MERCHANTS UNDERESTIMATING RISKS CASTING SHADOWS OVER HOLIDAY SHOPPING SEASON

By Monica Eaton-Cardone, CIO and Co-Founder of Chargebacks911

The holiday shopping season is now well underway around the world with ecommerce sales increasing significantly as we move into the final weeks of 2016. But, while many focus on the benefits from flowing sales, the industry faces a hidden risk with a potentially huge detrimental impact on merchants and issuers alike.

In the US, the sales spree has long started on Black Friday, on the fourth Friday of November, following the Thanksgiving holiday. In 2015, a staggering USD 2.72 billion was spent online, with an additional USD 1.73 billion spent on Thanksgiving Day itself.[1]

The Black Friday trend has slowly but surely started to spread to other territories in the world, particularly the UK, where, as reported in a Global Risk Technologies whitepaper, the holiday has grown massively since 2014. In 2015, the UK topped GBP 1 billion in Black Friday sales, and Cyber Monday — which transforms Black Friday into a four-day-weekend long online shopping extravaganza — helped bring total sales to GBP 3.3 billion.[2]

The biggest online shopping days for Christmas in Europe typically fall between 7 and 11 December, often coinciding with the last date to guarantee on-time delivery of seasonal gifts. Last year on 7 December, an estimated EUR 517 million was spent online in Germany and EUR 341 million in France.

Yet, neither Europe nor the US’online shopping events can compare with the online spending frenzy of China’s relatively new ‘Singles Day’ phenomenon. What started in the 1990s as an obscure “anti-Valentine’s” celebration for single people in China, has spawned into the world’s biggest online shopping day. Ostensibly held on 11 November, but often extending to a week-long sale, this year the holiday set a new sales record of CNY 120.7bn (USD 23.39bn, around GBP 18.76bn) in just one day.[3]

While these world record-breaking sales create great headlines, huge amounts of attention from customers, and increased earning potential for merchants, statistics reveal dire consequences–in terms of chargebacks—are likely to follow.

Chargeback volumes can increase by as much as 50% during the holiday season,[4] and the trend is likely to continue growing. But, what is causing this?

One of the biggest problems most closely associated around peak shopping days is buyer’s remorse. Customers feel pressured into buying something before it disappears, but then change their minds or find a better deal elsewhere and no longer want the product. This regret often results in illegitimate chargebacks for customers trying to find another way to get a ‘refund’.

Similarly, if customers are having a bad shopping experience and are not satisfied with the merchant’s performance, they may also initiate a chargeback. A new report from Radial indicated that 71% of shoppers expect their online orders to arrive within five days, while 51% would stop shopping with a retailer if their order arrived later than the promised delivery date.[5]

Also augmenting the problem, concerning ecommerce, is a misconception regarding where fraudulent chargebacks are originated. Even though fighting cybercriminals and protecting the identity and data of customers should be a priority, fraudulent purchases are surprisingly low on Black Friday, Cyber Monday and Singles Day. Only 10% of chargebacks can be attributable to criminal fraud, with 20% coming from merchant error and 70% from friendly fraud,which occurs when a consumer makes an online shopping purchase with their own credit card, and then requests a chargeback from the issuing bank after receiving the purchased goods or services.This is a problem which is not properly been addressed by many retailers.

Adding to these reasons, the industry is also slow to react. Merchant liability often surfaces in the weeks following these shopping holidays – approximately 90 days after the purchase — as the costs of online fraud and chargebacks become apparent. Big purchasing events, like Black Friday, can significantly alter normal customer shopping behaviours, making it a challenge to find and stop friendly fraud.

Sales are often seen as more important, but merchants can lose the value of the sale, as well as the cost of the goods and a chargeback fine – essentially making a greater loss.

This burden is not only owned by online merchants.Issuers are getting increasingly serious about enforcing better governance on them.Ineffective or poor chargeback management is about to become even more costly.

MasterCard recently took action to help reduce their own encumbrance by introducing their new Dispute Administration Fee (DAF). The DAF is a fee passed through to merchants who fall foul of customer chargebacks and fail to effectively dispute their legitimacy. Ecommerce merchants can expect to pay an additional EUR 15 fee for chargebacks they accept without filing rebuttal, and up to EUR 30 if a non-compliant response is filed. Issuers are penalised as well with the reverse incentive.

As this year’s shopping frenzy progresses, merchants who lack a disciplined chargeback policy are likely to be more vulnerable than ever before.In order to avoid this, retailers need to understand chargebacks and the detrimental affect an ineffective risk mitigation system can have on their business. Beyond losing merchandise and revenue, internet retailers can face additional fees and consequences, particularly if they exceed allotted chargeback thresholds.

Adhering to best practices reduces the risk of chargebacks, however; superior results are obtained through the use of combined methods which leverage both in-house and outside expertise.Based on recent studies performed by Global Risk Technologies, merchants using a combination of fraud management strategies experienced improved performance within every fraud detection tool and reported a gain on average of 22.4% over those who did not utilise a layered approach or combination method.

Retailers needn’t resign and accept chargebacks as a cost of doing business. Acknowledging the problem and putting in place comprehensive management strategies can ensure merchants benefit from huge shopping days without sustaining enormous financial disasters.

