Last year’s holiday season broke previous records for etailers, confirming a promising future for ecommerce. However, with increased sales comes an even greater threat of fraud and chargebacks that can swiftly reverse a merchant’s fortunes. Most merchants consider chargebacks a necessary cost for doing business, but they may not consider all the losses resulting from fraud.
Loss #1: Initial Value of Item
When a merchant receives a chargeback, they’re forced to return the funds initially charged for the item. For those less experienced with chargebacks, this amount is what they most commonly assume as the loss from a chargeback. But as we’ll see this is just the beginning of a long list of compounded losses.
Loss #2: Shipping Costs
Shipping costs differ from shipping fees. Merchants charge customers shipping fees and must return these fees with a chargeback. Shipping costs, on the other hand, are the actual costs paid by merchants to ship the order and are thus an operational expense. With a chargeback, merchants reimburse the buyer all shipping fees with shipping costs accounted for as a loss.
Loss #3: Refunds
Many merchants panic when they get a chargeback and try to avoid the fees by issuing a refund to the customer, hoping they’ll cancel the claim. However, this will only double a merchant’s losses as a bank will rarely reverse or cancel a claim once it’s been filed. Thus, if a merchant issues a refund they’ll be hit twice.
Loss #4: Higher Costs for High-Risk Merchants
If a merchant receives a lot of chargebacks, especially in a high-risk industry, there’s a good chance their payment provider will label them “high-risk.” This leads to harsher terms and higher processing rates for merchants and each subsequent chargeback becomes even more damaging.
Loss #5: Chargeback Monitoring Fees
If a merchant’s chargeback rate exceeds 1% of their total transactions their payment provider may place them on a chargeback monitoring program which results in additional fees. Merchants who are unable to get chargebacks under control can ultimately lose their ability to process transactions.
Loss #6: False Declines
To avoid chargebacks merchants often put in place stringent rules or blacklists which don’t guarantee chargeback protection but will decline legitimate customers (because their payment details differ from the merchant’s specified rules). Incorrectly declining a legitimate customer is known as a “false decline” and is now estimated as being a larger loss for merchants than fraud itself. Unfortunately, most customers who are incorrectly declined are unlikely to return to that merchant’s site, especially in competitive industries where buyers are fickle and always looking for the best deals. Thus, false declines can have disastrous consequences as merchants may be turning away customers for life.
Don’t Minimize Fraud, Eliminate It
To avoid all of these losses merchants need to prioritize fraud prevention for their growing businesses. Until recently merchants could only leverage 3rd party scoring tools to evaluate orders themselves, but now fraud losses can be eliminated entirely by a handful of solution providers. For example, Signifyd offers a 100% financial guarantee on every order they approve and their real-time machine learning platform evaluates transactions instantly, eliminating manual reviews. Signifyd is only paid for orders they approve so they eliminate false declines and allow merchants to accept more orders and increase sales. Complete protection allows merchants to focus on growing their business and taking care of their customers while providing a completely predictable cost for fraud.
This blog post was written by Sourabh Kothari, Director - Advocacy, Brand, Content at Signifyd.