensive. Global payments provider Ingenico revealed that by mid-December 2016, 50 per cent of refunds from Black Friday had been processed, with a huge 75 per cent processed by Christmas Eve. This has a detrimental effect on retailers as their stock will be tied up in the returns process instead of being available for customers who actually do want it. In addition, if retailers don’t offer an accessible, always-available returns process, customers will turn to their bank, kicking off the costly chargeback process.

It’s not all bad news

Chargebacks needn’t be accepted as a cost of online retail. Do not be naïve when it comes to peak shopping days. Now is the time to ensure a comprehensive management strategy to benefit from huge opportunities without sustaining enormous financial disasters.

In order to reduce fraud risk, retailers must identify internal errors, as well as external fraud that finds its way into systems. If retailers can prevent fraudsters from disrupting the system, not only will they prevent diminishing income from peak shopping days, but they will truly profit overall. Consumers will instead have a positive attitude towards the online store, enhancing brand reputation, ultimately increasing loyalty.

If merchants consider the potential detrimental outcome and instead prepare the tools at their disposal, they can end up saving thousands of pounds each peak sales day by handling excessive chargebacks in a way that reduces losses, grows customer satisfaction and increases loyalty while eradicating avoidable scheme fines and penalties.


By: Monica Eaton-Cardone - co-founder and CIO at The Chargeback Company



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