Analysts predict record post-holiday fraud, chargebacks

Record 2018 holiday spending may lead to high levels of returns, chargebacks and consumer fraud, retail analysts warned. The Chargeback Triangle, a May 2018 independent study by Javelin Strategy & Research and sponsored by Verifi, linked U.S. consumer disputes and chargebacks to $31 billion in losses, with merchants sharing almost $19 billion of the overall costs. Authors identified merchants, issuers and customers as three points of a chargeback triangle in which each should bear equal responsibility for prompt, accurate communication.

"Greater collaboration between issuers and merchants can help preempt chargebacks and eliminate the burden of a formal dispute process," researchers wrote. "Victory is measured not only by avoiding financial liability for the transaction but also by securing the relationship with the customer who is disputing the transaction."

Matthew Katz, CEO at Verifi, expects to see a post-holiday season spike in chargebacks and fraud as cardholders peruse their credit card statements. "[Merchants] will spend much of January 2019 dealing with an increased onslaught of disputes and chargebacks as cardholders receive their post-holiday credit card bills and – in many cases – begin contacting their issuing banks to dispute suspicious, nebulous or outright fraudulent charges," Katz said.

Hope not an effective tactic

Katz observed that a surprising number of merchants consider chargeback-related fraud a cost of doing business. While they are hoping for the best, Katz emphasized that hope does not ameliorate chargeback and consumer fraud problems. Fraud mitigation platforms with early warning systems are effective deterrents to consumer fraud, he stated.

Vague billing descriptors are another leading cause of cardholder confusion and calls to issuing banks, Katz noted. Some cardholders may have made the purchase but do not recognize the descriptor language. Fraud mitigation platforms can reduce disputes by sharing shopping cart data, such as merchant's name and contact information and item descriptions among cardholders, merchants, and issuers, he explained. By provisioning this data directly into issuing bank call centers, online and mobile applications, the platforms can further clarify questionable charges.

"Despite being limited to 20 to 25 characters, including spaces, the descriptor is the best means by which an issuing bank and merchant can convince a cardholder that he or she has actually made the purchase," Katz said. "Successful merchants take the time to carefully craft their descriptors, experimenting with different terms until they arrive at something that reduces cardholder inquiries."

Proactive, preventive strategies

Suresh Dakshina, president at Chargeback Gurus Inc., pointed out that chargebacks have numerous hidden costs. "When it comes to online fraud during the holidays, it's not just the cost of transaction merchant lose when they incur fraud," he said. "It is estimated that merchants lose up to three times the transaction cost considering their product, fulfillment, marketing and operations costs."

Dakshina advises merchants to take the following precautionary measures to mitigate fraud, especially during holiday season:

• Secure authentication: Activate AVS/CVV match features in your payment gateway to avoid fraudulent orders.

• Scrutinize rush orders: Review overnight orders closely; fraudsters know that merchants who rush to deliver products may bypass security measures.

• Review large, multiple orders: Flag unusually large or multiple orders that originate from the same customer, as well as unusual international orders.

• Address verification: If you have a suspicious order, call the customer to verify phone number, email and physical address.

In an October 2018 blog post titled "How to Prevent Online Fraud During Peak Holiday Season," Dakshina wrote, "Merchants today are stuck in a bind where they must make every effort to detect and avoid fraud, while being careful not to overzealously decline legitimate transactions or allow the costs of fraud prevention to harm their profitability."

Dakshina acknowledged that balancing chargeback protection with fast approvals can daunting, especially for merchants who are afraid of losing sales. Fortunately there are cost-effective, high-tech chargeback tools that can help fight fraud and chargebacks, he said.

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