The taming of friendly fraud: Striking the balance between customer care and profitability
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Originally conceived as a consumer safety net against credit card fraud, chargebacks have served to empower customers to challenge unfair or unauthorized transactions. However, this possibility has been increasingly misused by customers- sometimes out of convenience, sometimes without awareness and sometimes deliberately for personal gain. Regardless of the reason, it's the merchants who pay the price, more often than not. Such situations challenge the intrinsic trust in a merchant-customer relationship, as the occurrence of fraud stems from the actions initiated by a seemingly unassuming customer, whom the merchant has no particular reason to mistrust in the first place. Hence the phrasing, friendly fraud.
The exponential rise in ecommerce transactions, subscription-based models and novel payment methods like Buy Now Pay Later (BNPL), has exacerbated the occurrence of friendly fraud incidents. Friendly fraud poses severe consequences for merchants, including financial losses, increased chargeback fees, damage to reputation, and even a potential suspension of payment processing capabilities. With each chargeback carrying consequences that ripple through their operations, merchants should be well prepared to arm themselves with effective strategies to combat this phenomenon.
How to best manage chargebacks?
Reporting and correlation for various business:
First, it’s important to assess your chargeback situation and understand where you stand. Has the chargeback rate been increasing, decreasing or remaining steady? What correlations can be found between your business operations and your chargeback rate? Merchants can start by keeping track of all chargebacks they deal with, substantiated with corresponding reasons. The next step is to compare these to other business metrics. For example, what percentage of your revenue and earnings do you lose to chargebacks? The most successful merchants can monitor chargebacks by sales channel. The correlation here is dramatic, and typically, e-commerce merchants will have a specific channel driving the riskiest customers.
Refunds and chargeback representments vs. Wins and losses:
To gain a deeper understanding of how chargebacks impact your business, there are two key factors to be tracked without fail- the number of chargeback requests you refund and the amount you choose to contest through representment. Consider your win and loss rate when you do fight them. You may find that you win often, indicating that it’s worth the effort and resources expended, or that the fight isn't worth your time and money. That being said, you should evaluate the revenue of the ‘won’ chargebacks against the reduction in approval rate caused by having chargebacks in the first place. These metrics work together for your overall collection and performance. In many cases, avoiding or refunding chargebacks can yield more revenue than the net savings from representing them, particularly for merchants with average tickets of $40 or less.
Third-party solutions in the chargeback management process
Outsourcing chargeback management not only saves you time digging through transaction details but can also save you money and help with revenue recovery. Data shows that merchants that use only third-party tools limit their losses to 0.32% of annual revenues compared to 0.46% of revenues lost by the merchants that rely strictly upon in-house systems.
Turn your chargeback into a refund:
Refunds are one of the most effective chargeback management tools at your disposal. When a chargeback strikes, you can promptly counter it with a well-timed refund instead of spending heaps of time and money compiling a case and paying higher investigation fees. The goal is not just to save time and resources, but also to safeguard your business from potential harm. Refunds help businesses demonstrate a commitment to consumer satisfaction and maintain a positive image while mitigating negative sentiments.
Sure, refunds do involve some financial implications, but they often prove to be more cost-effective in comparison to the expenses associated with investigating and disputing chargebacks. By analyzing your cash flow metrics in relation to chargeback costs, you can gain valuable insights into how much of the company’s money is spent on this process and make informed decisions that minimize financial impact.
Third-party vendors to help you manage your chargebacks:
Work with vendors that can efficiently help with any chargeback situation, so you're covered at all times. Collaborating with multiple vendors can provide you with a diverse range of services, technologies and expertise, presenting an opportunity to leverage their specialized expertise to effectively manage chargebacks. However, special attention should be paid to a potential overlap in services in case you choose to work with multiple vendors. If their services overlap one another, your business can incur a double expense for similar services or cause confusion in the chargeback process. It’s best to monitor this overlap and understand the percentage will vary based on your merchant/card portfolio. You can manage this in your contracts to avoid duplicate fees and ensure the chosen vendors perform for your customer base.
Strategy for automating chargebacks
Manual handling of chargebacks can be time consuming and more prone to inaccuracies. By using a chargeback management software, you let the software do the heavy lifting for you. Automating chargeback management brings efficiency, consistency and scalability into business operations. You can use chargeback management software to automatically produce rules-based responses to inquiries. The rules are typically based on chargeback codes to create appropriate responses without needing to manually review every case. Needless to say, as with any other product or service, it’s always prudent to compare your options.
Moreover, it's essential to understand that chargeback automation may not be a complete solution for the entire chargeback life cycle. This is why it’s also a great idea to explore the benefits of a multi-solution strategy to proactively cater to the ever-evolving landscape of chargebacks. Every business is different and what may work for one may not work for another. Understand the limitations of your current platform, processor, or service provider and rightly identify the areas which need to be revitalized.
Challenging, but not unworkable
As frustrating as chargebacks can be, it’s also important to understand these situations from your customer’s perspective. If customers don't know how to cancel your service, they may simply file a chargeback to make their lives easier. In these cases, consider meeting these inquiries with refunds to minimize complications for both parties while you make product changes.
While friendly fraud is common in business, a comprehensive chargeback management system includes measures to detect and prevent fraud. Efficient chargeback management relies on thorough and accurate documentation. This enables merchants to effectively defend against false claims of fraudulent chargebacks.
About Revolv3
Founded in 2020, Revolv3 is a payment company with a cutting-edge SaaS optimization platform that revolutionizes billing for card-on-file merchants. By leveraging adaptive technology, Revolv3 ensures the industry's highest credit card approval rates, resulting in increased revenue, reduced churn, and improved cost efficiency. Get started, book some time with a payment expert now.
