Chargebacks, or forced payment reversals conducted at the banking level for credit and debit transactions, can be a nuisance for you as a merchant.
Each chargeback filed translates to lost revenue and merchandise, plus added fees and increased overhead. Over time, your chargeback rate may also come close to exceeding the limits imposed by card networks like Visa and Mastercard. If that happens, chargebacks could come to represent a genuine threat to your long-term business sustainability.
Of course, that’s not to imply that there’s nothing you can do about chargebacks. There are steps you can take to manage your risk exposure and, hopefully, prevent many disputes. You can also engage in a process called chargeback representment to fight back against chargebacks that you believe were either filed in error, or as deliberate chargeback abuse (a practice known as friendly fraud).
The Importance of Representment & Tracking Your Win Rate
With representment you literally “re-presentment” the transaction to the issuing bank. The re-presented transaction should be accompanied by compelling evidence and other documents to support your claim that that the original transaction was valid, and should be upheld.
Engaging in representment is important. Not only does it offer a chance to recoup much-needed revenue, it also helps clue banks in on the threat posed by friendly fraud. Fighting back against chargeback abuse helps retrain consumer behavior over time, too, potentially preventing future disputes.
Representment is a complex, time-consuming process, though. How do you ensure that you’re making the best use of your resources and recovering as much revenue as possible? One way to judge is to look at your chargeback win rate.
Your chargeback win rate, or the rate at which you successfully re-present transactions to the bank after a chargeback, is one of your most important key performance indicators (KPIs) from a risk management standpoint. It helps you determine whether you’re getting a good return on the time and money invested in chargeback representment. Tracking your win rate can also help you pinpoint opportunities to optimize processes.
According to the recently published 2021 Chargeback Field Report, the average merchant reported a chargeback win rate of 32%. This suggests that, when merchants choose to fight back, they win disputes in roughly one-third of cases. However, the report also notes that many respondents failed to distinguish their win rate from their net recovery rate. By overlooking this one KPI, merchants could literally be leaving billions of dollars on the table each year.
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Win Rate vs. Net Recovery Rate
A chargeback win rate simply looks at your rate of success among represented transactions. In contrast, your net recovery rate gauges the portion of chargebacks you successfully represent to an issuer as a portion of total chargebacks.
This is an important distinction. As we discussed earlier, some chargebacks get filed without a valid reason. These friendly fraud chargebacks are not incidental; they’re serious business.
Respondents to the Chargeback Field Report observed a 23% increase in friendly fraud chargebacks between 2018 and 2021. The problem is growing at such a fast rate that, by 2023, more than 6 in 10 chargebacks filed against merchants may be cases of friendly fraud.
If friendly fraud is so pervasive, though, why do merchants fight back against such a small portion of chargebacks? Why are they letting cardholders get away with this behavior? The problem lies in the fact that, as a merchant, you have limited time and limited data access.
The chargeback timeframes outlined by the card schemes are based on the central site business date (the date the dispute was filed). By the time all the information get transmitted, you might only have a few days in which to investigate the claim, compile evidence, draft a rebuttal, and submit all the necessary documentation to fight it. That’s assuming you have access to enough data to identify friendly fraud in the first place.
Get the Full Picture
Time and data limitations mean that, even if you engage in representment, you might only recover revenue from a small portion of chargebacks.
According to the Field Report, the average net recovery rate among merchants was just 12%. This is after accounting for second chargebacks, which occur when the issuer rejects a representment case. While these don’t impact your chargeback rate, they do force you to choose between accepting the loss and escalating to card network arbitration. This could be very costly proposition; hence, why only 2% of chargebacks escalate to that point.
Merchants tend to look at their win rate in isolation to gauge their effectiveness at fighting friendly fraud. You have to look at your win rate in the context of your net recovery rate, though. Otherwise, you’re not getting an honest impression of your performance when it comes to fighting chargebacks.
If 6 in 10 chargebacks are friendly fraud, but merchants successfully re-present just 1 in 8 chargebacks, then there’s clearly a lot of money being left on the table. But, you might ask, what can you do about it?
Collect the Data You Need
You can defend against unnecessary losses by putting more resources into analyzing historical transaction data.
Cardholders tend to get away with friendly fraud because merchants can’t parse transaction data with enough detail to identify common signs of the behavior. Examining past purchases can make it easier to pick up on patterns among transactions that result in chargebacks. This can help you fast-track the process of identifying future abuse and compile more comprehensive, compelling cases.
I want to be clear: tracking your net recovery rate and using that to help identify opportunities for greater profitability still will not guarantee success. No KPI on its own will accomplish that, regardless of how consequential it may be. But, by examining your chargeback win rate as informed by your net recovery rate, you stand to gain a much more informed—and more useful—perspective on chargebacks.
This post was contributed by Monica Eaton-Cardone, COO at Chargebacks911.
Monica Eaton-Cardone is an entrepreneur and business leader in the technology, eCommerce, risk relativity, and fintech fields. She’s launched numerous successful companies, earning a reputation for developing effective, innovative business solutions in the process. In 2011, she co-founded Chargebacks911, developing the world’s first end-to-end chargeback management solution for merchants. She later launched Fi911, a new subsidiary providing solutions for financial institutions, in 2019. She currently serves as the COO of both companies. Monica is also a valued subject matter expert, whose insights have been featured in outlets including Forbes, The Wall Street Journal, The New York Times, and more.
