The Payment Management Blog

Operational Excellence: Chargeback Recovery Part 2. Lessons From the Field

In our last post we briefly discussed  some considerations when implementing a chargeback recovery process. Here are some lessons we've learned as we've worked with merchants on their chargeback recoveries:

o    As you examine your chargeback process, you may find lots of repeated, often manual, tasks or sequential steps that are out of order that offer opportunities for improvement. For example, placing the appropriate priorities on incoming chargeback cases so that we could focus on the most profitable work first. In one specific case, this meant recognizing certain types of chargebacks and focusing on resolving these first since those cases have a higher degree of success with re-presenting.

o    Learning about the characteristics and win rates of chargeback cases helps to both establish the priorities for efficient screening and determine the effectiveness of your re-presentment staffers. Tracking cases by reason codes, availability of evidence (such as delivery confirmations or account access dates and times), and time-in-process can help decide the right cases to work on, and which staffer should be offered overtime pay for the operation to be most profitable.
 

o    Just as there is a balance between detecting fraud and insulting a potential customer, there is a balance to be sought in deciding which fraud chargeback cases have a potential to be re-presented. In cases of identity theft, pursuing a chargeback dispute resolution and attempting to recover funds from the victim —could negatively impact your brand reputation. Of course, there are cases of "friendly fraud," or customer abuse that can be effectively pursued to a favorable conclusion, but experience is the best teacher for finding the right balance.

When implemented with an eye towards optimization and balance, chargeback recovery can offer an opportunity to improve collections against some of the fraud losses you're experiencing. Add that to your overall risk management operation (automated and manual screening, and order rejection rate optimization), and you have a complete portfolio of tools to reduce your fraud losses and improve operational efficiency.

Operational Excellence: Chargeback Recovery

Chargeback Recovery Part 1: To Do or Not To Do, That’s the Question

From the last few posts on effective order screening operation, you've probably noticed the following common themes:

o    Optimizing your operation often means winning a lot of little battles between doing the right things and doing things right (with the appropriate nod to Mr. Drucker)

o    Collecting and analyzingdata about what you do helps you refine your screening and decisioning process, as well as identifying new tests or rules to implement

o    You should strike a balance between the appropriate level of detection and the potential for false positives that often translate into suboptimal customer experience

Let’s now talk about chargeback recovery. In a lot of ways, the themes you noted above apply to this complex but important part of your risk management operation. Some merchants may not actively pursue the chargeback dispute resolution process, either from a lack of available resources, or inexperience with the steps involved. Our 11th Annual Fraud Report shows an average re-presentment rate of 53% and a success rate of 42%, for an average overall recovery percentage of 24%  [note: if you simply multiply the two averages you get 22% but we calculate the recovery % for each merchant re-presenting and then average this estimate to get to 24%]. Depending on your chargeback rates, business model, margins, and available resources, you may be considering adding or improving your chargeback recovery efforts. In my next entry, I'll discuss some things we've learned as we've worked with merchants in managing their chargeback dispute resolution processing.

Upcoming Webinar: Fraud Management Trends, Best Practices

If you are wondering what the e-commerce fraud trends are for 2010, CyberSource has the webinar for you. The one-hour free webinar will be presented on March 10, with an encore presentation on March 24 at 11 a.m. Pacific Time (noon Mountain Time, 1 p.m. Central Time, and 2 p.m. Eastern Time).

Doug Schwegman, research director at CyberSource, will share highlights from our 11th Annual Online Fraud Report. He will be joined by Paul Brock, principal of managed services, and Corey Siddens, senior product manager for CyberSource fraud management solution. Together they will share best practices in battling online fraud. A live question-and-answer session will follow immediately.

Register for one of the webinars. If you can't attend the webinars, download the report (registration required).

Manage Order Rejection Rates to Optimize Profits

After completing automated and manual screening of your orders, they either move into the fulfillment process or are declined.  Our 11th Annual Fraud Report tells us that over the past two years, many merchants have reduced the number of orders they decline due to suspicion of fraud with no overall increase in the average fraud loss rate.  Declining valid orders from good customers is sometimes referred to as “customer insults” and is also known as “false positives,” where an initial determination of high fraud risk turned out to be false.   Since many customers will either try to re-submit their order or place it with a different merchant, it is difficult to know how many false positives / customer insults your fraud process is generating – or how many customers you are losing.

Depending on what goods are being sold and the costs of goods sold as compared to their gross margins, different levels of order rejection are appropriate for different merchants.  High-risk goods with high costs and low gross margins typically have higher order rejection rates.  This can be attributed to higher fraud attempts for these types of goods as well as lower merchant tolerance for risk because  more additional “good” sales are needed to make up the loss on a single fraudulent order.  Alternatively, merchants with relatively high gross margins, a high cost of customer acquisition, or larger lifetime customer value tend to employ the lowest rejection rates.

We believe it is important to set targets based on risk tolerance and potential fraud cost, and manage the trade-off between rejecting valid orders and controlling fraud losses.  For merchants selling a wide range of goods with different costs and margins, we recommend setting order rejection thresholds, or other screening criteria such as velocity of purchase attempt for the top selling products that comprise the bulk of online revenues or losses due to fraud.

Review How You Review Part 3: Feedback on Team Performance

Now that you’ve looked into the productivity of your review team and the effectiveness of the tools they use, you might now look into the data that shows your reviewers’ compliance with the established review processes, including final outcomes of transactions. Merchants we work with that are improving review cycle time and process accuracy have a well-documented review process. This process becomes the baseline that they use to compare statistical samples of actual reviews for quality assurance purposes.  As you can imagine, establishing a comprehensive quality assurance program provides an indication of training and development issues, as well as supporting continuous improvement efforts. We also suggest evaluating the chargebacks received against transactions that underwent review. Although this process seems fairly logical in nature, our 11^th Annual Fraud Report indicates that 46% of merchants lack the mechanism or process to regularly evaluate whether a reviewer’s transactions resulted in chargebacks.

With the results of the analysis, you can get a good start on the new year by incorporating the lessons you learned over the holidays, and, if you haven’t already done so, build in some of the data collection and evaluation processes outlined here. With additional data, you’ll be armed to make better decisions, emphasize effective tool usage, and improve your reviewer behaviors throughout the year. More importantly, you will be ready for the next holiday shopping season . . . . 11 months and counting down.