It felt like we spent much of 2022 discussing the possibility of an impending recession. While it’s still not certain exactly what will happen, the majority of experts do agree that some form of recession is on its way. What it will look like—how hard it will hit and how long it will last—remains to be seen, but the smart money is generally on preparing for an economic downturn rather than ignoring the possibility and hoping we’ll steer clear.
There are many activities that businesses should undertake in anticipation of a period of economic retraction, but let’s discuss one today that runs the risk of going overlooked. I’m talking about preparing for the increase in lost revenue due to chargebacks.
During any economic period where consumer budgets shrink, customers regularly scrutinize their purchases more aggressively. This leads to marked increases in transaction disputes, chargebacks, and fraud. In fact, online fraud rose 87% in less than a year during the 2008 recession.
Our internal data has also shown that, on average, fraud-to-transaction ratios increase by 50%, average fraud losses by 39%, and dispute-to-transaction ratios by 42% during a recession.
As a potential signal that recessionary forces are already starting to exert pressure on consumers, 27% of global enterprise-level retailers said that their chargeback rates have increased in the past six months.
We expect a recession to arrive, and soon. When it happens, battered consumer businesses are going to take another financial hit due to an uptick in chargebacks, fraud, and unnecessary disputes. What can businesses do today to prepare for this deluge of disputes? Here are some tips.
Develop a robust risk strategy
Chargebacks and related fraud are, after all, just another risk category that can be calculated, planned for, and mitigated with the proper tools. By building the right capabilities and supercharging processes with machine learning that can help detect fraudulent disputes and start identifying the reasons for chargebacks—so you can stop them from occurring in the first place—that risk will be greatly reduced. Given the uncertainty we’re looking toward in the marketplace, any reduction in risk will be a welcome change for owners, managers, and employees alike.
The following aspects of a chargeback risk reduction strategy will serve any company well. Some payment processors provide a few of those tools, but in many cases, you’ll be looking for external tools to integrate with.
- Detection and blocking capabilities - Machine learning (ML) can analyze real-world and transactional data to detect transactions that have a high probability of becoming chargebacks. You can set the rules by which the system accepts, declines, or allows an extended time for the validation of a transaction. Building “decline and allow” lists also allows you to speed up the process of transactions from trusted sources and block the ones known to be tied to fraud.
- Manual validation and extra security - Sometimes, you just need someone to go in there and personally review a transaction; making sure the capabilities are in place for that manual review is important. Additionally, for certain transactions deemed a little riskier than others, you can further validate through 3D Secure (3DS) means with whatever challenge preference you like.
- Customization features - The machine learning capabilities will pull from order, transactional, and other real-world data, so hooking your ML system into merchant data feeds and uploading custom lists will provide important context for the system to do its job and accurately predict and block transactions likely to be fraud or charged back. Customer segmentation features also help here, as the behaviors that might seem odd and cause some red flags for one group of consumers could be normal for others, and shouldn’t be challenged for the latter group.
- Identification of key KPIs and vulnerable areas - Strategic Key Performance Indicators (KPIs) can guide the implementation of any risk prevention tool—and teach the machine learning system what to focus on. Make sure you have visibility into the full transaction journey analysis so you can identify the areas that are causing mistakes that lead to chargebacks—or are most vulnerable to fraud.
- Investigation tools - Granular transaction reports go a long way to figuring out the source of chargebacks and patching that area up. They can also be crucial evidence when it comes to reversing chargebacks through representment. The tools should also track the win-loss ratio for your company; you’re not going to be able to stop 100% of chargebacks before they happen, so making sure you’re reversing many of those that do get through will also help prevent financial losses.
- Testing capabilities - Finally, testing the tools to make sure the ML processes are getting it right before letting them handle real transactions is highly recommended. Poorly handled charges could cost customers and partners and lead to losing a higher number of chargeback disputes.
Lean on your payment partner and fight “friendly fraud”
Don’t hesitate to utilize the expertise of your payment partner and collaborate with them to stay vigilant against fraud. There are three main sources of chargebacks: true fraud, merchant error, and friendly fraud.
True fraud is self-explanatory; someone used a card they weren’t authorized to use (usually because they stole it). Fraud prevention tools, some of which are described above, are the recommended solution here. Just make it hard for fraudsters to succeed: discover your vulnerable points and patch them up. Merchant error, on the other hand, isn’t malicious, but can still be painful to the bottom line when it keeps happening. For example, duplicate billing that isn’t immediately corrected will lead to a chargeback. If the same issues keep causing chargebacks, it’s a sign that process improvement is needed. Determine the root cause of the repeated errors and patch them up.
Friendly fraud can be a little more complicated to deal with. We refer to the act of someone using their own card and making a purchase but later disputing it simply to get the money back (even though they received the product) as “friendly fraud.”
Preventing or fighting friendly fraud often requires a more in-depth approach, with the addition of the tools above and/or a third party that specializes in fraud prevention. The first step will be to analyze the root cause of these chargebacks and then identify and fix any operational issues that might have helped them arise.
But you can’t stop there. Working with customers to reduce the possibility of them initiating these chargebacks is a worthwhile strategy. Ensure that customer service is available and helpful so they don’t feel like they need to go the chargeback route if they are unsatisfied with any part of their purchase. Use order intelligence tools like Consumer Clarity and Order Insight to address any confusion they may have, and make sure your billing descriptor has a name your customers will recognize and a customer service phone number. Finally, communicate clearly with all parties to set expectations properly—make sure customers know what they’re paying for, and what you expect from your payment processing partners at every step of the way.
Recession-proofing
No one escapes a recession unscathed, just like no one can prevent all chargebacks from taking a bite out of their revenue. But by building a risk strategy that utilizes the latest technologies for preventing chargebacks and fraud—and winning more of the disputes that do happen—companies can reduce the impact of these activities on their bottom line. And they’ll have a little bit better of a chance of weathering the economic storm ahead, whether it turns out to be a rain shower or a hurricane.
