How Holiday-Season Fraud Can Hurt Your Chargeback Ratio in the New Year

Many merchants spend the whole year preparing for winter holiday sales peaks. Now, sellers must focus on adapting to immediate changes brought on by the pandemic. However, it’s wise to keep looking ahead, because online fraud is increasing as more people go online.

That’s in part because professional criminals are busy exploiting the rapid migration of brick-and-mortar retailers to e-commerce as they try to survive widespread stay-at-home orders. It’s also because pandemic-induced economic hard times may increase the incentives to commit fraud among people who’ve never done so before. That means 2020 holiday-season chargebacks could be higher than in years past, and the stakes for merchants may be higher than ever.

As a merchant, maintaining a low chargeback ratio is important to the success of your business. A low chargeback ratio keeps your payment processing fees low and avoids costly account reviews by card companies. By contrast, a high chargeback ratio can prompt your processor to charge you higher rates or close your account.

Even if you’re careful to keep your chargeback ratio low, the time from the holidays through the start of the new year can trip up merchants. Knowing how fraud during the holiday season can affect your chargeback ratio in January can help you prevent starting the new year with higher rates and penalties.

High chargeback ratios and the problems they cause

First, let’s look at what counts as a high chargeback ratio and why it can cause problems for merchants. In general, 1% is considered a high chargeback ratio by card issuers, although each card brand has its own formula and threshold. Even a short-term increase in your chargeback ratio could result in a warning from card issuers, followed by higher rates if you can’t bring the ratio down quickly. Those higher processing fees can be a hardship for low-margin merchants.

But your business can find itself in real trouble if your chargeback ratio exceeds 1% in a given month and the total value of the charged-back transactions is $5,000 or more. When that happens, your acquiring bank can terminate your merchant account and add your business to what’s called the MATCH list. MATCH is Mastercard’s Member Alert to Control High-Risk Merchants database.

Once your business is on the MATCH list for excessive chargebacks, it stays on for five years. During that time, any acquirer can see that your business is on the list and charge you much higher than average processing fees. Acquirers may also refuse to work with you.

How the holidays can skew your chargeback ratio

Even if you maintain a low chargeback ratio for most of the year, the winter holiday sales peak can present challenges. Let’s walk through why.

Most retailers sell more during November and December than during any other time of the year. The number of fraud attempts may increase during this period, because fraudsters want to take advantage of looser fraud controls designed to reduce false declines. However, that bump in fraud is usually more than offset by the larger than number of good orders placed by holiday shoppers.

For example, let’s say your store receives 20,000 orders during December and 100 of them turn out to be fraudulent. It would appear that your chargeback ratio is 0.5%, which is considered low. However, some credit card companies calculate your chargeback ratio not by when the fraudulent charges were made but when they were reported. Holiday-season chargebacks might not be reported until early January, especially because consumers are busy with family gatherings and travel.

That can be bad news for merchants whose typical post-holiday order numbers are much lower than their peak months. Let’s look again at our example with the 0.5% chargeback ratio for December. If your January order total is 8,000 and the card company counts your 100 chargebacks against that total, now your chargeback ratio is 1.25%.

That’s over the threshold for a warning and/or higher processing fees. What looked like a low chargeback ratio in December is suddenly a problem in January. What if the total value of those 100 chargebacks was $5,000 or more—not hard to imagine for retailers of clothing, accessories, electronics or jewelry? Then the 1.25% chargeback ratio is coupled with a total value that could prompt your acquirer to close your account and add your business to the MATCH list.

To prevent this type of scenario, merchants need to factor post-holiday chargeback ratio concerns into their holiday fraud prevention program.

Avoiding high post-holiday chargeback ratios

As you plan your fraud control rules for this year’s holiday sales season, keep in mind that what looks like an acceptable chargeback ratio in December may be problematic in January. Now is the time to look at your historical data.

What’s your typical December chargeback total, and what are your typical December and January order totals? With this information, you can see whether your December chargebacks are usually low enough to prevent chargeback ratio problems in January or whether they’re close enough to 1% to potentially create problems.

While you’re reviewing this data for previous years, see if your total number of holiday sales season chargebacks has been trending upward, and if your January order totals have been steady or are trending downward. Even if you haven’t had post-holiday chargeback issues before, you might be trending toward them. It’s better to know in advance so you can plan now to avoid the problem.

If you’ve had high post-holiday chargeback ratios before, or if your data shows that you’re heading in that direction, dig into your chargeback data to see what you can learn about those orders. Was most of the fraud in your mobile channel? Was there a particular product or category that was a major target of fraud? Did many of the fraudulent orders originate from or ship to one ZIP code? Were there any other characteristics the chargebacks had in common?

When you understand the patterns you’ve seen during holidays past, you can adjust your fraud rules to flag orders that fit those patterns. Of course, you should arrange for manual review of those flagged orders to make sure you aren’t turning away good orders. But by reducing your total number of chargebacks during the holidays, you can ensure that you start the new year with a low chargeback ratio. 

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