Help Your Merchants Increase Their Chances at Winning Chargebacks

Responding to chargebacks is important, but did you know that how merchants respond to chargebacks can drastically increase their chances of winning?
 
The “how” of their response largely depends on the reason code.  Merchants should use this as a baseline of what relevant information to include in their response.  The card brands each have their own reason codes that help classify chargebacks based on the reason they are initiated. 

For example, a merchant would not respond to a reason code 13.1 Merchandise/services not received chargeback in the same way they would respond to a 10.4 Other Fraud, Card-Absent environment chargeback.

A response to a 13.1 chargeback should include proof that the merchant delivered the good or service.

For a 10.4 fraud chargeback, the cardholder is claiming they didn’t initiate the transaction and therefore the burden is on the merchant to prove that they attempted to confirm the buyer is who they said they were.  If the merchant attempted CVV2 and AVS but the issuing bank does not participate, that evidence should be included.  The same holds true if the merchant used 3DS but the issuing bank does not participate.

Reverse the response on these chargebacks and one thing is certain: the merchant will lose. 

There are a variety of tools merchants can use to ensure their response contains all the necessary elements.  They can also help merchants provide responses in a timely manner, since responding to chargebacks can be time-consuming. 

As you’re assessing tools to use to assist with chargeback response, you’ll want to find one that:
✔️ Customizes the response based on the reason code.
✔️ Automatically pulls any relevant data from the transaction or the merchant’s company profile into the response.
✔️ Simplifies the chargeback response process as much as possible by removing any cumbersome or redundant steps.

How and When Should Merchants Respond to Chargebacks?

When is it worthwhile for the merchant to respond to a chargeback?
 
This is a tricky question, and to understand the right answer, it’s probably best for us to start with when it doesn’t make sense to respond to a chargeback.

Here’s the thing that many merchants don’t realize: there are fees that follow chargebacks through their life cycle.  It can also be time-consuming to respond to a chargeback.  So, a merchant should weigh the costs of these fees and the time it will take to respond.  If the transaction was for a small dollar amount, and it’s not typical for the merchant to receive chargebacks, it might not be worth the time and resources to fight it.

There are also chargebacks that simply cannot be won, and those are not worth fighting.  The most common scenario for this?  The response timeframe has already expired.  Another reason?  The merchant cannot produce sufficient evidence to win the chargeback.

However, if the dollar amount of the sale outweighs the resources needed to respond, and the merchant feels that they have a chance of winning, they should definitely respond.

Here are a few tips to increase the likelihood of winning:
✔️ Include a rebuttal letter that summarizes key pieces of evidence.  Stick to things that are relevant to the case.
✔️ Ensure the response includes compelling evidence given the chargeback claim (we covered this in detail yesterday)
✔️ Respond within the allowable timeframe.
✔️ Use chargeback response and automation tools.  Ask the Secure Bancard team to help identify the best products that match the merchant’s needs.

What Are Friendly Fraud Chargebacks?

As a merchant services professional, if the businesses you serve are encountering friendly fraud chargebacks, how can you help them?

But first, what are friendly fraud chargebacks? 

Friendly fraud happens when a cardholder uses the chargeback process incorrectly:
· As an intentional attempt to get something for free -or-
· An innocent misunderstanding.

Here are a few examples:
· Someone uses the card of a family member without letting them know. The cardholder sees the transaction and does not recognize it since they didn’t make the purchase.
· A cardholder doesn’t recall a transaction because the billing descriptor shown on their statement doesn’t seem familiar.
· Someone signs up for a service with a free trial, forgets to cancel before the free trial ends, and then calls their bank to complain once the charges hit.
· Someone makes an online purchase, receives the merchandise, misses the return window and then files a chargeback instead.

Why should merchants care whether a chargeback is friendly fraud vs. malicious fraud?

Friendly fraud is a chargeback that they have a chance of winning, which means they can recover the revenue that is rightfully theirs.

Malicious fraud is not.

That’s a big difference.

If your merchants are encountering friendly fraud, we dive into the specific ways to help them in this post.

Friendly Fraud Chargebacks

How can we help merchants that encounter friendly fraud chargebacks?

This is when the cardholder misuses the chargeback process– either intentionally or unintentionally.
 
If the cardholder is misusing the chargeback process unintentionally, it is probably because they don’t recognize the charge.  Here is how we can help:
 
CLEAR BILLING DESCRIPTOR
The billing descriptor is what appears on the cardholder’s statement.  The merchant should ensure that the descriptor used is easy to understand and accurately reflects the business where the charges occurred.  Ideally, the merchant’s phone number should be included in the descriptor with 24/7 customer service available, if possible.  The descriptor helps eliminate friendly fraud where the cardholder simply doesn’t recognize the charges. 