Originally conceived as a consumer safety net against credit card fraud, chargebacks have served to empower customers to challenge unfair or unauthorized transactions. However, this possibility has been increasingly misused by customers- sometimes out of convenience, sometimes without awareness and sometimes deliberately for personal gain. Regardless of the reason, it's the merchants who pay the price, more often than not. Such situations challenge the intrinsic trust in a merchant-customer relationship, as the occurrence of fraud stems from the actions initiated by a seemingly unassuming customer, whom the merchant has no particular reason to mistrust in the first place. Hence the phrasing, friendly fraud.
The exponential rise in ecommerce transactions, subscription-based models and novel payment methods like Buy Now Pay Later (BNPL), has exacerbated the occurrence of friendly fraud incidents. Friendly fraud poses severe consequences for merchants, including financial losses, increased chargeback fees, damage to reputation, and even a potential suspension of payment processing capabilities. With each chargeback carrying consequences that ripple through their operations, merchants should be well prepared to arm themselves with effective strategies to combat this phenomenon.
How to best manage chargebacks?
Reporting and correlation for various business:
First, it’s important to assess your chargeback situation and understand where you stand. Has the chargeback rate been increasing, decreasing or remaining steady? What correlations can be found between your business operations and your chargeback rate? Merchants can start by keeping track of all chargebacks they deal with, substantiated with corresponding reasons. The next step is to compare these to other business metrics. For example, what percentage of your revenue and earnings do you lose to chargebacks? The most successful merchants can monitor chargebacks by sales channel. The correlation here is dramatic, and typically, e-commerce merchants will have a specific channel driving the riskiest customers.
Refunds and chargeback representments vs. Wins and losses:
To gain a deeper understanding of how chargebacks impact your business, there are two key factors to be tracked without fail- the number of chargeback requests you refund and the amount you choose to contest through representment. Consider your win and loss rate when you do fight them. You may find that you win often, indicating that it’s worth the effort and resources expended, or that the fight isn't worth your time and money. That being said, you should evaluate the revenue of the ‘won’ chargebacks against the reduction in approval rate caused by having chargebacks in the first place. These metrics work together for your overall collection and performance. In many cases, avoiding or refunding chargebacks can yield more revenue than the net savings from representing them, particularly for merchants with average tickets of $40 or less.
Third-party solutions in the chargeback management process
Outsourcing chargeback management not only saves you time digging through transaction details but can also save you money and help with revenue recovery. Data shows that merchants that use only third-party tools limit their losses to 0.32% of annual revenues compared to 0.46% of revenues lost by the merchants that rely strictly upon in-house systems.
Turn your chargeback into a refund:
Refunds are one of the most effective chargeback management tools at your disposal. When a chargeback strikes, you can promptly counter it with a well-timed refund instead of spending heaps of time and money compiling a case and paying higher investigation fees. The goal is not just to save time and resources, but also to safeguard your business from potential harm. Refunds help businesses demonstrate a commitment to consumer satisfaction and maintain a positive image while mitigating negative sentiments.
Sure, refunds do involve some financial implications, but they often prove to be more cost-effective in comparison to the expenses associated with investigating and disputing chargebacks. By analyzing your cash flow metrics in relation to chargeback costs, you can gain valuable insights into how much of the company’s money is spent on this process and make informed decisions that minimize financial impact.
Third-party vendors to help you manage your chargebacks:
Work with vendors that can efficiently help with any chargeback situation, so you're covered at all times. Collaborating with multiple vendors can provide you with a diverse range of services, technologies and expertise, presenting an opportunity to leverage their specialized expertise to effectively manage chargebacks. However, special attention should be paid to a potential overlap in services in case you choose to work with multiple vendors. If their services overlap one another, your business can incur a double expense for similar services or cause confusion in the chargeback process. It’s best to monitor this overlap and understand the percentage will vary based on your merchant/card portfolio. You can manage this in your contracts to avoid duplicate fees and ensure the chosen vendors perform for your customer base.
Strategy for automating chargebacks
Manual handling of chargebacks can be time consuming and more prone to inaccuracies. By using a chargeback management software, you let the software do the heavy lifting for you. Automating chargeback management brings efficiency, consistency and scalability into business operations. You can use chargeback management software to automatically produce rules-based responses to inquiries. The rules are typically based on chargeback codes to create appropriate responses without needing to manually review every case. Needless to say, as with any other product or service, it’s always prudent to compare your options.
Moreover, it's essential to understand that chargeback automation may not be a complete solution for the entire chargeback life cycle. This is why it’s also a great idea to explore the benefits of a multi-solution strategy to proactively cater to the ever-evolving landscape of chargebacks. Every business is different and what may work for one may not work for another. Understand the limitations of your current platform, processor, or service provider and rightly identify the areas which need to be revitalized.
Challenging, but not unworkable
As frustrating as chargebacks can be, it’s also important to understand these situations from your customer’s perspective. If customers don't know how to cancel your service, they may simply file a chargeback to make their lives easier. In these cases, consider meeting these inquiries with refunds to minimize complications for both parties while you make product changes.
While friendly fraud is common in business, a comprehensive chargeback management system includes measures to detect and prevent fraud. Efficient chargeback management relies on thorough and accurate documentation. This enables merchants to effectively defend against false claims of fraudulent chargebacks.
About Revolv3
Founded in 2020, Revolv3 is a payment company with a cutting-edge SaaS optimization platform that revolutionizes billing for card-on-file merchants. By leveraging adaptive technology, Revolv3 ensures the industry's highest credit card approval rates, resulting in increased revenue, reduced churn, and improved cost efficiency. Get started, book some time with a payment expert now.
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