Chargebacks are often considered a cost of doing business—an unavoidable expense that merchants should just accept and then move on. However, newly released data contradicts this assumption.
In reality, there is great value in ongoing, proactive chargeback management. Certain prevention strategies have proven effective, and fighting chargebacks can yield significant ROI.
New Report Emphasizes the Importance of Data-Driven Decisions
Newly released data in The Year in Chargebacks report provides an all-new perspective on chargeback management.
Understanding the state of payment disputes on an industry-wide level has always been a challenge. Often, insights about trends are actually assumptions drawn on merchant surveys and opinions.
However, The Year in Chargebacks report replaces speculation with real data. Now, the industry has a reliable resource that serves as a benchmark to monitor year-over-year trends.
The report not only benefits the industry as a whole, but also emphasizes the value of data analysis on an individual merchant level.
Without data, the real reason for a chargeback can remain hidden. Rather than recognize the exact cause of a dispute, merchants often guess or assume. As a result, prevention strategies would be ineffective because they target a “problem” that isn’t actually a problem–while the real issue remains unchecked.
On the other hand, monitoring key performance indicators for different chargeback variables helps expose the underlying reason for disputes so merchants can solve problems at their source.
The same is true for chargeback responses. If merchants aren’t actively and accurately monitoring outcomes, it’s hard to evaluate effectiveness. However, an in-depth analysis of things like win rates and revenue recovery can help merchants critique and optimize their processes for better ROI.
So, what does this new data reveal? What is there to be learned?
Key Insights About Chargeback Prevention
One of the most attention-grabbing stats in The Year in Chargebacks report relates to the average chargeback-to-transaction ratio. What percent of transactions turned into chargebacks?
While chargeback risks are increasing for many merchants, the study participants who were actively engaged in chargeback prevention strategies saw a 13.3% decrease in their chargeback-to-transaction ratio between 2017 and 2018.
This information is encouraging. Chargebacks are an ever-present, always-evolving concern, but there are ways to keep these threats under control.
The most commonly used risk reduction strategy for study participants was data analysis. Merchants had access to in-depth analytics that helped expose the underlying cause of disputes.
The second most popular tool (used by 76.5% of study participants) was chargeback prevention alerts. Prevention alerts allowed 60% of those merchants to resolve at least 30% of their disputes before they progressed to chargebacks.
While these chargeback prevention strategies are helpful, there is no way to guard against all risk. It is also important to be aware of what’s possible when fighting illegitimate disputes and recovering lost revenue.
Key Insights About Chargeback Responses
Not all merchants make dispute prevention a top priority, but it is usually a far more common task than fighting chargebacks.
There are numerous reasons why this is the case. However, the available data suggests the benefits of fighting outweigh the potential drawbacks.
Merchants in the study achieved win rates of up to 85.5%, with certain dispute types seeing a success rate of 96.2%.
However, this level of success is only possible if merchants understand what they can and can’t fight–and opportunities to respond are usually more prevalent than merchants realize.
For example, in some situations, false consumer claims accounted for three out of every four disputes. Only one out of four cases was a legitimate chargeback resulting from merchant error. In other situations, issuing banks were filing invalid disputes that failed to comply with Mastercard and Visa regulations.
And 77.3% of disputes classified as fraud were actually cases of friendly fraud. Cardholders were intentionally or accidentally claiming legitimate purchases were unauthorized.
All of these invalid chargebacks are causing merchants to unfairly sacrifice revenue. Fortunately though, these disputes can be fought and won, successfully recovering what has been lost.
One of the keys to maintaining a high win rate is compelling evidence. The more evidence merchants had, the better their win rates.
This was especially true for fraud-related disputes being fought with new card network regulations. Seventy-one percent of participating merchants didn’t use address verification service (AVS) or ask for card verification values (CVV) during checkout. As a result, these merchants initially saw a 64% decrease in their fraud win rates after Visa Claims Resolution (VCR) took effect.
Ultimately, merchants who invested time, money, and expertise into fighting chargebacks saw a significant return on their investment. In five case studies, the ROI of fighting chargebacks ranged from 712% to 1,144%.
More Data Analysis Opportunities Mean More Accurate Management Strategies
As The Year in Chargebacks report shows, data provides unique insights that couldn’t otherwise be obtained.
And the more chargeback insights available, the greater the impact that management strategies will have on the industry as a whole.
Corey Baggett is the CEO of Midigator, a technology company that removes the complexity of payment disputes.