How Poor Chargeback Ratios Affect Businesses the Worst During a Sale

by Tyler P. A Passionate Blogger - Entertainment

During different times of the year, businesses use promotions to increase sales. The holiday season is a great time of the year for online vendors due to the increase in sales volume. But with these added transactions comes added fraud and chargeback risk and merchant account complications.

The revised Payment Services Directive (PSD2) was designed to provide customers with more security and help businesses or third-party payment providers to become more independent. In September 2019, the Strong Customer Authentication (SCA) aspect of these new directives took effect.

Under these directives, bank customers can now directly initiate payments from their accounts as long as the receiver of the money (e.g., an eCommerce vendor) is SCA-compliant. This is good news for vendors because it increases their chances of earning more revenue while paying less in processing fees.

Sale Periods

During promotional events and sales periods such as the Christmas season, an increased number of orders and transactions create a lot of friction for vendors. Fraudsters target businesses that don’t have an efficient chargeback fraud management service.

Having a poor chargeback ratio during a sale can destroy a vendor’s transaction profile. Additionally, the volume of orders can be so high that non-experts have difficulty accessing or disputing chargeback claims in a timely and complete manner.

An Increased Fraud Risk

One would assume that fraudsters will leave innocent vendors alone, at least during the holiday season. However, the stats suggest otherwise. In April 2020, the United States was forced to implement strict lockdowns which caused the number of fraudulent transaction attempts to increase by 35% compared to the previous year.

Christmas and other holidays almost always come with increased security risks. For instance, if a vendor receives 4,000 orders in the busy month of December, and 20 of them are fraudulent, the vendor’s chargeback ratio will be only 0.5%.

A 0.5% chargeback ratio isn’t bad until the post-sale season chargebacks start ramping up. Consumers usually wait a few weeks to report chargebacks. After counting January sales, the vendor may experience an unexpected increase in chargeback ratio. Once the total chargeback amount crosses the $5,000 mark, vendors will be immediately added to the “high-risk” vendor list by authorizing banks and merchant platforms.

Post-holiday chargeback ratios are one of the leading causes of vendor account terminations. Maintaining a global chargeback rate of less than 0.13% is much more difficult during and after the holiday season.

Which Businesses are Best-Prepared?

During the holiday season, consumers demand a seamless buying process. Vendors who do not meet the strict PSD2 SCA requirements cannot provide smooth transactions because they have to deal with added authentication steps. This greatly increases the risk of cart abandonment. Online sellers who are best prepared for the holiday season engage in these practices:

· Creating non-disruptive purchasing processes by maintaining PSD2 compliance.

· Maintain low chargeback ratios to qualify for exemptions on low-risk transactions.

· Use the best chargeback fraud management solution to monitor and analyze each chargeback request.

· Invest in mobile buying experiences.

In 2018, payment card fraud caused merchants, payment card issuers, and Payment Service Providers around the world to lose $27.85 billion. To reduce such losses and consistently maintain a low chargeback ratio during the holiday season, teaming up with professional chargeback managers is the best course of action.