Merchants can also take advantage of Ethoca’s free logo program.  Through the program, merchant brand marks/logos will be linked to corresponding transactions in the digital banking applications of participating card issuers.
 
Now let’s work on fighting the chargebacks that happen with intentional misuse from a cardholder:

CLEAR PRODUCT AND SERVICE OUTLINES
The better merchants can be about setting expectations and service levels with their customers before the sale takes place, the better.  If a customer charges a purchase back because they missed the return window, the merchant should be able to win that chargeback provided they submit sufficient evidence. 

CUSTOMER SERVICE AVAILABILITY
Most cardholders have immediate access to their statements and pending charges on their account.  The dispute initiation process is easier than ever and, often, can be completed without even picking up the phone.  Merchants should keep that in mind and attempt to make their customer service experience every bit as available to their customers.  If it’s a frustrating experience to get in touch with customer service to resolve an issue, many cardholders will default to using the dispute/chargeback process.

BLACKLIST OFFENDING CUSTOMERS
Many friendly fraudsters are repeat offenders–if they file one illegitimate chargeback, they will likely file another. By blacklisting offending customers, you can prevent them from making future purchases as well as the chargebacks that are likely to follow.

ANALYTICS
If friendly fraud chargebacks are happening, you’ll want to first understand more about why they’re happening.  You can use analytics to narrow them down to a specific product, service, marketing promotion, issuer BIN, geographical area, etc. Check out In-Depth Analytics and Reporting from Midigator to help with this task.

Implement 3DS
EMV 3-D Secure 2.0 is a security protocol that allows issuers to authenticate online consumers.  Providers of this service, like PAAY, can provide fraud liability protection for certain reason codes.  See this post for more detail.

Chargeback Monitoring Programs

A merchant has surpassed a chargeback threshold and is now on a monitoring program.  Now what?

The card brands have specific limits on chargeback counts and volume that merchants must abide by.  They typically receive a warning, and then are automatically enrolled in a program.

These programs come with fines attached. But the real risk is merchant account closure — which could limit transaction and sales volume to a point that impacts the business’s bottom line. 

If this happens, this is how you, as a merchant services professional, can direct them to the right resources.

➡️ The first step is to understand why the chargebacks are happening. Can we narrow it down geographically, a specific product line, issuer BIN, or payment plan (annual plan vs. monthly subscription?) The merchant will also need to track card-present and card-not-present disputes separately.  The key is to drill down as much as possible into the source and reason for the chargebacks, and then strategize as to how to reduce or eliminate them.
➡️ Put together a remediation plan, including a timeline for remediation.  The merchant will need to present this to the processor and the card brand’s monitoring program.
➡️ If the chargebacks are mostly friendly fraud chargebacks, please refer to that post for tools to fight that specific issue (see link below.)

Here are some specific tools that can be put in place to stop the bleeding:

CHARGEBACK PREVENTION ALERTS
Once subscribed, a merchant will receive instant notification when a cardholder disputes a charge with its issuing bank.  This gives the merchant an opportunity to intervene before the dispute is formally filed.  Merchants can subscribe directly to chargeback Prevention Alerts through Ethoca or Verifi. Alternatively, merchants can manage their disputes on a single platform, like Midigator, that incorporates these services.  Learn more about these services in this post.

RAPID DISPUTE RESOLUTION
This is a chargeback prevention tool created by Verifi and made available to technology resellers.  When an issuing bank is ready to process a chargeback, the RDR platform allows the acquirer to automatically issue a refund to your customer instead. 

MODIFY PRODUCTS/SERVICES TO REDUCE HIGH-CHARGEBACK CHANNELS
This is the simplest solution, yet the most challenging to business owners.  The reason?  It often results in immediate slashes to top-line revenue.  But merchants must weigh the costs of chargebacks with a reduction in revenue.

Merchants should carefully assess and implement the solutions that best fit their needs.  No two merchants will be the same.  It is possible to exit the programs once enrolled, most commonly once the merchant is below the card brand’s threshold for 3 consecutive months.

How 3-D Secure Can Help Reduce Fraud Chargeback Losses

Do your e-commerce merchants find themselves in this seemingly helpless situation?

They accept payments for legitimate sales, only to have cardholders dispute the transaction, claiming fraud.

There are products that can completely shift liability for fraud chargebacks from the merchant to the issuer.

These products are based on EMV 3-D Secure 2.0 technology, which is a security protocol that allows issuers to authenticate online consumers.

