This article is part of an interview series with experts in the continuity, subscription and trial-offer ecommerce space.
The focus of this series is to provide valuable insider information from the people who work in the industry, for novice and advanced online entrepreneurs and advertisers alike.
The first interview in the series is with Ben Grossman, CEO of Pinpoint Intelligence. Ben is a veteran in the trial offer space, having been an advertiser himself. These days, Ben is focused on risk management and chargeback mitigation for high risk merchants and high volume subscription services.
What is The State of Chargebacks in 2017 and How Have They Evolved in The Last Couple of Years?
The chargeback landscape has changed significantly, especially for the card-not-present merchant, over the last year or so.
At the end of October 2015, Visa and MasterCard required all the card-present merchants to use something called EMV or “the chip”, which many people now have in their credit cards. This new technology has forced online merchants to deal with a new brand of thieves.
For card-not-present merchants, we’ve seen between a 40-60% increase in card-not-present chargebacks and fraud, as a result of the EMV.
We can tie it directly to the EMV because, as EMV compliance increases, we see more and more online fraud.
And that is the bad news.
The good news is, there are a lot of companies out there that are trying to combat fraud and even Visa and MasterCard are starting to come around and understand that card-not-present fraud can’t be looked at and judged the same way card-present fraud can be looked at and judged.
How Can an Advertiser Determine What is Causing Chargebacks?
The cause of chargebacks is a very hard problem to determine, because they can come from so many different reasons:
- you can be suffering from poor affiliates running traffic through bad demographics or bad sites
- your affiliates can be using misleading information on their “landers” to generate initial interest in the product
- customers, often, know exactly what they are doing, but are using chargebacks as a strategy to get free product
- the advertiser may not be clearly stating the price, the nature of recurring charge
- the advertiser may not be deploying proper fraud management tools and thereby allowing bad or risky transactions to go through
There are a lot of things that an advertiser can do to combat chargebacks.
The single biggest thing an advertiser can do is to use tracking software to see which affiliates are causing a problem.
Understanding where bad traffic is coming from and who is sending it, is one of the biggest indicators of chargebacks.
Optimize Landing Pages
The first thing is to go back and check through their landing pages and checkout flow to make sure that in that checkout process they are alerting the client, that they are going to get a credit card charge – so the consumer doesn’t think there is a free transaction.
Obviously, the merchant needs to test ways to do that without greatly affecting conversions. This is a processes of many A/B tests until a page is optimized for both conversions and dissatisfaction ratios – i.e. chargebacks and refunds.
The other helpful thing is at post-transaction, where it won’t affect the conversion ratio, let the client know what they’ve purchased!
Visa and MasterCard rules dictate that an advertiser is supposed to send a receipt after a transaction goes through, and by doing that, especially if you include things like a description of the product, the advertiser will see a reduction in chargebacks.
Keep Chargebacks Low
Clients tell us that they have low chargebacks when they are only at 2.5% — is that really low?
Currently in the United States, and in most of the world, Visa allows an account to have up to 100 and 1% of your transactions to be chargebacks, MasterCard allows 150 and 1.5%
If your chargebacks are above 1% and you have over 100 chargebacks you are in violation of the Visa rule. 1.5% and 150 chargebacks for the MasterCard rule.
Good payment processors will not allow you to get that far.
Many processors will have their own internal rules. And as a result, we see that advertisers do different things in order to try to keep their chargeback ratios under control.
What Happens When You “Breach”
When you have a breach, meaning that you’ve exceeded the Visa, MasterCard, or processor’s limits, you are then subject to fines and even termination from the processor and from Visa and MasterCard.
When Visa and MasterCard start to fine you, it’s quite an expensive fine. You can also be put on a list called the Match List, otherwise known as “TMF”.
Visa and MasterCard Treat Chargebacks Differently
Visa looks in the current month vs the current number of chargebacks, meaning that if for each 100 transactions you can have 1 chargeback in that month.
MasterCard looks at last month‘s transactions vs current number of chargebacks. So 1.5 Chargebacks this month against 150 from last month.
The MasterCard method is a bit more effective in showing what your real chargeback ratio is.
With Visa, having more transactions in a current month allows an advertiser to reduce the chargeback ratio mid-month. Albeit, increasing traffic to reduce your chargeback’s is bad practice and will catch up to you.
With MasterCard you have less options.
True Chargeback Ratio
When talking about chargeback ratios, I like to always alert my clients to find out what their true chargeback ratio is; not what the bank is looking at.
An advertiser will want to look at a month at least three months in the past, and then look at the next three months to see the chargebacks that came as a result of the transactions from that month.
So, if an advertiser does 100 transactions in the month of January, then they need to look at how many chargebacks came in from those transactions in January, February and March. This will allow the advertiser to determine what the true chargeback ratio is.
The true chargeback ratio is the number you want to try to move the needle on.
As an advertiser’s volume becomes steady in an account, this will be what your normal chargeback ratio is. Not benchmarking chargebacks is what gets many advertisers in trouble.
False Chargeback Ratio
There’s a false chargeback ratio, which occurs when you add or reduce transactions in any future month. This will then either exasperate your chargeback percentage or it will help your chargeback percentage.
That’s the way the banks look at it, but if you want to run your business appropriately you need to take that into consideration and not manage on that number.
What Are Some Ways Advertisers Can Shield Themselves from Friendly Fraud?
Friendly fraud is the most difficult fraud to stop, it’s often perpetrated by the same customers over and over again.
