62% of merchants cite chargebacks as top benchmark for fraud, but many overlook their impact on revenue. Loss prevention specialist Chargebacks911 examines how profit parasites skew financial results and threaten eCommerce sustainability.
(Tampa Bay, FL) October 24, 2018 – Adjusted for seasonal variation, quarterly retail eCommerce sales hit a record high of $127.3 billion in Q2 2018.(1) Yet this ongoing top-line growth does not truly reflect the health of the eCommerce industry because it fails to account for hidden losses asserts Chargebacks911, a leading dispute mitigation and loss prevention firm. The company alerts retailers to beware of “profit parasites” that leech income and create artificially inflated revenues, warning that if these variables are not properly tracked and controlled, they could force a merchant out of business.
According to Chargebacks911, profit parasites include often-overlooked costs such as chargebacks, refunds, returns and false positives (legitimate orders incorrectly flagged as fraud and declined). Many eCommerce merchants group these losses under cost of goods sold (COGS) instead of scrutinizing them as separate line items, making it difficult to calculate their direct impact on revenue and obscuring the true source of rising costs. When a Quora post questioned whether processing fees, refunds and chargebacks should be recorded under COGS, finance and accounting pros responded with a resounding, “No.”(2)
“Writing off chargebacks, returns, refunds and other losses as a cost of doing business can be very misleading, essentially resulting in ‘fake’ revenue that creates a false sense of security,” explained Monica Eaton-Cardone, co-founder and Chief Operating Officer (COO) of Chargebacks911. “If merchants don’t track these areas separately and work on improving them, they will continue to erode profits and can eventually lead to financial collapse.”
A survey found 62% of eCommerce retailers list chargeback rate as the most important key performance indicator (KPI) for fraud management, ranking it higher than fraud rate by value (47%), confirmed fraud rate (35%) and fraud rate by order volume (27%).(3) Yet 13% of merchants say they don’t know their current chargeback rate, and 23% have a chargeback rate at or above 1%.(4) Crossing the 1% threshold can push them into Visa’s or Mastercard’s chargeback monitoring program, which may incur additional fees—and, if unresolved, could even culminate in account termination and blacklisting by processors.(5)
- One of Chargebacks911’s big-box retail clients was confronting over $2 million in monthly fraud losses; that figure climbed 100% in a span of two years, yet sales growth was less than 10% during that time.
- Another big-box merchant experienced a 2% sales increase but saw a 7% rise in chargebacks over the same period.
Eaton-Cardone says if retailers aren’t careful, losses can quickly outpace growth. In the case of these two merchants, implementing a multi-layered risk management solution helped substantially reduce losses and recover revenue that had previously been forfeited to chargebacks. Using remediation technology as a post-fraud detection tool, recovered revenue losses from invalid chargebacks of over 50%, and ultimately reduced repeat attempts by 2.5% on average. Studies prove that identifying the source of the fraud, and identifying invalid attempts with the use of post-analysis technology such as Chargebacks911’s ISD technology is more effective that a pre-auth fraud filter alone.
eCommerce businesses that have a high ratio of chargebacks and returns generally have persistent but correctable problems, notes Eaton-Cardone, whether it’s a quality-control issue, merchant errors, insufficient or inaccurate product details on the website, or continually accepting orders from customers who have a history of chargebacks and returns. Conversely, retailers whose fraud filters are too tight could end up turning away legitimate customers, losing both the current sale and the potential for future business.
“Chargebacks are the best barometer for the health of the eCommerce industry,” stated Eaton-Cardone. “Analyzing and correcting the root causes of chargebacks can also help in other areas, such as reducing returns and identifying consumers who are likely culprits of friendly fraud. And as you gain a better understanding of your customers and their purchase patterns, you can fine-tune your fraud filters and minimize false declines.”
To help merchants cure profit parasites, Eaton-Cardone recommends the following steps:
- Maintain detailed records of returns, refunds, chargebacks, false declines, customer acquisition costs and other losses, and keep each category as a separate entry.
- Analyze this data on an ongoing basis to assess the quality and value of each customer and develop an action plan for areas that need improvement.
- Conduct a compliance review to pinpoint internal problems that need to be fixed.
- Learn when and how to dispute chargebacks; submit compelling rebuttal letters with supporting evidence and stay on top of deadlines. Successfully challenging disputes can help reform consumer behavior and reduce chargeback-related costs.
- Use a multi-layered fraud solution to address as many risks and threats as possible.
As the holiday shopping season approaches, fraud attempts can spike to 43% of monthly transactions(6)—making it even more important to control and correct unnecessary losses. And when it’s time for year-end financial reporting, having a detailed breakdown of costs (even if only for internal use) can give a realistic big-picture view of revenue, guide business-improvement resolutions for 2019 and pave the way for sustainable growth.
Chargebacks911 is dedicated to educating and supporting eCommerce merchants on ways to increase profitability, curtail chargebacks and combat fraud. To that end, Monica Eaton-Cardone will be speaking at The Future of Payments event in London on November 6 and co-presenting a panel on cyber threats at the Sofwerx Security Summit in Tampa on November 7. The Chargebacks911 team will also be at the upcoming Airline Industry Retailing Symposium in Rome and the Emerging Payments Association EP@Home event in London.
About Chargebacks911/The Chargebacks Company
Chargebacks911 empowers businesses to combat constantly evolving fraud tactics and mounting customer disputes that directly threaten profitability. Operating as The Chargeback Company in Europe, Chargebacks911 has pioneered effective, industry-leading solutions designed to reduce chargeback fraud, alleviate processing costs, mitigate risk and recover revenues.
The company’s unparalleled expertise and proprietary technology have earned three consecutive CNP Customer Choice Awards for Best Chargeback Management Solution, three successive AI Lions’ Den Awards for Best Airline Industry Solution, and Gold and Silver Stevie Awards from the American Business Awards (ABA). With innovative and highly scalable services ranging from Intelligence Source Detection™ (ISD) to Tactical Representment, Chargebacks911 uncovers the true source of chargebacks, battles unjustified disputes, rescues lost revenue, safeguards reputations, and defends against relentless, ever-changing cyberthreats.
Discover why Chargebacks911 is a hero to the payments industry, nemesis of fraudsters and trusted protector of over 2.4 billion transactions per year, representing clients worldwide—visit www.chargebacks911.com.
- S. Census Bureau. “Quarterly Retail E-Commerce Sales: 2nd Quarter 2018”; release issued August 17, 2018.
- “Should I record merchant processing fees, refunds and chargebacks under ‘Cost of Goods’ sold when doing bookkeeping?”; first answer posted February 2, 2016.
- 2017 Online Fraud Benchmark Report, North America Edition; September 2017.
- Kount and Chargebacks911. The State of Chargebacks: 2018 Report; February 2018.
- “Do You Know Your Chargeback Ratio?”; April 24, 2018.
- LexisNexis Risk Solutions. 2017 True Cost of Fraud Study; October 2017.
Karla Jo Helms