We won’t get into the technical specifics here, but in general they:

  • Allow merchants/payment providers to send additional data elements to the cardholder’s bank.
  • Can be specific to that payment, like shipping address or contextual, such as the customer’s IP address, location, or transaction history.
  • The issuing bank uses this information to determine whether the cardholder is making the purchase.

Sometimes this is frictionless, others, an additional step is required to authenticate the cardholder.  When an additional step is needed, the issuing bank “challenges” the cardholder by sending a one-time passcode to the cardholder, for example.

How can this help merchants manage chargebacks?  It provides liability protection for certain fraud chargeback reason codes: Visa 10.4, Mastercard 4837 and 4863.

That means that if a transaction was authenticated using 3DS, and a cardholder dispute is filed for specific fraud reason codes, the liability falls to the issuer instead of the merchant.  This is commonly referred to as “liability shift.”

When cardholders commit friendly fraud and the transaction is 3DS-authenticated, the issuer is responsible for covering the chargeback.
If you have experience with the original version of 3DS and stopped using it because of the friction, it’s time to revisit.  3-D Secure 2.0 has much less friction than the original.

PAAY‘s EMV 3DS is built understanding the pain points that 1.0 brought. Friction, latency and difficulty integrating are some of the few things that were a big concern. PAAY’s solution is easy to implement, completely frictionless off-the-shelf and minimal latency.

All this to say, 3DS, specifically the solution provided by PAAY, can be an effective tool in a merchant’s toolbox for fighting fraud chargebacks.

A few things to keep in mind:

  • There are a handful of merchant category codes that are not eligible for coverage.
  • If 3DS authentication is attempted and the issuing bank does not participate, the merchant still gets the liability shift.
  • PAAY has options when it comes to implementation method. Their javascript SDK can often be implemented in less than a day.  They also offer assistance if merchants don’t have an in-house development team.
  • PAAY’s solution has all merchants in mind, especially SMB.  But is especially helpful for high-risk verticals like nutra, digital downloads, ticketing, continuity/subscriptions, travel, etc.

Chargeback Prevention Alerts: What are they and how do they work?

prevention alerts

Most merchants are reactive when it comes to chargebacks because they respond after they’re filed, which might be fine if they happen infrequently. 

However, if chargebacks are common, merchants might benefit from implementing prevention alerts.

What value do prevention alerts bring?
✔️ Keep chargeback counts low.  The notifications can help merchants stop chargebacks before they count against them.
✔️ Provide a better customer experience.  Quickly and proactively respond to customer complaints.
✔️ Take quick action.  In the normal chargeback notification process, it can take 2-5 weeks to be notified.  Prevention alerts arrive within 24 hours of a dispute.
✔️ Save on fulfillment costs.  If an order is disputed, it can be stopped before it ships.
 
Now that we know what prevention alerts can do, let’s talk about how they work.
 
Prevention alerts allow issuing banks to communicate with merchants in real-time.  When a cardholder disputes a transaction, a prevention alert network like Verifi or Ethoca alerts the merchant.  The merchant can then issue a refund and notify the alert network, thereby avoiding the chargeback.

Merchants can work directly with Verifi and/or Ethoca, or these services can be obtained through a platform like Midigator.  Here are a few considerations as merchants navigate these choices:
✔️ Verifi is more commonly used if most of the chargeback reason codes are for consumer disputes predominantly taking place in the U.S., while Ethoca handles more chargeback reason codes for unauthorized transactions globally.  These are generalities – there is some overlap between these two networks.
✔️ Sometimes, Verifi and Ethoca have volume requirements when merchants work with them directly.  These may be avoided by enrolling through a provider like Midigator.
✔️ The alert functionality merchants have access to will be the same whether they work directly or indirectly with an alert network.  When used through Midigator, they have access to the added bonus of reporting & analytics.
✔️ Platforms like Midigator can also automate the alert process, which is not offered directly.  This technology reduces the risk of errors, improves outcomes, and cuts back on time-consuming, labor-intensive tasks.
✔️ Accessing these tools through a platform like Midigator also has the benefits of ease of use and visibility.  It is much easier to manage notifications from both providers on a single platform, and the consolidated data makes it much easier to spot trends and threats.
✔️ Lastly, pricing is set by Verifi and Ethoca, whether the merchant is accessing these services directly or through a reseller like Midigator. 

Even though there are fees for prevention alert services, they can pay for themselves or even produce a return when closely managed.   The key is to select the option that best matches the merchant’s needs, and then consistently monitor to ensure the solution continues to deliver results.  It is not set-it-and-forget-it.