It used to be that chargebacks were just another cost of doing business. But with the e-commerce world growing by leaps and bounds, online merchants are experiencing a corresponding spike in chargeback rates that's eroding their bottom lines and jeopardizing their merchant accounts.
Because this rise in chargebacks can hold consequences for ISOs, merchant acquirers are taking additional steps to mitigate and even avoid these disputes.
"It's requiring a lot more attention. It's no longer just a routine error on merchants' balance statements," said Monica Eaton-Cardone, managing partner for the risk mitigation firm Global Risk Technologies and co-founder of its Tampa, Fla., subsidiary Chargebacks911.
Some ISOs are turning to third-party mediators that have popped up in recent years to address this growing demand. Others are offering new services to address and even capitalize on the need to lower chargebacks.
ISOs are paying much closer attention to chargeback thresholds and using more scrutiny when bringing on e-commerce merchants. For some ISOs, part of the underwriting process now involves ensuring that when boarding an e-commerce merchant, there's a 24/7 customer service support center available to them.
E-commerce sales have more than doubled in the past five years, from $144.9 billion in 2009 to more than $304.9 billion in 2014, according to the U.S. Commerce Department. But at the same time, online-only merchants are experiencing more fraud losses because they are being held liable for a greater proportion of chargebacks, according to the LexisNexis Risk Solutions True Cost of Fraud Study.
Large e-commerce merchants lost 1.39% of their revenues to fraud in 2015, compared to 0.6% of their revenues in 2012.
Acquiring banks have taken notice of the trend, said Payments attorney Paul Rianda.
"The banks are deciding they just don't want to do e-commerce merchants," he said. "And they're changing their unapproved merchant lists to reflect that."
Online transactions have been of particular concern to Rianda's ISO clients, especially those who serve smaller merchants that are less sophisticated about payments. A merchant might receive the store's biggest order ever and ship it out, only to be hit with a massive chargeback. "All of a sudden, he gets a chargeback for $8,000 and doesn't know what happened," Rianda said.
Mediation for acquirers and merchants
Companies like Chargebacks911 are coming on the scene to help ISOs and merchants lower their chargeback rates. The company works with merchants to challenge illegitimate chargebacks.
Previously a merchant herself, Eaton-Cardone helped develop the chargeback management service after some of her own ISOs, acquirers and processors started contacting her and her colleagues to consult with their merchants.
"Little did we know, there were actually plenty of merchants out there that suffered from chargeback ignorance, like we did, and they didn't know how to solve these problems," she said.
Global Risk Technologies estimates that approximately 86% of chargebacks are fraudulent, and that many consumers bypass merchants to directly file complaints with card-issuing banks. In other words, most chargebacks can be challenged and are not the merchant's fault.
With e-commerce growing, there are more layers of technology, which add complexities that make it very easy for criminal and fraudulent activities to remain hidden.
"The more technology there is, the more opportunity there is for fraud," Eaton-Cardone said.
The phenomenon known as "friendly fraud" is helping to drive up chargeback rates. This occurs when consumers abuse the chargeback process to get a refund. They illegitimately dispute the transaction with the bank instead of contacting the merchant. Online banking and the availability of "dispute" buttons next to transactions is making it even easier for consumers to commit this kind of fraud.
Another factor that is creating a lot of chargebacks is the need for online stores to give exciting offers to compete with brick-and-mortar stores, where consumers can touch and feel merchandise and have everything at their fingertips. Companies like Amazon.com are offering same-day shipping, free returns, better value and the ability to comparison-shop all in one place. In addition to this, consumers might also have credit cards that advertise zero liability, Eaton Cardone said.
"We believe that the Internet right now is in an age of entitlement. You go above and beyond for your customer base, and before you know it, that is the new expectation," Eaton-Cardone said.
Another reason chargeback activity has increased is the way issuing banks have promoted the use of their credit cards, Eaton-Cardone said. Cardholders are more willing to spend when advertising tells them that everything they purchase online is completely secure and has zero liability.
"They suffer no consequence. They don't get caught. And statistically, half of those customers will file another chargeback within 60 days," Eaton-Cardone said.
That means that every friendly-fraud chargeback is actually worth 1.5 chargebacks, because half of those customers are going to do it again, she said. "This is one of the biggest reasons that we're seeing the chargeback climate continue to expand," she said.
Business opportunities for ISOs
Banks are becoming more cautious about taking on e-commerce merchants, creating opportunities for ISOs to take on that business.
"It's probably logical to assume that since there are fewer people willing to take on the business, the people who are willing to can charge a premium for doing that," Rianda said.
UniBul Merchant Services has built its business model around serving e-commerce merchants, many of which the banks consider too high-risk to touch.
All of the company's clients are in the e-commerce space, and about 60% of them are considered high-risk. Metodi Slovenov, credit card processing consultant for Boston-based UniBul Merchant Services, says he deals with a number of businesses that have been around for several years and process more than $1 million a month, but banks aren't willing to take them because they are e-commerce merchants.
In September, UniBul launched a new product designed to help high-risk merchants lower their chargeback rates.
Much like a customer would buy insurance when purchasing an airline ticket, the product gives customers the option of buying insurance on the product at checkout. The program is specifically designed for high-risk e-commerce merchants and offers them insurance for shipping physical products as well as selling virtual products.
It's becoming more important for merchants to preempt chargebacks because if they wait until a chargeback has already occurred to contest it, it's too late, Slovenov said.
"Chargebacks are costly. And they damage reputations, both your merchant's and your own as a payment processor," he said. "You have to find ways to deal with them, and we're doing our part."
