What is a chargeback?
A chargeback occurs when a cardholder questions a transaction with their bank and subsequently receives a refund (from the merchant). This typically happens when fraudsters have illegally obtained the card details and used them to make a purchase from an unsuspecting online merchant.
Chargebacks happen before the cardholder reports the card as lost or stolen. At this stage, there is no reason for the cardholder’s bank not to authorise the transaction, so the merchant provides the service purchased or ships the goods. It may be several days before the cardholder realises an unauthorised transaction has taken place and they will immediately report it to their bank.
In around 85% of cases, the merchant cannot prove the cardholder made the transaction and therefore must refund them.
This leaves the merchant doubly out of pocket as not only have the goods been shipped or service provided, neither of which will be recovered, the merchant must also return the cost of the goods or service to the cardholder.
There are also fees and admin time associated with the chargeback process, resulting in a real loss to the merchant of 2.5 times the cost of the sale.
Chargebacks are an expensive issue for online merchants
Chargebacks are overwhelming and complicated, and if not handled well, can have a significant impact to your business bottom line.
The cardholder’s bank will dispute this transaction with the merchant's payment provider (acquirer).
The merchant is given a limited amount of time to prove the transaction was not fraudulent, which can be costly, time-consuming, and very difficult to achieve.
As the transaction was card-not-present, the liability for the refund sits with the merchant.
To make matters even worse, every time a merchant receives a chargeback the credit card companies mark this against them. Too many marks against them and eventually the credit card companies will stop the merchant from selling online, ultimately leading to the loss of the business.
Companies such as Visa, Mastercard and payment services providers will encourage you to sign up for anti-fraud solutions that attempt to spot and block fraudulent transactions. These solutions constantly monitor and analyse fraud patterns around the world to spot suspicious activity.
The latest versions use immensely complex AI to analyse and build profiles of consumers' shopping behaviours to flag anything that seems out of the ordinary, such as shopping at an unusual time or placing high value orders with an unknown or new merchant.
While some merchants may find these solutions helpful, they can be expensive and require specialist knowledge to work effectively, therefore typically being suited to large online merchants with dedicated analysts. But this isn't the biggest issue with anti-fraud systems ...
Are there tools that can help me?
Yes... and no!
The problem with AI is that it can (and does) block genuine sales
Anti-fraud providers want to block as much fraud as possible, therefore these solutions can be over cautious in what they deem a fraudulent transaction, for example a customer shopping in a new location with a new merchant on a new device or outside of their normal shopping hours.
When anti-fraud solutions block a legitimate transaction, this is called a false positive. And it’s a problem ten times more costly than fraud.
