Is My Business Generating Enough Chargebacks?
How a Good Processor Allows CNP Merchants to ‘Get After It’
For CNP merchants, chargebacks are generally seen as an unfortunate cost of doing business. Whether a dispute is fraudulent or sincere, if a consumer initiates a chargeback it costs businesses time and money. The energy and expense devoted to avoiding and reducing chargebacks is evident and necessary. But a question businesses operating in the CNP space also must consider is: Are my chargebacks high enough?
The convoluted rules handed down by the card brands vary, but, according to industry experts, the threshold a merchant can approach but not exceed is, in Visa’s case, 1 percent of transactions. If more than 1 percent of a merchant’s transactions result in a chargeback (regardless of how the dispute is resolved) the merchant is subject to penalties, including fines.
Necessarily, then, because the consequences can be severe, merchants that accept a significant number of CNP transactions devote the most resources to ensuring that they are able to keep the number of disputed charges below the thresholds. But, growing businesses that are under the limits set by the card networks may want to take more chances to increase their orders lest they leave money on the table. A natural consequence of this is an increase in chargebacks. For both kinds of businesses—those over the threshold that need to bring their chargebacks down to avoid penalty and those under the limit hoping to grow—the key to managing their performance in this area is choosing a processor with the right capabilities, according to Paul Larsen, a New York-based consultant specializing in advising companies collecting recurring CNP payments.
Knowing Where You Stand
Larsen says accurate, real-time information is the most important factor influencing a company’s ability to manage its chargebacks on both sides of the threshold.
“You have to be a merchant who knows where it is in the chargeback scenario,” he explains. “There are many processors and gateways out there but precious few actually provide merchants with a keen understanding in real-time of where they are in any given month regarding chargebacks. Choosing a great processor that has great reporting is key.”
Larsen says the card networks do their tracking in real time and if the processor is not able to report that out immediately, a business might not know until far too late that it is in violation.
“[The networks] are measuring you in real time and by the 15 th of any month they will have notified your processor that you were in violation the previous month,” he says. “If you don’t know ahead of time where you’re at and you’re already playing up against and past the threshold, by the time the card network notifies you, it’s too late for that month and probably too late for the next month to affect an under-1 percent scenario. So, it’s vital to understand where you stand at all times.”
But having a processor that accurately tracks and reports the number of chargebacks is only half the battle, Larsen notes. Being able to categorize them is another major piece that not only gives merchants freedom from the worry of spending some time in chargeback “jail”—merchants that exceed the threshold are warned the first time, enter a chargeback monitoring program the second time and are subject to fines and penalties after that—but enables them to more aggressively seek sales if they are under the limit.
A good processor not only is able to tell a merchant where it is at any given point, but clearly defines for it the type of chargebacks it is generating, Larsen says.
“Chargebacks come in many different flavors, and the category, as defined by the card networks, can be a clue that tells you what’s causing them,” he explains. “When a customer calls the issuing bank and says ‘I didn’t authorize this charge,’ or ‘I don’t recognize that charge,’ it notes the reason that the chargeback has been initiated and, according to the standards set up by MasterCard and Visa, it categorizes the dispute.”
The information flows from the issuing bank to the processor, which, if it is serving its merchant client well, is able to communicate that information to the merchant in real time forming a detailed picture of what could be a fixable problem.
“Hopefully, the processor’s reporting has the kind of granularity that enables the merchant to see what the customers are saying,” Larsen says. “A customer that says, ‘I didn’t recognize the charge,’ could be a fraudster, but the business could also have a problem with the descriptors it uses in its billing to customers.”
Unleash The Marketing Dept.
He notes that if merchants can understand all this information, they can identify which chargebacks they can do something about. A company that takes care of preventable issues that sometimes result in chargebacks can lower them enough below the threshold to give itself the flexibility to engage in more adventurous marketing practices. Those practices could be the key to additional orders and sales for the merchant, but probably will invite more fraud as well.
“There is no excuse for something like unclear descriptors,” Larsen states. “That kind of customer confusion is goofy. You want to have quality customer service and the right kind of refund policy so you can free up your marketing engine to do its thing.”
Larsen points to affiliate marketing as an example of how a merchant might get more aggressive and, if it is properly managing its chargebacks and has the right information delivered in a timely fashion, purposefully flirt with the chargeback threshold without exceeding it.
“To the extent you want to play in the affiliate world, especially the incentivized affiliate world, there are a lot of orders waiting to be had,” he says. “But you know that entering that world comes with a downside. If you don’t have protections in place, if you don’t have your other chargebacks under control and don’t have the ability to measure what is going on by affiliate, you set yourself up for chargeback problems.”
But with the right controls in place, merchants are free to try additional techniques.
“You can balance your more organic strategies with more aggressive marketing opportunities to create the motif that suit you best.”