Containing the Cost of Online Fraud

Posted on | May 1, 2009  
Writen by | Ian Griffith

Selling wine in this climate can be hard work. While some argue that consumers are drinking more, they are certainly harder to please. Completing the sale and shipping your order should be money in the bank, but unfortunately, some orders reappear unexpectedly, like a corked bottle of wine.

Chargebacks are demands from the customer’s bank that you prove the transaction was conducted properly and the goods delivered. If the sale happened in the store with “card present”, evidence of a swipe should be all that’s needed to recover your funds. However, if the order was taken over the phone, or online with the “card-not-present” then there is a good chance that the chargeback will not be resolved in your favor.

Merchants are understandably uncomfortable with this exposure. For e-commerce in general, the total loss to fraud as a percentage of sales is about 1.4%, with the average number of fraudulent orders coming in slightly lower; fraud usually occurs with higher value transactions. Certainly this potential loss needs to be factored as a business cost, yet there are strategies a retailer can take to manage this risk both before and after the order is taken.

In their annual Online Fraud Report, Cybersource estimates that 20% of e-commerce merchants use some form of automated chargeback management tool. One popular gateway is Authorize.net, which in addition to the verification of the address and card code, offers a set of rules and transaction filters to identify suspicious activity.

Depending on the bank you can be given as much as 45 days to respond to a chargeback, however, funds will be removed from your account immediately. The merits of your response can be reviewed by your merchant processor who can return your funds even before the issuing bank decides on the merits of your documentation. Although, a chargeback can be resubmitted if the cardholder and issuing bank insist, and if the dispute continues it can finally be settled by arbitration.

Shipping an order to the billing address strengthens your argument in this dispute process; even better is evidence that the cardholder signed for the delivery. You should also be aware that the issuing bank can trigger a chargeback based on whether the card was charged in a timely manner. A credit card authorization is valid for only seven days, so if a transaction has taken longer to process then the card needs to be reauthorized.

Cybersource estimates that 50% of chargebacks are contested by merchants, but also points out that one third of merchants are responsible for 90% of these recovery attempts. They make the case that disputing the majority of your chargebacks and having an efficient re-presentment process can do a lot to reduce the cost of fraud.

Chargebacks represent one of the most frustrating parts of your work as a retailer. While there are likely to be disputes that you lose to fraud, you should track these losses as a percentage of sales and by the type of dispute. Any opportunity to improve your order review and chargeback management process can help contain this unwelcome cost of doing business.

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