What holiday fraud data can tell you about ecommerce risk level now
The 2022 holiday season is done, but don’t close the books on it just yet. Retailers often see higher chargeback rates on holiday season orders, which can lead to elevated chargeback ratios that affect processing fees for months to come. While chargeback ratios declined overall in 2021, the average ratio is still higher than card issuers’ high-risk threshold. The most common reason for chargebacks, by far, is fraud. A post-holiday audit of your chargebacks, false declines, and prevented fraud can help you adjust your chargeback-management strategies to reduce your costs for the 2023 holiday season and the rest of the year.
Know your chargeback ratio(s) for holiday months
The ideal chargeback ratio, according to card issuers, is less than 1.0%. In 2021, the average chargeback rate was 1.52%. That may seem like a small difference, but that 1.52% chargeback rate was correlated with a loss of 2.31% of revenue, according to Midigator. That includes chargeback fees, lost revenue, and lost employee time spent gathering and presenting information to dispute chargebacks.
There are other costs associated with a chargeback ratio over 1.0%. Processors may charge higher per-transaction rates. Banks may withhold or increase reserve funds to cover potential fraud losses. If the chargeback ratio rises high enough or fast enough, your bank may even close your account to prevent a wave of fraud losses. Even if your chargeback ratio is low for most of the year, holiday sales peaks tend to generate more chargebacks, for reasons including slow or lost deliveries, customer impatience or confusion with the return process, and fraud.
You may have a different chargeback ratio with each card brand, because they each have their own way of calculating ratios. For example, Visa bases your chargeback ratio on the current month’s chargebacks divided by the current month’s total transactions. Mastercard divides the current month’s chargebacks by the previous month’s transactions. Do the math for each card brand you accept to understand each ratio and its implications for your processing rates and other costs in Q1. Save those ratios to use as a month-to-month and year-over-year benchmark to track your improvement.
Know why your chargebacks happened
Identifying the reasons behind chargebacks can be difficult because fraudsters lie. Reason codes provided by card brands can give you a general idea of why your chargebacks occurred and how to reduce chargebacks for legitimate reasons. For example, if you had a lot of “item not received” (INR) chargebacks, it’s wise to invest in a package tracking service. This will show customers when their purchases will arrive and document their delivery. That documentation can help you dispute future INR chargebacks.
“Item not as described” claims may be fraud, but they can also indicate problems with product descriptions, images, and even packaging. Do you see particular items for which this is a problem? If so, review those product pages and make changes as needed. If the items are fragile, review the way they’re packed for shipment and improve it if necessary.
Are there specific items that frequently get charged back? Often fraudsters will target popular items that they can resell them at a below-market price and still make money. If some of your products seem like chargeback magnets but there’s nothing wrong with the description pages and they’re packed properly, you may want to apply extra fraud controls to orders that include those items.
Finally, do you notice any trends among specific customers? Repeated chargebacks from the same person can indicate friendly fraud, which has increased by 28% over the past three years. If you find customers with multiple chargebacks, their future orders may require more extensive review. You may even choose to block those customers if the problem is severe.
Review and revamp your chargeback responses
Disputing a chargeback requires documentation that contradicts the reason given for the chargeback. For example, AVS and CVV data can help show that the order wasn’t CNP fraud. Package tracking and delivery confirmation can mitigate item not received claims. However, for this kind of data to be useful, it must be organized and ready to go when you receive a chargeback, because businesses have just 20 to 45 days to respond.
Your supporting data must be stored securely for the right amount of time. Typically, consumers have 120 days to dispute a charge. After that, that data should be destroyed properly to avoid breaches. Many businesses outsource their chargeback management to third party services to avoid having to handle data storage and chargeback responses in-house.
Don’t overcorrect your way into a false decline problem
As you adjust your fraud controls and other processes to reduce your chargeback rate, take care to avoid increasing your rate of false declines. This can happen when businesses implement stricter rules for their automated fraud screening tools but also allow for automatic declines of flagged orders. The goal of this approach is to prevent fraud and keep secondary order review costs low.
However, the result is often higher losses over the long term. That’s because 40% of consumers who experience a false decline will never shop with that business again. Depending on the average lifetime value of each customer, each boycott can represent a substantial revenue loss.
A more effective approach is to send all flagged orders for expert review, either in-house or with a trusted third-party service provider. These reviews can help you prevent fraud without excluding good orders, and review results can feed back into the automated screening tool so its AI can learn to sort fraud from good orders more accurately.
Conducting a post-holiday chargeback review can feel a little bit like having to clean up after the party’s over. However, taking this step now can help you set the stage for more profitable, less stressful holiday sales seasons to come.