Fraud

[Matt_White]

A small point before I start. This is in the fraud forum because chargebacks are often associated with fraud in all of our minds because those are the most personal ones, but remember, there are many more reason codes than the fraud ones.

So you've got chargeback trouble, now what? Here is a basic outline that I have used at least a couple dozen times at this point, which has never failed to reduce a client's chargeback trouble. This is not a complete, in depth strategy, it's a sample which may not apply to your case exactly, it takes a great deal of analysis and judgement to tune a custom strategy. However, invariably, the merchants with the lowest chargeback problems I have seen are the ones with the best customer service. One of the lowest chargeback rates I have ever heard was from a merchant priding itself on its outstanding customer service. They had a very simple fraud system, and a fairly small review team, and one of the lowest loss rates I had ever heard. I would actually have wanted it slightly higher, but they didn't need it to be higher.

In order to get out of chargeback trouble and stay out, give outstanding customer service. Give your reps the power to credit time or tokens or give out a promo coupon to customers that are upset, because not only will they appreciate the gesture, they will tell everyone about the outstanding service they received! Nothing avoids a chargeback better than free stuff (should that be trademarked?). A lot of the list below will seem like business best practices. There's a reason for that! Companies that take best practices into account when building out their strategy tend to have much lower chargeback rates. Once you get out of trouble, then you can do analysis to find out which strategies can be loosened. Wait until you're well out of danger before you start changing your rules, remember that chargebacks can take up to 120 days to come in, so don't relax until you've drastically reduced the rate. Once it's under 0.50%, then you can start looking to loosen up the reins.

• Review chargebacks to group by reason code, this will give you an idea as to potential root causes. There are a number of reasons that merchants get into chargeback trouble. Chargebacks are usually associated with fraud in the minds of merchants, but customer service issues such as difficult refund policies or outages can be at fault. This is usually done at the summary level, just to get the lay of the land, to see if there are specific areas where we need to direct our focus.

• Review current use of association-provided fraud prevention tools (AVS/CVV). If you're not checking CVV, you should be (read this for more). AVS policies should reviewed as well. Merchants in chargeback trouble are advised to always reject AVS "No Matches." While this will not necessarily be the practice once chargebacks are under control, it's a low hanging fruit for preventing a number of chargebacks, and it's relatively painless, from a development standpoint, to implement.

• Review Terms of Service to find areas to reduce confusion about billing practices. For example, if you have an annual subscription billed in a lump sum, converting that to an installment, billed monthly, may reduce the surprise to customers. It's very possible that customers are simply not expecting a bill because they forgot they subscribed the year before, so if you go to renew without warning, then the customer may simply charge back instead of calling to cancel and requesting a refund.

• Review billing descriptor to make sure that it will be readily recognizable. For example (to borrow an old example from one of our customers), billing as "Symantec" would likely result in far more chargebacks than billing as "Norton Antivirus."

• Review affiliate practice. Don't pay your affiliates Net 30 if you can avoid it, unless you can make adjustments for chargebacks. I have seen more than one customer burned by fraudulent affiliate traffic. It's a quick way into chargeback trouble because it's often initiated by the affiliates. I would typically also review some affiliate-generated transactions to see if any obvious anomalies jump out (this is a soft skill, it's hard for me to explain what I do here, essentially, I'm searching for common patterns in bad transactions that differentiate them from the good ones, feel free to ask me if you're having trouble).

• Review the use of CAPTCHA if traffic is looking bot-like. With a low price point for the cheapest subscription or item, it’s possible that people could be using your site test stolen cards.

• Then, and only then, do we do a deep dive on fraud. The first thing that I look at is IP geolocation. In my experience, fraudsters are typically as lazy as your system will allow them to be (and your system should be as relaxed as the fraudsters laziness or your loss tolerance will allow). If they don't need to make an effort to hide their origins with proxies because they don't get blocked without them, they will save the proxies for other sites.


• As we do further analysis, the goal is to break up the transactions into groups based on level of risk. For example, we might discover that affiliate traffic is higher risk, so the score threshold would be set lower than direct traffic. We can also break down by product or other elements. I will look for other commonly observed patterns (repeated transactions that might indicate the need for velocity checking, for instance), though much of this amounts to experience from going over tens or hundreds of thousands of transactions.

As you may have noticed, none of this is very industry-specific. Some of the examples might be, but I have used some variation of this strategy for merchants in everything from airlines and luxury goods to online dating, online gaming (MMO and casino, heck, even a power-leveler who sells WoW gold), and online classified ads. Some of these strategies may seem extreme, but a chargeback problem is an urgent problem, one that you should not shrug off as a fluke. I have seen a merchant fined hundreds of thousands of dollars in a month (I am not exaggerating, seriously - a month) because they refused to believe that it is an urgent problem that had to be treated as such.

It's not the end of the world, you just need to do a little analysis and a lot of self-reflection, and you can't be afraid to apologize for any inconvenience the policy changes may cause. Just remember how much less convenient it would be for your customers if they couldn't pay you with credit cards! Let me know if you have specific questions, I know it's easy to freak out when you get into chargeback trouble, but it's not the end of the world - some of the biggest brands you know have had chargeback trouble at one time or another.