Credit card chargebacks present a growing and costly problem for merchants, taking up scarce time and resources to track and dispute. With numerous companies offering services to help reduce chargebacks and fight claims, is it a good idea to bring one on board?
About 50 percent of all chargebacks – which happen when customers contact their credit card issuer to dispute a purchase and request a refund – are due to fraud, and up to 80 percent are resolved in the customer’s favor, according to a 2016 report by the Federal Reserve Bank of Kansas City.
Chargebacks are expensive. The 2016 LexisNexis “True Cost of Fraud” study reports that, “On average, U.S. merchants reported an 8 percent increase over last year in the cost per dollar of fraud losses, from $2.23 to $2.40. This means that for every dollar of losses, merchants are losing $2.40 based on chargebacks, fees and merchandise replacement.”
If those fees add up to 1 percent or more of a company’s sales volume monthly, a bank can terminate use of its card services, said Phillip Parker, founder of cardpaymentoptions.com, which provides merchant account and payment services.
Card-not-present chargebacks harder to fight
“We’ve seen a huge increase in chargebacks in 2015 over 2014,” said Matthew Katz, chief executive officer of Verifi, a company that helps merchants prevent and fight chargebacks.
Retailers are worried that number will only increase. Last October, brick-and-mortar stores were required to convert card processing equipment to accept the more secure EMV chip cards, which reduce in-store purchase fraud.
But EMV cards only address a small part of the problem – Katz and others predict that as chip cards stop more in-store fraud, scammers will move to online or card-not-present (CNP) fraud, which already faces the greatest chargeback problems, according to the Kansas City Fed’s report. “Issuers can initiate chargebacks for CNP fraud more easily because it is more difficult for merchants to authenticate cardholders and their payment devices when transactions are made remotely,” wrote the study authors in the Fed report.
So when it is time to turn to help from the numerous companies out there that offer it?
First, it’s important to know how chargebacks are reported and how companies can help.
Friendly vs. actual fraud chargebacks
There are a number of valid reasons why a customer might dispute a charge on a credit card, including: if the merchandise didn’t arrive or arrived damaged or if the company duplicated a charge. However, a high percentage of chargebacks are the result of what is called “friendly fraud.” Actual fraud is stealing a credit card number and buying goods. Friendly fraud, on the other hand, is when customers dispute charges they actually made – and received the product or service. It could be because they don’t like the product or don’t want to pay shipping costs to return the product, or it could be because they want something for free.
And it’s easy to do. Monica Eaton-Cardone, co-founder of Chargebacks911, a chargeback remediation and loss recovery company based in Clearwater, Florida, noted that 70 percent of the chargebacks they deal with are a result of “friendly fraud.”
“We’ve found that 50 percent of customers who commit friendly fraud will do it again within 60 days,” she said.
Preventing friendly fraud chargebacks requires good record keeping, easy-to-read terms and agreements, prominent return and contact information on your company website, and clear communications to the customer about the name the company will appear as on their charge statement. Its’ also necessary to have the tools to fight fraudulent chargebacks if they do occur, said Srii Srinivasan, chief executive officer of Chargeback Gurus.
Fees, fees and more fees
Normally, it can take three to six weeks for a merchant to hear about a customer dispute or confirmed fraud through the chargeback process, said Keith Briscoe, chief marketing officer of chargeback and fraud prevention company Ethoca.
The fees cover the transaction costs of reversing charges for the customer and provide a disincentive for merchants to incur chargebacks, said Parker. Those fees usually range from $25 to $35 per chargeback, but vary depending on the merchant account provider and region.
“Merchants are responsible for paying a fee for each chargeback, but they are also liable to pay fines and increased fees per chargeback if their merchant account accumulates too many chargebacks,” Eaton-Cardone said.
Early notification, early prevention
Verifi and Ethoca, both well-established chargeback and fraud prevention companies, offer real-time alerts directly from the card issuer, so merchants are notified the moment a dispute or fraudulent transaction is confirmed between the bank and the cardholder and before the chargeback is processed, Briscoe said. That is important because merchants can only issue a refund before a chargeback is processed. So upon receiving an alert, the vendor can either choose to contact the customer and agree to a refund, or allow the chargeback to be processed.
