Payment fraud detection: Challenges and steps to solve
Chargebacks are a necessary evil; just part of doing business - right?
In some ways, yes. 44% of shoppers filed at least one chargeback in the last year, usually because the item they ordered was never received or it wasn't what they’d expected. But another study found that 86% of chargebacks are probably cases of friendly fraud. We all know that chargebacks tend to side with the customer; and rightly so. But that doesn’t mean they should be allowed to go unchecked. They’re incredibly expensive, not only costing you the revenue from the sale but also the cost of shipping the item and the chargeback fee from the acquirer. It’s hardly surprising our research found that 43% of UK retailers report chargebacks as a significant cost to their operations.
At a time when retailers are being squeezed from all sides, it’s really worth getting to grips with chargebacks; understanding how (and when) to contest them as well as preventing them in the first place.
Before you start, you need to understand why the chargeback happened in the first place. The clue will be in the dispute reason code. You’ll then need to build a case with as much evidence as possible. It’s especially important to establish a link between the cardholder and the person receiving the item. Things to look out for are:
Note: American Express, Visa and Mastercard will all follow slight variations of a chargeback process to collect funds back.
Disputing chargebacks can be a huge drain on your resources. And, even if it’s successfully disputed, it’ll still count against your chargeback ratio. This puts you in danger of falling into the scheme programmes.
So the best way to reduce chargebacks is to prevent them from happening in the first place. You can do this by:
Lots of responsibility sits with your customer service teams. But your fraud and risk teams should also be taking precautionary steps to ensure compliant processes are in place. It’s also worth checking in with your tech support teams to ensure the payment data tells you what you need to know.
3D Secure 2.0 (3DS2) helps defend against fraud by getting customers to authenticate themselves to confirm they are who they say they are. 3DS2 is an improvement on the original 3D Secure as it allows for better risk-based analysis within the customer purchase. Most European businesses implemented 3DS2 when Strong Customer Authentication requirements came into effect for transactions above £25. Our research shows that just 73% of UK retailers have a solution in place to manage SCA, meaning they could be losing out on valuable transactions.
If you haven’t enabled 3DS2, it becomes much more difficult to dispute a chargeback, and you’ll need to collect a host of data. Some payment providers, like Adyen, will take care of this compliance for you so you don’t need to worry that the correct transactions are being routed via SCA.
Adyen will automatically defend chargebacks if the case is straightforward. For example, if you’ve already refunded a transaction before the cardholder filed for the chargeback, our auto-defence feature will defend it with no action needed on your part. Once a chargeback has been submitted for defence, whether automatically or manually, the card issuer will review what has been provided and will accept or decline it based on how compelling the evidence was.
These days, every penny counts, which is why tightening your defences and limiting your chargebacks becomes increasingly important. With peak upon us it’s important to ensure sure your payments provider and risk management system are set up properly to ensure you’re collecting the right data. This will help you identify customers who regularly file chargebacks and could be committing friendly fraud. Ultimately, it will give you the confidence to contest chargebacks, protecting your revenue at a crucial time.