Rafael Lourenco
When small ecommerce business owners start out, they typically assess risks such as slow sales, tough competition, economic trends, and even natural disasters like snowstorms that can interfere with timely deliveries. The biggest threat to small online sellers, though, may be the chargeback – a refund request customers can initiate through their card issuer by claiming they never placed or never received their order. While chargebacks can protect consumers against improper merchant behavior, they’re gaining popularity among professional criminals as a way to rip off sellers by making fraudulent purchases and then reselling the goods.
Chargeback fraud is increasingly costly and common
Online retailers are much more likely to be targets of chargeback fraud now than in the past. In-store chargeback fraud rose 3 percent from 2015 to 2016, according to the LexisNexis report, while online and mobile channel chargeback fraud rates rose by 9 percent and 12 percent, respectively.
For all merchants, chargeback disputes are costly to fight and costly to lose, in terms of time, merchandise, fines and higher processing costs. The LexisNexis 2016 True Cost of Fraud Study found that “for every dollar of losses, merchants are losing $2.40 based on chargebacks, fees and merchandise replacement.” Large retailers can afford enterprise-level fraud-fighting resources. But for small online retailers, ongoing chargeback fraud can quickly destroy cash flow, which makes it all the more troubling that 60 percent of U.S. small businesses have no transaction fraud protection at all.
Chargeback fraud can cause damage fast
Fraudsters know small ecommerce shops are vulnerable, of course, so they target these retailers looking for easy scores. Chargeback fraud against a particular shop can escalate quickly once criminals discover them, make repeat purchases, and share their findings with fellow fraudsters. A small retailer that might be able to survive the financial impact of occasional chargebacks by amateur fraudsters faces a much bigger problem once they’re under attack by organized criminals.
Chargebacks can lead to account closure and "blacklisting"
As the number of chargebacks against a retailer rises, so does their chargeback ratio – the number of chargebacks compared to overall transactions. A high chargeback ratio puts merchants at risk for sudden loss of banking services. When merchant banks close an account due to excessive chargebacks, they also report the business to MasterCard’s MATCH list.
MATCH is, in essence, a "blacklist" of merchants who face five years of paying exceptionally high processing rates or being unable to bank at all. Imagine being able to reach customers online but having no way to take their payments. Even if a small business does everything else right, sells great products, and has a loyal customer base, fraudulent chargebacks can shut it all down.
How small online sellers can guard against chargebacks
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