Online retail offers some fairly obvious benefits for consumers. Convenience, ease of use, fast shipping, even internet of things, or IoT, enabled shopping is developing into a driving force in the space. But, while eCommerce is truly a revolutionary market, it’s not all ideal.
There are downsides to eCommerce growth; namely, that it creates a culture of instant gratification.
Contemporary consumers expect faster and easier online shopping. They want to have a frictionless experience, get their products fast, and pay less for them. And, while that’s all very possible through eCommerce, these expectations developed without any broader discussion about customers’ responsibilities in the new marketplace.
Unfortunately, consumers’ appetites for easy, frictionless experiences cause problems, too. First, consumer behavior is enabling phishing and other forms of fraud.
Consumers are accustomed to doing very little in the actual verification process. While the average internet user is acutely aware of the risks posed by identity thieves and other bad actors, they often neglect to act in a responsible or informed manner. They fail to secure their information, or in the case of phishing, personally hand it over to criminals. Users might accidentally enter personal information on a phishing site, or be tricked by a fraudster impersonating a trusted figure.
Criminal fraud is growing fast in response to that vulnerability, bolstering the existing trend toward increased online fraud.
Customers do have some options when they become victims of fraud, of course, in the form of chargebacks. However, this creates problems of its own.
Consumer Entitlement Creates Problems
Consumers often fall short in securing their personal data and online accounts. Then, when something goes wrong, they expect someone else to take responsibility and reimburse them. The problem: no one’s taking any corrective steps here. In fact, the way banks and card networks operate can actually encourage irresponsible behavior.
Allowing individuals to act irresponsibly trains consumers’ expectations to believe that they’re entitled to take their money back in different situations. Even in the case of buyers’ remorse; if the product doesn’t match the buyer’s expectations, that person can still see herself as deserving her funds back. This is the mentality behind the incredible growth of friendly fraud seen in the last decade.
Friendly fraud occurs when a customer files a chargeback without proper justification. Incidents are on the rise, increasing at a rate of roughly 41% every two years, potentially costing merchants $25 billion annually by 2020.
There is a clear “double standard” in the way we handle chargebacks. The burden overwhelmingly falls on merchants, hurting individual sellers’ bottom lines and distorting the market. Merchants aren’t the only ones who pay a price, though; in turn, the negative consequences impact other parties. The card networks get more reports of fraud on their networks, banks get bogged-down in cases and potentially lose customers, and consumers ultimately pay higher prices to offset merchants’ losses.
As if that weren’t enough, the confusion also creates a situation in which it’s hard to distinguish the truth about fraud when examining data. Distorted data leads to distorted conclusions, making it even harder to properly deploy antifraud strategies. It’s a feedback loop of fraud.
Merchants Taking the Lead
We need an overhaul of our entire approach to fraud, and it starts with the chargeback process.
More than 40 years after chargebacks were introduced, the way we manage fraud and chargebacks at an industrywide level really hasn’t changed much. Therein lies the problem: commerce has transformed over the last four decades, but antifraud strategies haven’t kept up.
Of course, what we really need is standardization. There’s so much inconsistency in how we manage chargebacks, with each network employing their own rules and processes. Then, we expect banks to interpret those chargeback regulations. In turn, merchants interpret what information they get from banks, adding even more confusion to the process.
I’ve called for coordination between card schemes, banks, and merchants for years. We need to develop standardized processes that are widely applicable, yet still responsive. No more problems guessing at chargeback sources or misused fraud tools. We’d have clarity on every party’s responsibilities, and consistent standards to determine liability when something goes wrong.
Until then, of course, it’s up to merchants to protect themselves. This calls for businesses to engage fraud by separating disputes based on their primary sources: criminal fraud, friendly fraud, or merchant error. All chargebacks should fall under one of these three.
Criminal fraud and merchant error are pre-transactional; they’re caused by factors that occur ahead of time. Once a customer files a dispute, there’s little one can do but accept it. With friendly fraud, on the other hand, the fraud is post-transactional. In these cases, merchant can—and should—engage in tactical representment to recover their funds, and adopt practices and policies intended to minimize their risk. They may also contract with a chargeback management service, providing specialized expertise and freeing-up the merchant’s time and resources to focus on growing revenue.
Best practices for mitigating chargeback risk include everything from providing round-the-clock live customer service, to offering delivery confirmation and easy cancelations for subscription services. By adopting these practices, you offer excellent service to customers and hopefully avoid triggering a chargeback.
Even with these policies in place, though, it’s impossible for merchants to really “prevent” chargebacks under the current regimen. That’s why it’s so vital we examine ways to overhaul chargeback policy to develop a better and more fair long-term solution that works for card schemes, issuers, merchants, and cardholders.
Monica Eaton-Cardone is an entrepreneur and business leader with expertise in technology, e-Commerce, risk relativity and payment-processing solutions. She is COO of Chargebacks911 and CIO of its parent company Global Risk Technologies.
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