By applying certain best practices, subscription and continuity merchants can drop their chargeback rates with no additional costs. In fact, they can lift their profits. Here’s how.
Real Costs of Friendly Fraud
Chargebacks, the lion’s share (70%) of which are so-called “Friendly Fraud” are a bane for online merchants.
There’s nothing friendly about Friendly Fraud. It often comes from customers who do not want to call the merchant to get a refund or who have “buyer’s remorse” about their purchase and know that the terms of the sale do not permit a refund or multiple refunds.
In our experience, most merchants bend over backwards to prevent chargebacks and take solid, ethical steps to insure customer satisfaction and lower chargebacks.
Despite the best intentions of the merchant, the level of customer chargebacks can trigger fines or loss of processing accounts by Visa or Mastercard.
The original monitoring methods are very antiquated. The 1% transaction rule by Visa and MasterCard started long before the customer anonymity of the Internet, but they are strongly enforced none the less with no qualitative reviews of facts in determining penalties or account suspensions.
Lowering Chargebacks is Expensive
The actions a merchant must take to lower chargebacks typically exceeds in cost (by a factor of 5-10x) the reduction in chargebacks costs from customers. Loosening of return policies and cancellation policies as well as pre-refunding customers with certain characteristics are some of the blunt instruments people occasionally use to lower chargebacks. Usually, there’s a much better, less expensive path to follow.
So, finding cost-neutral ways to lower chargebacks can be a huge benefit.
Three Proven Methods
Here are three sure-fire ways for continuity and subscription merchants to drop chargebacks 50% or more.
All three examples are Cloud-based SaaS technologies. So you don’t need to add servers or buy software or hire technicians to keep the systems running. It’s all done by the service providers.
The Case Study
Let’s assume we are a merchant who wants to drop their overall chargeback rate from 1.8% to .9%.
As a merchant we are adding about 18,200 new customers per month.
We do 50,000 transactions/month and our overall chargeback rate is 1.8%, so we have 900 chargebacks/month.
50,000 x 1.8% = 900 chargebacks.
And, chargebacks and related costs are about 4.8% of overall revenue, or in this case, $144,000/month.
$3,000,000 x .048 = $144,000.
Let’s get to work….
First Method: Pre-Sale Fraud Filters
The first step to lowering chargebacks is to deploy Fraud Filters at the landing page (if a web-based merchant) or the call center or transaction portal, to cut out potential fraudulent transactions.
There are several products which do a solid job of filtering out customers with a history of fraud or customers with high-risk profiles, but from what we have seen so far, we think Kount does the best job of providing a comprehensive platform.
Kount offers a broad array of filtering methods designed to identify characteristics that indicate a high fraud risk. These filters include active and passive device identification, including mobile device ID, whichallow you to filter out multiple transactions coming from one device, even if that device is using cloaking methods to appear to be from several locations.
Additional filters include velocity checks, IP geo-location, proxy detection and other technologies, to detect and prevent fraudulent activity.
We’ve studied the metrics of several Kount customers.
In general, after deployment, we’ve seen a reduction of 25-33% in chargeback rates. So, now plug in the Kount system and those 900 chargebacks now just fell to 675. Best of all, our overall chargeback rate has fallen to 1.35 %!Woohoo!
From an economics standpoint, Kount costs about $10k to get set up and then, at 25,000 attempts per month (assuming 18,200 new customers but normal declines and then declines flagged by Kount), the monthly pricing is roughly $2,100. So an annual cost of $35,200 and a monthly amortized cost of $2,933.
The reduction in chargebacks should save you about $36,000.
Merchants typically see an improvement in customer quality with Kount which exceeds the incremental eCPA costs they incur for slightly poorer converting traffic due to the fraud filters.
We haven’t attempted to model that into the economic benefit, but you can assume it is neutral or slightly positive.
Monthly Economic Scorecard
($2,933) Kount Monthly Cost
$36,000 Kount Economic Benefit
$33,067 Net Monthly Economic Improvement
Annual Economic Improvement $396,804.
Not bad huh?
But, there’s more low hanging fruit – let’s go get it!
Second Method: Use Personalized, Status-based, Automated Customer Interactions in an Optimized Customer Outcome System
In the course of testing over 20 million customers, 550 brands and 100 merchants and performing more than 2,300 unique optimizing tests involving all those customers, at RevGuard we’ve learned that personalized, status-based, automated (PSA) customer interactions always lower chargebacks.
What does PSA mean?
“Personalized” means that the customer, through an automated system of IVR, web or email, gets immediate affirmation that they are recognized and the system knows who it is talking to. That level of reassurance is important because it raises customer confidence that the actions they are taking are being recorded correctly.
