While the surge in the volume of purchases during the holiday season has the potential to be hugely profitable for retailers and eCommerce merchants, there are also lurking dangers such as fraud, false declines, and chargebacks that could negatively impact revenue for those who are unprepared for them.
With online shopping continuing to skyrocket, one of the most common cases of eCommerce fraud is chargeback fraud. A credit card chargeback is when a customer successfully challenges a transaction, resulting in the payment being reversed by the cardholder’s bank and debited from the eCommerce business. While this process is in place to protect consumers against fraud, it can erode eCommerce margins significantly. Friendly fraud occurs when the chargeback is filed for a purchase that was in fact legitimately carried out by the cardholder.
Retailers refund billions of dollars to customers every year in the form of chargebacks. According to AusPayNet’s 2022 Payment Fraud Report, credit card fraud grew by 5.7% to $495 million in 2021, following an 8% growth in credit card payment and 8.2% growth in online shopping. Card-not-present (CNP) fraud – mainly affecting online purchases – accounted for 91% ($452 million) of all fraud on Australian cards in 2021, which is an indication of the migration of fraudulent activity to the online environment as e-commerce continues to grow. CNP fraud involves credit card details being stolen by fraudsters and used to make purchases or other payments without the card being present, usually online.
Chargeback fraud can have a range of short and long-term consequences for merchants. In the short term, merchants have to repay every chargeback claim – so they lose the cost of the product as well as the revenue, plus they are faced with hefty penalties for the process as well as operational costs. Double refund chargebacks are also common, occurring when the customer files a chargeback and asks for a refund at the same time. Sometimes merchants will process the refund before even being made aware of the chargeback, and end up paying twice.
In the long term, when chargeback rates are too high, a merchant’s credit card network may place them in an excessive chargeback program that comes with heavy fines, and they may be forced to switch to a high-risk merchant account with high processing fees. In rare cases, a credit card provider might choose to terminate a merchant’s account.
Many retailers consider chargebacks as a part of the reality and cost of doing business and therefore they, more often than not, accept to foot the bill rather than go through the hassle and processing costs of fighting the dispute. Moreover, excessive fraud and chargebacks can get merchants penalised or dropped by their payment processors. However, retailers can take a proactive approach to chargebacks, especially in the lead up to the holiday season, to minimise their losses and take full advantage of peak sales seasons.
While fraud prevention tools are increasingly part of any eCommerce business, not all tools are created equal. Traditionally, manual fraud review teams try to keep up and make accurate decisions on what is a fraudulent activity or not, based on some rigid, pre-determined factors. The risk of using a rule-based approach is that some legitimate customers might be wrongfully declined because they don’t fit this rigid criteria, leading to false declines, frustrated customers, higher cart abandonment rates, and lost revenue.
Delivering exceptional customer experience has long been a cornerstone for eCommerce growth and as such, it is imperative for eCommerce merchants to strive to balance their need to block card-not-present (CNP) fraud with their need to deliver a frictionless checkout journey and approve as many good orders as possible. By having a Chargeback Guarantee with an Approval Rate SLA in place, eCommerce merchants will be in a better position to provide an instant fraud decision, immediate dispatch and a higher conversion rate. Real-time decisioning capabilities are key to delivering the efficiency, accuracy, and scalability required for typical transaction volumes or peak holiday traffic regardless of the device source or payment type.
Against the backdrop of the rapid and ongoing changes in consumer behavior as well as the current economic conditions, merchants need to stay nimble and get all their ducks in a row for this holiday season and beyond. Implementing the right fraud prevention solution will enable merchants to quickly adapt to emerging trends and threats––all while ensuring a frictionless experience for customers. While catering to customers’ shopping preferences is important, fraud prevention should not be an afterthought.
Nick Kirtley is country manager for Australia & New Zealand at Riskified.