Anyone who operates in the eCommerce market probably knows a thing or two about chargebacks. While intended as a consumer protection tool, the chargeback has really become the bane of the online merchant’s existence.
Although we’re in the middle of a booming economy, merchants aren’t seeing as much value as they should because they’re losing so much to these payment disputes.
The total estimated cost of chargebacks reached $31 billion in 2017. That total was not distributed evenly across the market, though, as nearly 2/3 of the burden fell on eCommerce retailers. Even then, $31 billion a year is a conservative estimate of the real economic impact of chargebacks. Some sources say it could be as much as $80 billion or more…and the damage is spreading.
So, let’s take a closer look at those figures and discuss how you can avoid all that red ink.
Exposing the True Cost of Chargebacks
$31 billion…$80 billion…where is all that money going? Obviously, a chargeback will cost you the sales revenue from the original transaction, but the impact goes far beyond the sale:
- Lost Merchandise: After filing a chargeback, the customer has no incentive to send back any merchandise shipped.
- Transaction Fees: Interchange fees and other costs of processing the customer’s payment.
- Shipping Costs: You are forced to eat the price of shipping any goods once they’re gone.
- Chargeback Fees: Your bank will charge a fee to cover the cost of chargeback administration.
According to that same report from Javelin, all these costs up to an additional $1.50 lost per every $1 in disputed transactions. Given roughly 45% of consumers filed a chargeback last year, the total adds up quick.
We could dig even deeper than that, though. For example, we can factor in return fraud, which results from accepting invalid returns as an alternative to a chargeback. Then there’s the false positives resulting from overly-strict fraud rules meant to avert criminal attacks. All totaled, these could add up to as much as $150 billion every year!
The Root of Friendly Fraud
So, why do nearly half of all consumers file chargebacks? That’s the multibillion-dollar question, and ironically, it’s the same force that helped fuel the recent boom in eCommerce sales growth: convenience.
At this point, consumers are trained to expect instant gratification, along with lower prices and supreme ease of use. It didn’t take long for buyers to get used to the idea of ordering something in a matter of seconds with a few clicks, then receiving it the next day. Unfortunately, that same mentality fostered by the ease of online shopping is contributing to the rise in chargebacks.
When consumers who are trained to expect that level of convenience don’t get immediate satisfaction, there’s a risk they will turn to friendly fraud and file a chargeback without proper justification. It’s a well-founded fear, given that more than 4 out of 5 consumers have done exactly that.
Up until now, the phenomenon has been limited mostly to eCommerce, but it’s spreading into other industries. Food and beverage sales, for example, saw a 117% increase in fraud between 2016 and 2017.
Why is that? Well, eCommerce is gaining more of a foothold in these sectors through food delivery services like Uber Eats and Bitesquad, as well as online grocery shopping through Amazon and other retailers. And, as that happens, problems associated with the eCommerce business model move in. Most of the chargebacks associated with the food and beverage sector are probably not criminal fraud, but rather friendly fraud in disguise.
You Don't Have to Accept Chargebacks
As a merchant, the high cost of chargebacks, coupled with the fact that many disputes are not legitimate, puts you in a difficult spot. You’re forced to ask: “How do I know which chargebacks to fight?”
Mitigating the impact of chargebacks is incredibly difficult without expert insight and analysis.
First, you must identify valid chargebacks and separate them out from invalid sources like friendly fraud, affiliate fraud, or family fraud. All are unique threats with different evidence and varying degrees of sophistication. Even if you manage to do that, you need to look at transaction data in real time, prepare cases, and deal with the back and forth, litigation-based dispute process. It’s tedious, difficult, and time-consuming, and unfortunately, a large segment of merchants will write it off entirely and just accept chargebacks as a cost of doing business.
However, it doesn’t have to be so black-and-white. You can mitigate the impact of chargebacks with the right strategy.
I recommend building a more comprehensive approach that combines rapid detection technologies with human oversight. This will allow you to quickly identify fraudulent chargebacks and respond with the best approach based on the individual chargeback source.
Remember: while chargebacks already cost merchants billions each year, the problem will only keep getting worse. The sooner you act, the better.
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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