By Monica Eaton-Cardone, CIO and Co-Founder of Chargebacks911

The holiday shopping season is now well underway around the world with ecommerce sales increasing significantly as we move into the final weeks of 2016. But, while many focus on the benefits from flowing sales, the industry faces a hidden risk with a potentially huge detrimental impact on merchants and issuers alike.

In the US, the sales spree has long started on Black Friday, on the fourth Friday of November, following the Thanksgiving holiday. In 2015, a staggering USD 2.72 billion was spent online, with an additional USD 1.73 billion spent on Thanksgiving Day itself.[1]

The Black Friday trend has slowly but surely started to spread to other territories in the world, particularly the UK, where, as reported in a Global Risk Technologies whitepaper, the holiday has grown massively since 2014. In 2015, the UK topped GBP 1 billion in Black Friday sales, and Cyber Monday — which transforms Black Friday into a four-day-weekend long online shopping extravaganza — helped bring total sales to GBP 3.3 billion.[2]

The biggest online shopping days for Christmas in Europe typically fall between 7 and 11 December, often coinciding with the last date to guarantee on-time delivery of seasonal gifts. Last year on 7 December, an estimated EUR 517 million was spent online in Germany and EUR 341 million in France.

Yet, neither Europe nor the US’online shopping events can compare with the online spending frenzy of China’s relatively new ‘Singles Day’ phenomenon. What started in the 1990s as an obscure “anti-Valentine’s” celebration for single people in China, has spawned into the world’s biggest online shopping day. Ostensibly held on 11 November, but often extending to a week-long sale, this year the holiday set a new sales record of CNY 120.7bn (USD 23.39bn, around GBP 18.76bn) in just one day.[3]

While these world record-breaking sales create great headlines, huge amounts of attention from customers, and increased earning potential for merchants, statistics reveal dire consequences–in terms of chargebacks—are likely to follow.

Chargeback volumes can increase by as much as 50% during the holiday season,[4] and the trend is likely to continue growing. But, what is causing this?

One of the biggest problems most closely associated around peak shopping days is buyer’s remorse. Customers feel pressured into buying something before it disappears, but then change their minds or find a better deal elsewhere and no longer want the product. This regret often results in illegitimate chargebacks for customers trying to find another way to get a ‘refund’.

Similarly, if customers are having a bad shopping experience and are not satisfied with the merchant’s performance, they may also initiate a chargeback. A new report from Radial indicated that 71% of shoppers expect their online orders to arrive within five days, while 51% would stop shopping with a retailer if their order arrived later than the promised delivery date.[5]

Also augmenting the problem, concerning ecommerce, is a misconception regarding where fraudulent chargebacks are originated. Even though fighting cybercriminals and protecting the identity and data of customers should be a priority, fraudulent purchases are surprisingly low on Black Friday, Cyber Monday and Singles Day. Only 10% of chargebacks can be attributable to criminal fraud, with 20% coming from merchant error and 70% from friendly fraud,which occurs when a consumer makes an online shopping purchase with their own credit card, and then requests a chargeback from the issuing bank after receiving the purchased goods or services.This is a problem which is not properly been addressed by many retailers.

Adding to these reasons, the industry is also slow to react. Merchant liability often surfaces in the weeks following these shopping holidays – approximately 90 days after the purchase — as the costs of online fraud and chargebacks become apparent. Big purchasing events, like Black Friday, can significantly alter normal customer shopping behaviours, making it a challenge to find and stop friendly fraud.

Sales are often seen as more important, but merchants can lose the value of the sale, as well as the cost of the goods and a chargeback fine – essentially making a greater loss.

This burden is not only owned by online merchants.Issuers are getting increasingly serious about enforcing better governance on them.Ineffective or poor chargeback management is about to become even more costly.

MasterCard recently took action to help reduce their own encumbrance by introducing their new Dispute Administration Fee (DAF). The DAF is a fee passed through to merchants who fall foul of customer chargebacks and fail to effectively dispute their legitimacy. Ecommerce merchants can expect to pay an additional EUR 15 fee for chargebacks they accept without filing rebuttal, and up to EUR 30 if a non-compliant response is filed. Issuers are penalised as well with the reverse incentive.

As this year’s shopping frenzy progresses, merchants who lack a disciplined chargeback policy are likely to be more vulnerable than ever before.In order to avoid this, retailers need to understand chargebacks and the detrimental affect an ineffective risk mitigation system can have on their business. Beyond losing merchandise and revenue, internet retailers can face additional fees and consequences, particularly if they exceed allotted chargeback thresholds.

Adhering to best practices reduces the risk of chargebacks, however; superior results are obtained through the use of combined methods which leverage both in-house and outside expertise.Based on recent studies performed by Global Risk Technologies, merchants using a combination of fraud management strategies experienced improved performance within every fraud detection tool and reported a gain on average of 22.4% over those who did not utilise a layered approach or combination method.

Retailers needn’t resign and accept chargebacks as a cost of doing business. Acknowledging the problem and putting in place comprehensive management strategies can ensure merchants benefit from huge shopping days without sustaining enormous financial disasters.