Chargeback management in ecommerce is undergoing an evolution in several aspects. One major development in recent years has been the adoption of post-transaction fraud prevention tools by enterprise merchants (defined as those with over USD 50 million in annual revenues). According to Justt’s 2023 Chargeback Pulse survey, 76% of companies surveyed used at least some of the post-transaction fraud prevention tools offered by Ethoca and Verifi. In certain industries, such as Travel & Hospitality, the figures reached over 90% usage. These include chargeback prevention alerts that allow merchants to manually issue refunds before a chargeback is processed, Verifi’s Rapid Dispute Resolution (RDR), which automates the refund process for chargeback alerts and tools that clarify charges for cardholders such as Ethoca’s Consumer Clarity and Verifi’s Order Insight.
Notably, large enterprise merchants, i.e. companies with over USD 500 million in annual revenue, use these tools more than their smaller counterparts. Half of large merchants surveyed reported using RDR, compared with 20% of smaller merchants. Meanwhile, 67% of large merchants use Ethoca’s Consumer Clarity or Verifi’s Order Insight, compared with 43% of smaller companies.
Visa’s introduction of Compelling Evidence 3.0 has only accentuated the advantage of using Order Insight, as now merchants who use the tool can block fraud (i.e. Reason Code 10.4) chargebacks before they happen by providing key pieces of compelling evidence. By showing a pre-existing legitimate commercial relationship with the cardholder using key data points, Order Insight users can short-circuit attempted chargebacks. This way they can avoid having potential chargebacks counted against the company’s monthly chargeback to transaction ratio as well as the accompanying chargeback fees at the cost of the Order Insight fee set by Verifi.
While these advances in chargeback mitigation technology provide huge benefits in general and for specific industries in particular, there is also a drawback or caveat that must be stated: the cost. If not used strategically, the costs of implementing these post-transaction fraud prevention tools can be significant when compared to the potential financial losses to chargebacks, especially if the merchant in question has an effective chargeback team or chargeback mitigation solution in place.
The main benefit of post-transaction fraud prevention tools is to keep merchants’ chargeback ratios below the threshold for the credit card networks’ chargeback monitoring programs.
Therefore, as long as merchants are significantly below the threshold, it would be preferable for them to challenge chargebacks they consider illegitimate and recoup the lost funds, instead of using chargeback alerts to issue pre-emptive refunds. Below the chargeback monitoring program threshold, it might even be more cost-effective in certain circumstances to avoid using Consumer Clarity and Order Insight and experience higher illegitimate chargebacks but then recoup the money through an effective chargeback representment strategy.
This is where working with chargeback experts comes into play. Instead of just throwing money at a problem to make it go away, enterprise merchants should seek help in optimising their use of post-transaction fraud prevention tools. It is important to first establish whether the business is close to passing the chargeback monitoring program thresholds. The next step would be to conduct a financial analysis of how much the business is losing to chargebacks, how much is being spent on post-transaction fraud prevention tools, what impact these tools are having on chargebacks losses, and what would be the impact if the business fought more of its chargebacks using existing internal resources. Everything should be quantified. A final, logical step once such a financial analysis is undertaken would be to examine what sort of value an external chargeback management solution could bring to the company. Can win rates be significantly improved and operating costs reduced by outsourcing some or all chargeback representment cases to third-party providers? The answer is not one size fits all. It will vary based on the specifics of the business in question and the solution vendor.
A complete defence against payments fraud requires a pre-transaction fraud solution to sift out true fraud attacks and post-transaction chargeback management solution to address friendly fraud. The post-transaction fraud prevention solutions offered by Ethoca and Verifi meanwhile are oriented towards ensuring that the business does not exceed chargeback ratio thresholds to avoid incurring significant fines and penalties from the likes of Visa and Mastercard. They are not a total replacement for a robust defence against either true fraud or friendly fraud.
Regardless of whether a business decides to outsource some or all of their chargeback management to a third-party vendor, it is crucial to conduct a financial analysis of what you are spending on tools, solutions and manpower to maintain compliance with credit card networks’ mandates. If you don’t have someone internal who can conduct such an analysis, find someone external to the company who can. Payment solutions and pre-transaction fraud tools are increasingly being optimised and orchestrated today. And the same will happen to post-transaction tools and solutions that handle chargebacks. The industry is moving in that direction. Make sure you are onboard with it.
Roenen Ben-Ami, co-founder and Chief Risk Officer of Justt, is an expert in the field of payments and chargeback mitigation. Previously, at the payments service provider Simplex, Roenen built the Chargeback and Merchant Risk teams that successfully recover millions of dollars a year.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now