When the Best Defense Is a Good Offense

A reality today is that consumers will chargeback transactions they knowingly authorized. Some experts call this “Friendly Fraud” others call it “Liar Buyer”; either way it is happening everyday. In a Card Not Present business the question is, “What, if anything, should a merchant do about a chargeback?” Is this something the merchant should dispute or is it something the merchant should simply accept as the cost of doing business?

With every chargeback the merchant is given a letter detailing the transaction and what options are available to them. The options are do nothing or dispute the chargeback. Roughly 90 percent of the time the merchant will be able to challenge the chargeback. To challenge a chargeback, simply follow the instructions that were issued with that Chargeback Notification. This is a straightforward process and it is a merchant’s right. Some merchants take a stance to challenge chargebacks as there is no apparent harm in trying to recoup the sale and any chargeback that is reversed is better than not trying at all.

Take the time to analyze the transactions upfront on an ongoing basis and eliminate the ones that are suspect before they are sent for settlement.

However, it’s prudent to examine the potential that actually exists by challenging the chargeback. It’s also relevant to point out that there is language on some Chargeback Response documents that states “For non face-toface transactions, (mail/telephone and internet transactions) we recommend that you provide as much information as possible to establish cardholder participation in a transaction. Non face-to-face transactions are made at your own risk”

The actual costs to challenge the chargeback include employee time to research and respond to the chargeback. Lets say that activity takes 20 minutes of your employee time, plus postage or fax costs and potentially a “Representment fee” which varies per processor.

Then comes the response; the merchant will receive one of the following responses to the dispute:

  • Another chargeback;
  • A pre-arbitration request (~$250);
  • A full arbitration request (~$500); or a
  • Reversal.

The first three options get the merchant no further ahead and none of them are options that an ecommerce merchant would pursue. However, if another chargeback does occur, it will not count towards the account’s chargeback ratio, but it will have the potential of another chargeback fee being applied to the account. The potential of an additional chargeback fee will depend on the processor.

That leaves the best-case scenario of winning the dispute and having the chargeback reversed. It is likely that you will win no more than 30 percent of the chargebacks responded to will actually be reversed. That is 30 percent reversals of the 90 percent challenged, which is only 27 percent of total chargebacks. Since an account should have no more chargebacks than 1 percent of its sales we are talking about a recovery of only .27 percent of total sales. If you are doing $100,000 a month in sales that is $270!

Perhaps it isn’t simply about the recouping of lost sales dollars and the merchant is looking to gain other side benefits. A common misconception is that by challenging a chargeback the merchant improves their chargeback ratio. This is not true. Even winning a chargeback dispute does not remove the chargeback from the card association calculations. The chargeback occurred, it exists and to avoid the complications of when is a chargeback a bona fide chargeback due to the dispute process, the ratio is simply calculated by including the first time chargeback. The fact that a consumer or their bank issued the chargeback in the first place may be indication enough that there is an issue with the merchant.

One potential benefit that exists is that a bank evaluating an account for setting up merchant processing, may take into account the number of chargeback reversals during the underwriting process and try to determine if there is a way to improve the payment process to make it clearer to the consumer what they are busy and from whom.

A merchant can use the points above and calculate their own return on responding to chargebacks using their true costs, chargeback ratios and success. The figures that were used are averages and were based on conversations with processors, merchants and ISOs experienced in the process.

When it comes to managing chargebacks on an account, the best defense is a good offense. Take the time to analyze the transactions upfront on an ongoing basis and eliminate the ones that are suspect before they are sent for settlement. If a transaction was sent for settlement and further data analysis makes it suspect later, the merchant should consider a pre-emptive refund to that account to avoid a chargeback.

Remember, with a non face-to-face transaction, you are taking the transaction at your own risk.