“Status-based” means that the messaging they receive is directly related to their status (ie In-Trial, Ongoing, Already Cancelled, etc.). When a customer doesn’t have to go through a long IVR, email or web decision tree but is instantly given options that are directly related to their status, they happily move through those choices and their needs are quickly addressed.
“Automated” means that the system is providing them with a non-human, non-threatening, always-the-same-high-quality interaction. Most humans, in today’s world, do NOT prefer to talk to a human. When presented with a PSA or a human option, 75% of customers will choose a PSA option. In an APP-oriented fast paced world, people don’t want to wait on hold for three minutes to potentially fight it out with a customer service rep with a thick accent.
The PSA method makes customers happy and happy customers are much less likely to do chargebacks.
For the customer who was aggravated or motivated for a return or chargeback, they now have had their primary concern addressed in a very professional manner. The steam blows off and customer happiness (or at least civility) returns. When the PSA attributes are combined, we’ve seen it typically lower chargebacks by 23% while raising the revenue (+10%) and thereby profits (+43%) of customers at the same time. That’s the holy grail of chargeback reduction; lower chargebacks and higher income.
Since the RevGuard system allows merchants to do A/B testing to optimize performance, some merchants have aggressively designed their interactions to cut chargebacks. In those instances, we’ve seen reductions as high as 54% in chargeback percentages.
But for this case, let’s stick with the typical, revenue positive results most RevGuard customers prefer.
So, there’s another 23% chargeback reduction. In this case we’ve actually increased customer lifetime value (CLV) and business income. So the 675 chargebacks are now reduced an additional 23%. Our new chargebacks level is now 520, which is 1.03% of 50,000.
Yabba Dabba Doo!
Furthermore, using A/B testing, PSA and other best practices, RevGuard typically lifts CLV (higher revenue +lower returns + lower chargebacks less RevGuard fees) per customer by about $6.35 per customer.
So, add in the $6.35, per new customer, per month and RevGuard has improved monthly profits by $115,570.
Monthly Economic Scorecard
$ 33,067 Kount
$148,637 Net Monthly
Annual Economic Improvement $1,783,644
Third Method: Use the CDRN program
The Verifi CDRN (chargeback dispute resolution network) program has been diligently built over the last ten years to be a viable chargeback reduction tool.
Sometime ago, Verifi went to Visa and Mastercard and pitched them on an idea to create a pre-chargeback mechanism for customers to have disputes immediately credited by merchants and for merchants to avoid having disputes tallied against their merchant accounts for purposes of Visa or Mastercard monitoring or enforcement programs.
By signing up participating banks and having the banks go through a rather lengthy and intense technical integration with the CDRN network, Verifi is able to interdict chargebacks. The CDRN network literally stops chargebacks in their tracks and they never hit the Visa or Mastercard monitoring program.
There is a price to pay of course. In order for the merchant to participate in the CDRN program, they must agree to not contest any disputes which come through the program and allow Verifi to initiate a 100% chargeback on the dispute. Furthermore, the merchant is typically billed $40 per chargeback dispute.
For many merchants that amount is close to what they already pay their credit card processors, with most credit card processors charging between $25 and $50 per dispute.
We’ve studied the metrics of about 100 continuity and subscription companies that are customers of RevGuard. Some using the CDRN program and some not. Depending on the traffic source, type of product and merchant policies, the reduction in chargebacks can range from about 16% up to 35%. On average, we’ve seen a 24% reduction in chargebacks.
From an economics standpoint, we’ve found that the Verifi program ends up being about a net 8% increase in your overall chargeback costs, BUT those costs do not show up on the merchant account as chargebacks.
So, the overall costs of chargebacks (after Kount and RevGuard reductions) has increased from pre-Verifi levels of $83,160 to $89,813 (8%) since Verifi. A small price in the aggregate since we are trying to lower overall chargebacks and we’re getting solid wins with Kount and RevGuard on increased profits.
Monthly Economic Scorecard
$148,637 Net Monthly
Annual Economic Improvement $1,703,810.
How These Three Methods Work Together
The three methods discussed above apply simple principles:
- With Kount, you keep out bad customers in the first place;
- With RevGuard, you make your current customers happier and less likely to do a chargeback;
- With Verifi, you intercept some of the remaining customers who still might do a chargeback and keep them out of the Visa/Mastercard monitoring program.
If you’re an online merchant, you can reduce chargebacks and increase income.
It just takes a methodical deployment of the above Cloud-based SaaS technologies and a commitment to following through on these best practices.