Published December 1, 2017

What is a Chargeback?

Chargebacks occur when the customer files a claim with the bank for their money to be returned (or “charged back”) after an online purchase has been made. These can happen for several reasons, including everything from buyer’s remorse, goods being lost in shipping, or items not arriving as described. However, statistically over half of all chargebacks occur due to transactions not being authorized by the customer – which is usually the result of credit card fraud.

This is a big concern for eCommerce merchants because not only do they lose the goods/services that were rendered to the customer, but they get charged a fee from the bank. These fees vary from $25-100 depending on the bank, but are charged per transaction, so if a customer wants to dispute several months-worth of transactions, this can be very costly to the merchant.

To make matters worse, if a store starts seeing a high number of chargebacks (e.g. 1% or more of all transactions result in chargebacks), they might be determined “high risk” by a payments provider, which would result in more expensive chargeback fees. When you look at the cost of these fees, lost goods, and wasted employee time, it all adds up, which is why some estimates say that for every $1 lost to fraud, your typical business spends $2.23 dealing with the problem.

Chargeback Ratios (figure 1)

Some industries face a higher risk of chargebacks The chart above (Figure 1) shows the different chargeback rates for different industries, and the reduced rate observed after fraud scoring and reduction.

How Do You Fight Chargeback Fraud?

So how do you safeguard your business and reduce the number of chargebacks you receive? The first step is to start scoring every user visiting your site to watch for potential fraud, as identifying suspect users will go a long way to reducing your number of chargebacks. The next step is to quarantine the order and verify the user's identity. Orders placed by suspect users should be held while action is taken to verify that the user’s identity to the credit card you are about to accept.

For example, a merchant may send the user a SMS text message requesting order verification. If verified, this ties a phone number, a phone account, and a real person to the order, as well as giving you an order confirmation on record for fighting disputes.

Actionable intelligence, such as verified or failed identity checks, will also speed up your manual review considerably, in addition to reducing the number of chargebacks due to credit card fraud. The final step is to use this process to tweak your future scoring based on the individual needs of your industry. NS8 Protect for platforms can do all of this, and more.

NS8 Protect

Protect your storefront from chargeback fraud and the other revenue killers.

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