So, what we do at Pinpoint is we look at the transaction and put a fingerprint on the device. The device fingerprinting allows us to see when this device is used again and again. We are then able to compare one transaction to another, among many millions of transactions we run every month. This allows us to see if this person is a habitual fraud offender, and if they have been using multiple credit cards to make those transactions.
While not foolproof, this process does reduce occurrences of friendly fraud significantly because we’re able to identify the usual suspects. Sometimes they use their own credit card, in which case we are utilizing the chargeback data which we get to try to determine a “score”, although that’s a very imprecise way of doing it. Sometimes they will use other people’s credit cards, and that is much easier to detect.
Often friendly fraud is not as fraudulent as one might think.
An example. A mother uses a credit card to make regular transactions on Amazon or another retailer, then her cousin uses that same credit card. While that’s real fraud, that falls in the category of family fraud.
If they are not using the same device, we are able to tell that there’s a new credit card to that device.
While other key data points may line up, it will still increase our fraud score to determine if this is the right person, and then allowing the merchant to have a limited number of people to contact directly in order to get the matter resolved.
How Can Advertisers Combat Affiliate Fraud and Bad Practices?
I used to work as an advertiser and I spent a tremendous amount of money each day on affiliate traffic. I knew all of the publishers that were sending me traffic, and still we had affiliate fraud – that’s when a lot of our systems and processes at Pinpoint were developed.
Every Advertiser Deals with Affiliate Fraud
Every single advertiser deals with affiliate fraud, and you can definitely trace your chargeback ratio back to true affiliate fraud. We use that same score which we use to determine whether a transaction is good and we then line it up to the publisher id, the sub id, and the campaign id.
Shut Down Affiliate Sources with High Chargebacks
People have different names for it, but there are three different levels of any affiliate campaign. We score each of those three levels, so that you can determine that while the network may have a low score, a particular campaign may have a very high score – those are the ones we want to get rid of.
Let’s say you have a network that sends you 100 transactions every day, and let’s say 95% of them are perfect – from those publishers – and let’s assume you’re getting 25 transactions from 4 different publishers, and each of those 4 publishers have 5 campaigns.
If you even have 1 campaign that’s doing all fraud, which is 5 transactions/day – while it sounds low – that’s a 5% chargeback ratio. So, we’re able to shut off those small traffic sources that are causing most of your chargebacks.
Tracking Fraud is Easier Now Than Ever
When I was an advertiser I had to wait until I was able to see the refund ratio and chargeback ratio to be truly sure that a PID, SID or CID was bad. Now, advertisers can determine this in minutes.
Within 10 transactions an advertiser should be able to tell whether or not a campaign is worth running, or if it’s time to run in another direction.
Typically, we see that most of the fraud occurs at the bottom level.
We are seeing more good networks now but they have downtrails which they have trouble controlling themselves, and that’s where a lot of the fraud is still coming from – and this is affecting advertisers more than friendly fraud and more than stolen credit cards.
Narrow The Funnel
Our system works two ways. At first we leave it wide open, look at the score and determine what transactions will work for your business and what will not. i.e. what scenarios are causing your chargebacks, then you can manually refund those and hopefully get credit from your pubs.
Eventually most of our clients set rules in the system and then reject transactions that don’t fit within the rules.
Doesn’t That Hurt My Conversion Ratio?
Yes, it does. There I said it. The first thing advertisers say is “OMG, my conversion ratio is going to go hell.”
It’s quite simple.
If you’re rejecting more of the fraudulent transactions, yes, your conversion ratio will go down, but you’ll be able to increase your payout – so you will get better traffic, because you’re not paying for:
- the bad transactions
- the cost-per-acquisition fees
- the chargeback fees
- the cost shipping out the product
- the merchant processing fees
- and the Customer Service fees
An example. So, the cost of doing that, if you’re paying a $40-50 CPA, then you’re shipping out a product that costs you between $7-10.
So what is the true cost of that chargeback?
You have to pay back that $4.95 that you charged, you lost money on the shipment, you’ve paid transaction fees and a $40 chargeback.
That transaction is not just costing you the $40 CPA, it is now costing you over $90 for taking that bad transaction.
So, if you put that same $90 into paying a higher CPA, and instead of $40 you pay $42, you can get yourself better traffic and put your competition and a disadvantage.
This is how making less sales can make you more money.
Are There Steps an Advertiser Can Take to Prevent Chargebacks?
The first step is, make sure the landing page is optimized for conversions, but not to the point that the consumer is confused and can’t tell if they’ve made the transaction. Make sure to send a follow up email so the client is able to see that a transaction was completed.
The second step is, have your customer service phone line in your descriptors and it should be a different phone number than the phone number on your website.
The reason is, if a customer is calling off the descriptor, you know they are calling about billing. So, when they call in and use a service like RevGuard, in order to handle billing issues, these issues are handled quickly and efficiently. This helps prevent chargebacks and lowers refund ratios.
When our clients utilize RevGuard they are able to reduce chargebacks because of the swiftness with which the calls get answered and because the system is optimized to deliver uniform, chargeback reducing messages instantaneously, every time. The worst chargeback creator in customer service is when a customer calls in to a call center and has to wait on hold, because the banks don’t usually have hold times now, so you can’t afford to either – otherwise they will just call the bank. The second biggest problem is inconsistent messaging and call handling by human beings.
Having a personalized, automated calling system will definitely help reduce chargebacks.
The last step is to always deal with customers in a friendly way, and to make a refund quickly, when a customer requests it.