Published on January 6th, 2009 | by Saurabh Pandey

eCommerce Chargebacks and Remedies

According to a recent report (Oct, 2008) by CyberSource (a leading payment & risk management services company), a record USD4B were lost due to online scams by online retailers in 2008.

The silver lining in the above is that retailers have managed to restrict the percentage fraud under 1.5% since 2006.

But with rising unemployment and recession, we might see a rise in ecommerce fraud in 2009.

The impact of fraud is not just restricted to the USD4b, but it goes beyond that figure. Another report by CyberSource states that retailers reject a further 2.9% of all orders in suspicion of fraud.

I had a personal experience of this at Airtel, when our fraud and risk system (installed by CyberSource) would reject seemingly OK cases due to the stringent filters, and the real figures were much larger than are provided by CyberSource here.

Another impact of ecommerce fraud is chargebacks and the penalties thereof; Visa and MasterCard etc. would penalise you for each chargeback and increase the penalties if chargebacks rise beyond a threshold.

What is Chargeback?

According to wikipedia: Chargeback is a reversal of a payment card transaction initiated by the consumer who holds the card or the bank that issued the card used in the purchase.

This differs from a refund or “credit,” which is agreed to and initiated by the merchant at the point-of-sale.

A chargeback usually occurs when a consumer files a dispute with their bank or credit/debit card provider. Sometimes the consumer dispute is untrue, and their refund claim gets denied. In these situations, the merchant will sometimes still be charged processing fees.

In cases of credit card fraud, the merchant loses the goods or services sold, the payment, the fees for processing the payment, any currency conversion commissions, and the chargeback processing fee. For obvious reasons, many merchants take steps to avoid chargebacks—such as not accepting suspicious transactions.

Types of Chargebacks:

Chargebacks can fall into any of five broad reason categories:

1. Processing Errors
2. Customer Dispute
3. Post-Transaction (or non-fulfilment of copy requests)
4. Potential Fraud
5. Authorization-Related

In a CNP scenario (Card not Present), following reasons are most common: Processing Errors, Customer Dispute, and Potential Fraud.

Common Reasons for Chargeback

Card holder did not authorize the transaction.

Transaction was processed more than once.

Transaction receipt was not imprinted.

Refund not processed.

No authorization.

Customer never received merchandise/services.

Card not used within valid expiration date.

Services not rendered.

Error in transaction amount.

Transaction receipt is incorrect, incomplete, or illegible.

Transaction processed for incorrect amount.

Product different from what was described or promised.

Transaction not processed within Visa or MasterCard time frames.

Card-holder claims merchant changed transaction amount without permission.

Merchant knowingly participated in a fraudulent transaction.

Card-holder claims invalid mail or telephone order transaction.

Card-holder was denied ability to return item.

Transaction was not cancelled successfully.

Card-holder not satisfied with quality of product or services.

Buyer initiating a false chargeback after receiving goods or services; this is considered fraud.

Many Chargebacks are genuine!

Again, I had the misfortune of transacting on http://www.SnapFish.com (HP) photo sharing and photo printing site. I had ordered a mug and a T-shirt, and even after almost a month and repeated reminders, I never received the products! I only received one email stating that the images that were uploaded by me are not cropping correctly so I have only two options: either I give them a go ahead to continue to published a wrongly cropped image OR I reorder!

Now here, Snapfish is not advising on both the above options: as to how would they adjust the money if I re-order and alternatively how do I go back to my account and edit my order for a corrected image.

That’s bad customer service and if a chargeback results, then HP and Snapfish would have to refund the amount and may also incur a penalty, of course they just lost a customer!

How could have they avoided this chargeback?

Remedies

Before venturing further, I have tried to keep both sides of ‘chargebacks’ in front of you, so that one can appreciate that chargebacks are both due to fraud and genuine reasons.

The challenge for etailers is:

1. How to detect and act against fraudulant chargeback.

2. How to pre-empt chargebacks (the friendly and the genuine chargeback)

By all means online merchants are at a disadvantage when it comes to chargebacks. With no credit card to swipe or receipt to sign, one needs to be innovative to really verify a sale.

For ecommerce players who are in ‘services’ or ‘intangible’ category: like online gaming or online calling services, the situation is even worse, because the delivery of service is immediate and online.

There are new tools available, and more on the way, that aim to reduce online fraud and therefore reduce opportunities for chargebacks.

Two similar technologies, Verified by Visa and SecureCode, provided by Visa and MasterCard respectively, will help to verify a customer’s identity at the time of purchase.

But while you use and adopt the Fraud Management technology, nothing beats a Customer Centric Environment. (This is specifically useful in avoiding the case of friendly and genuine chargebacks)

I would advise the following :

Analyse the reasons why one has a high incidence of chargebacks.

1. If it is fraud:
a. then one needs to have fraud management system in place. (Connect with players like cybersource and configure policies and systems around address verification, negative database, verify IP, order velocity, etc.)

b. Share your negative database with your competition and make a Global Industry Negative Database : Block these cards across the Industry.

2. if it is due to customer dissatisfaction: we need to work towards
a. Better and more frequent communication with customers

b. Put in place a system, that records step by step affirmatives and sign-ups by the
customer. This is proactively recording customer satisfaction and his receipt of service, so that even in case of dispute the incidence is minimum, and to start with it will help you have a satisfied customer with less chances of dispute.

c. Have a visible customer service contact available at your site and all communications with customer (including billing).

d. Run a customer loyalty program

At the end of it, as someone said, one needs to progress and become smarter along the way. There is no quick-fix and there is no permanent solution.

Also, at Airtel, we had some of the world’s best risk and fraud management systems in place, but that didn’t necessarily mean reduction in fraud. (We witnessed a time when we curtailed fraud, but along the way also reduced our earnings)!

Hence the best defence is to have a mix of human and machine, coupled with processes that involve consumers in the delivery of service and at all times stay connected with the consumer. If we can eliminate chargebacks due to genuine reasons that itself would be a great win for ecommerce players.

References: http://www.cybersource.com, http://www.visa.com, http://www.sitepoint.com, http://www.wikipedia.com

Image Courtsey: http://www.getfast.co.uk

Tags: chargeback, credit card, cybersource, Digital Marketing, E-COMMERCE, online fraud