The companies charge $40 per alert. Ethoca specializes in online fraud prevention and customer disputes. Verifi provides chargeback prevention and dispute management services. The merchant then has a choice to either fight the chargeback or turn it into a refund.
Normally, it can take three to six weeks for a merchant to hear about a customer dispute, said Keith Briscoe, chief marketing officer of Ethoca.
One of the services Verifi offers is “order insight,” which shows “shopping cart level data,” on online credit card statement card charges to cardholders. That way, customers are less likely to dispute a purchase because they don’t recognize the merchant name or can’t remember a purchase.
Companies such as Chargeback Gurus and Chargebacks911 can include Ethoca or Verifi services as part of a package. Fees vary depending on the type of services selected, as well as the number of chargebacks incurred. In addition to disputing chargebacks, these companies also work with customers to find the root cause of their chargeback problems to prevent them from occurring in the first place, said Srinivasan.
Chargeback Gurus, for example, focuses on more high-risk merchants, particularly ecommerce, which "operate in the card-not-present space," Srinivasan said. That can include those who offer negative opt-ins – that is when customers sign up for a free trial of a product or service, but if they fail to cancel the recurring charge within a specified period of time, they incur an automatic charge on their credit card.
When fighting chargebacks costs resources
Brynn Stenslie, manager of payments and fraud prevention for Spokeo, a people search service, started using Verifi’s Cardholder Dispute Resolution Network about four years ago.
As her company has grown – it now has 200 employees and $50 to $100 million in revenue – the chargebacks have also increased. So at the end of last year, Stenslie said, Spokeo decided to hire Verifi to handle chargebacks.
“We have a very clear billing description and it’s easy for customers to contact us – we have 24/7 customer service – but they prefer to contact the bank rather than us.”
Fighting the chargebacks became too time-consuming. “We didn’t have the bandwidth in-house to do it. Verifi has relationships with various banks and issuers that we don’t have,” Stenslie added. Also, Verifi’s expertise helps as “there are such a range of chargeback reasons, and each has its own rules,” she said.
Subscription or contingency service?
Suresh Dakshina, co-founder of Chargeback Gurus, said his company used to work on a contingency fee, but has since moved to subscription billing. “We have clients we bill $1,000 a month and clients we bill $60,000 a month,” Dakshina said. “This variation depends on the services they opt for, the size of company and other factors.”
Eaton-Cardone said for small companies, or for companies with less than 50 chargebacks per months, especially those that sell high-ticket items above $500, she suggests a subscription fee starting at $29.95 per month; the merchant also pays a percentage of the revenue recovered on chargebacks.
She also suggests that if a company doesn’t have at least 50 chargebacks a month, it should use a chargeback management company that will work on performance – that is they only charge a percentage of the revenue they recover.
Even with all the safeguards in place, people can be clever. The goal for chargeback companies is to be even more clever. Eaton-Cardone said her company uses a variety of tools, including social media, to determine if a chargeback is due to friendly fraud.
For example, a customer a company they worked with disputed her charge for Disneyland tickets, saying she had canceled the trip. “We took a screenshot of their Facebook page showing them at Disneyland” said Eaton-Cardone.
Conduct due diligence
If you do decide to hire a company to handle chargebacks, do your homework and make sure you’re hooking up with a reputable firm. Although Katz and others said they were not aware of a problem with companies trying to defraud merchants on the pretext of helping with chargebacks, scams are not unheard of. In 2011, a company, badcustomer.com, claimed to blacklist customers who repeatedly initiated chargebacks. It turned out to be a complicated con. So here are some suggestions from the experts on finding a good company:
- Be wary of companies that claim to win 80 percent of chargeback disputes, Katz said – 35 to 60 percent would be a good number.
- Ask what kind of access the company will need to get to the merchant’s chargeback and customer data, and whether that data will be shared with any third-party vendors.
- Find out if the company specializes in a particular industry.
- Examine the website. Is the “About” page generic? Are there contact names for actual people or a general email? Where is it based?
- Don’t just hire someone based on email exchanges. “Pick up the phone and call,” Katz said. “You don’t hire a nanny based on a resume and an email. This is money – don’t be lazy about it.”