What are chargebacks and how to prevent them
Sometimes, consumers need to dispute a charge on their credit card. Maybe a merchant refuses to provide a refund for whatever reason, or perhaps they’ve been the victim of fraud. Either way, the last resort is to contact their bank to reverse a payment — a chargeback. (Learn more about the basics of chargebacks here.)
It’s an important consumer protection, yet bad actors often exploit this process for their own gain by disputing legitimate purchases and demanding a refund. Known as chargeback fraud, it’s one of the most popular forms of fraud threatening ecommerce businesses today.
In fact, ecommerce merchants were at risk of losing $20+ billion last year due to payments fraud such as chargebacks. With ecommerce sales volumes on the rise, preventing chargebacks has become even more important for merchants looking to decrease these drains on their revenue.
As a recent Forrester Total Economic Impact™ study found, one strategy that can help is to partner with a unified solution like Adyen that offers in-built fraud prevention tools. Doing so can reduce chargebacks by 27%, worth $2.5 million over three years. Here’s why.
Merchants always have the option to fight chargebacks, but they have to make a pretty solid case to win a dispute. And even if they win, a chargeback still counts against their chargeback ratio, so it’s better to prevent them than defend them.
For most ecommerce merchants, preventing chargeback fraud usually entails manual work. Compliance teams cancel individual fraudulent orders and then block IP and email addresses one by one. This “review, cancel, and block” process bogs down compliance staff and, unless a team is highly trained, differentiating between genuine and fraudulent chargebacks is tough.
In addition to manual reviews, ecommerce merchants can also use third-party risk management tools. While they do help, they are often inefficient as they’re one step removed from where ecommerce chargeback fraud happens — the payment processor.
While a business can’t prevent all chargebacks from happening, reducing chargeback fraud is possible with the right payments tools. That’s because the first line of defense against ecommerce chargeback fraud is the payments processor.
With Adyen, ecommerce merchants benefit from our RevenueProtect feature to reduce manual intervention and automatically resolve chargebacks by separating legitimate customers from fraudsters. Forrester Consulting found that as a result, merchants reduced chargebacks by 27% — worth $2.5 million over three years.
"Reporting and predictive analytics on the transaction and settlement side of chargebacks would never have been possible without Adyen because we wouldn’t have the granularity of data to build out accurate models."
And the 27% reduction in chargeback write-offs could be only the beginning. Forrester applied a chargeback write-off rate of only 0.8% for the composite merchant profile used in the TEI™ study. In addition, the merchants interviewed for the study were also already using existing third-party risk management tools — making them outliers among ecommerce businesses.
For iconic footwear brand Hunter, high chargebacks in the US and Canada proved challenging to address beyond manual reviews numbering in the thousands during peak periods. After switching to Adyen, the company has been able to get down their chargeback rate from 2% to 0.2%. As a result, Hunter now views payments as a conversion driver.
After branching into Mexico, fast-growing platform Athlinks saw chargebacks soar to a peak of 24%. Working with Adyen to conduct extensive risk analysis, the Athlinks team was able to get their chargeback rate down to 1%. Having Adyen as a partner lets the Athlinks crew focus on what they do best — helping athletes register for events and get race results.
“We’ve managed to get our chargeback rate down from 2% to 0.2%. At the same time, we’ve managed to keep our authorization rates high.”
While most ecommerce merchants will see the most obvious impact on their bottom line by reducing chargebacks, preventing them also frees up employees to focus on business growth and gives merchants the ability to drive more conversions with their payments.
Forrester’s study revealed that in addition to a reduction in chargebacks, ecommerce merchants can unlock up to $7.6 million in revenue over three years with Adyen through intelligent retries, improved operational efficiency, and increased auth rates.
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