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By Brittany Allen /
With fraud teams now squarely facing the final quarter of 2021, it’s the time of year merchants should be thinking about rising disputes and how to manage them. Not because the end of the year brings an increase in chargebacks—that typically takes place in the aftermath of holiday season transaction surges, in the first quarter of the next year.
But rising seasonal volumes across e-commerce attract fraudsters. Events like Black Friday in North America and Cyber Monday/Tuesday sales online everywhere drive huge upswings in revenue, and cybercriminals bank on puffed-up traffic to mask how risky their actions appear on a site. Upticks in traffic, coupled with increases in total average purchase values, give fraudsters wider boundaries in which to operate. And, because they’re aware that merchants will adapt risk thresholds to account for changing holiday behaviors and patterns, fraudsters are also ready to exploit that expectation every year.
Where seasonal abuse succeeds, chargebacks follow—defrauded customers will fight unauthorized purchases, and merchants are left to eat the cost. In a recent webinar, we explored strategic actions risk teams can take to effectively prevent chargeback-causing fraud before it happens, and how to prepare for rising disputes after the holidays. Below are expanded tips to help businesses develop more comprehensive, end-to-end fraud operations that reduce overall disputes and make managing chargebacks straightforward and efficient.
COVID-19 had an undeniable impact on digital commerce and the fraud that plagues it. Increased traffic and transactions can drive your overall fraud rate up, as well as lead to a higher volume of chargebacks filed—not just won or lost. Keeping your overall dispute volume down is key to staying out of hot water with payment processors, which are becoming more strict about companies’ chargeback rates, issuing fees and restrictions on merchants who have a chargeback rate exceeding 1%. Anything above that usually gets a business labeled ‘high-risk’ by the processor.
To avoid the consequences of rising disputes, growing companies will need to reset expectations around manual review needs and resources. Relying on broad assessments undermines accuracy; in-the-weeds responses are incredibly time-consuming, and spending money and time onboarding seasonal teams to handle volume shifts is a costly, inefficient solution. None are sustainable. Businesses will need to equip internal trust and safety analysts with the strategic guidance and tools, like real-time dispute management, necessary to scale and streamline chargeback processes at the same time.
The majority of card-not-present (CNP) disputes are the result of CNP fraud, friendly or not. It’s the most common type of true fraud that results in chargebacks; fraudsters use stolen credit card information to make unauthorized purchases that are later disputed by the valid cardholder. These can be more challenging than card-present disputes, as those often meet the standards of the fraud liability shift—ongoing processes and practices that place the responsibility for fraud losses on the issuing bank, rather than on the consumer or business.
Fighting CNP disputes effectively requires you to have more information on file, and be willing to do additional research in order to provide comprehensive evidence. Depending on the reason for the chargeback, the information needed will change; be sure to compile thorough evidence that’s presented clearly to ensure the best chance of success.
Intelligent dispute management requires scaling your trust and safety operations to handle incoming chargebacks, regardless of how quickly the business grows. And although the most effective way to streamline the process is to reduce the number of disputes that are filed in the first place, merchants with a high volume of disputes cannot afford to fight that battle by responding to every single chargeback that comes in.
The most important type of chargeback to steer clear of responding to is when the customer is correct, and a merchant error or true fraud is behind the chargeback. In these instances, analysts won’t be able to gather sufficient evidence to win the dispute because it doesn’t exist, and fighting it could cause the affected customer to churn permanently.
Ultimately, when and how to respond to chargebacks is an individual business decision that depends heavily on the types of payments being received and processed, and the size and scale of the company. It’s worth considering the total cost of managing disputes, from returned profits to the cost of hiring for seasonal surges. That can be challenging without a clear understanding of where your company’s chargeback rate is being driven up by true fraud; e.g., payment abuse and account takeover attacks being executed with stolen credentials and cards, and done as part of a “professional” fraudster’s attack cycle. Merchants can preemptively reduce the likelihood of true fraud disputes by adopting a proactive fraud strategy that stops cybercriminals from compromising your users’ information and making unauthorized purchases.
Closing out a dispute may seem like the end of the process, regardless of the outcome. But pre-arbitration gives the consumer another chance to resolve the chargeback dispute, in the event that the consumer loses the first round. This phase doesn’t involve the card networks to make a final decision.
An issuer may file for pre-arbitration for a number of reasons, including the receipt of new information and evidence from the consumer, the discovery of poorly disclosed policies, or in select cases, invalid changes to chargeback reason codes.
If the cardholder or issuer loses the dispute, they can file for an arbitration chargeback—which plays out a bit like any civil legal dispute. If the cardholder filed for arbitration, they’re acting as the plaintiff, with the merchant as the defendant; the card network is the judge, and will determine whether a chargeback should be overturned. If the merchant loses in these cases, that’s the end of the road.
The cost and table stakes also change between pre-arbitration and arbitration. Many retailers are finding that fostering true customer loyalty requires maximum user convenience and leeway, whereas customers often have several options for acquiring goods and services, and aren’t concerned about disrupting their relationship with a specific brand or store. It’s critical that merchants weigh the cost of recouping revenue against the initial revenue lost.
You’re invited to ask additional questions in the comments, or watch the webinar to dig deeper into these and other dispute management strategies.
Brittany Allen is a Trust and Safety Architect at Sift. She has more than a decade of experience combating e-commerce marketplace fraud at companies such as Etsy, Airbnb, 1stdibs, and letgo. Her current role focuses on trust and safety education, developing industry best practices and strategies, and representing the merchant's voice at Sift.
Stop fraud, break down data silos, and lower friction with Sift.