Many retailers still believe that they must focus on either chargeback guarantees or approval guarantees. In reality, e-commerce merchants should be able to do both. When discussing these two instances, it is helpful to put it in perspective as both the dark side and the light side of the “force” in Star Wars. Only this time we don’t need Yoda to confirm that balance is, in fact, required.
For those of you who are not Star Wars fans, the force requires balance for peace. Vendors who only guarantee chargeback rate are likely declining too many transactions; if they only guarantee approval rate, they are probably approving more transactions than optimal. A good vendor is able to guarantee both rates.
There should be real consequences for missed targets and poor performance. It is common for legacy fraud prevention vendors to provide clauses within contracts that create guarantees for their shortcomings, but they keep retailers locked into their contract.
When shopping for a reliable fraud prevention vendor, the more cushion for retailers and the more on the line for vendors typically means better service. Focusing on either chargeback rate or approval rate guarantee leads to a mismanaged business that is not working transactions efficiently. Here is why:
Focusing only on chargeback guarantees dampens the customer experience
When a fraud prevention vendor only provides a chargeback guarantee, their desire is to decline borderline transactions to reduce liability. Unfortunately, this results in a high rate of false declines, when legitimate customers are rejected. In Forter’s research, we found that for every dollar lost to fraud, merchants end up losing almost $30 to false declines — this is the invisible cost of the chargeback guarantee-only model.
A lot of the times well-intentioned customers are declined because of bad decisions, and legacy fraud providers will fight them with very few channels for communication or recourse. Putting customer experience in chargeback guarantee-only fraud prevention solution provider’s hands can create misalignment in incentives.
To enable expansion into new markets, you need to focus on your approval rate
When legacy fraud prevention providers focus only on chargeback rate, entering new markets can become far more challenging. Incumbent fraud prevention vendors have a tendency of being the most stringent in applying rules and reviews to limit their exposure. As a result, new customers are five to seven times more likely to have their transaction rejected than existing customers. Instead of capturing more lifetime value, retailers shed those customers to competitors — our research also shows that 40% of new customers that have transactions rejected will never shop with that merchant again.
Empowering the fraud prevention team
The thread weaving together my four-part series is approval rates. Incumbent fraud prevention vendors that lead with chargeback guarantees keep the fraud team from being flexible.
With advanced fraud prevention solutions, fraud teams can materially move the needle on approval rate. This includes optimizing the use of Secure Consumer Authentication to drive fewer failures and abandons and increase conversions. It means improving bank authorization rates to complete more transactions. Fraud teams that focus on these changes deliver tens of millions (even hundreds of millions) of incremental revenue to their business. Those teams get noticed, resourced, and promoted.
Mastering chargebacks and approval rates
Some vendors lead with chargeback guarantees because they do not have the ability to guarantee approval rate. In doing so, they are keeping the fraud team in their current lane. While driving down chargeback rates is critical, driving up approval rates simultaneously is transformational.