Monica Eaton-Cardone
November 24, 2016: With the holiday season just around the corner, merchants are preparing for the most active online shopping time of the year. But, while many focus on marketing and deals, retailers and issuers face a bigger overlooked issue that could move them into the red.
In the US, the sales spree will be initiated on the fourth Friday of November with Black Friday, the day after the Thanksgiving holiday. In 2015, online sales for this event added up to an astounding $2.72 billion, with an additional $1.73 billion spent on Thanksgiving Day.
| Black Friday has slowly started to spread to other territories in the world, particularly the UK. According to a Global Risk Technologies whitepaper, the holiday has grown massively since 2014 and, in 2015, the UK topped £1 billion in Black Friday sales. Adding to this, Cyber Monday — which transforms Black Friday into a four-day weekend-long online shopping extravaganza — helped bring total sales to £3.3 billion last year.In Europe though, the biggest online shopping days for Christmas typically fall between December 7 and 11, dates which guarantee consumers on-time delivery of seasonal gifts. Last year on December 7, for instance, an estimated €517 million was spent online in Germany and €341 million in France. Yet, neither Europe nor the US’ online shopping days can compare with the online retail bonanza of China’s relatively new ‘Singles Day’ phenomenon. |
What started in the 1990s as a curious ‘anti-Valentine’s’ celebration for single people in China, has transformed into the biggest online shopping day in the world. Ostensibly held on November 11, but often extending to a week-long sale, the holiday set a new sales record of around £19 billion in just one day this year.
While these celebrations are increasingly global and popular, with record-breaking sales, huge amounts of attention from customers and greater earning potential for merchants, statistics reveal that severe consequences are likely to follow in terms of chargebacks.
Chargeback volumes can increase by as much as 50% during the holiday season, and this percentage is only likely to continue. But, what are the reasons behind this?
Buyer’s remorse is one of the biggest problems most closely associated with peak shopping days. The drop in prices and the multiple sales during the shopping seasons make customers feel pressured into buying something before it disappears. But, later, with a cool head, customers sometimes 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, customers are becoming increasingly demanding. Tight deadlines and high pressure around the holidays means small mistakes can be unforgivable to shoppers. If consumers are having a bad shopping experience and are not satisfied with the merchant’s performance, they may 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.
Adding to this problem, there is a flawed impression for ecommerce regarding the source of fraudulent chargebacks. Even though fighting cybercriminals and protecting customer’s data and money must be a priority for all merchants, criminally 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.
Friendly fraud 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. It is a problem which is not currently being properly addressed by most retailers.
The truth is 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. In addition, big purchasing events, like Black Friday, produce significant alterations to normal customer shopping behaviours, making it even harder for merchants to identify and stop friendly fraud.
For them, sales are often seen as more important, but chargebacks can essentially make a greater loss when adding the value of the lost sale, as well as the cost of the goods and a chargeback fine. Worse still, ineffective or poor chargeback management is about to become even more costly.
The burden of chargebacks is not only owned by online merchants; issuers are getting increasingly serious about enforcing better governance on them. MasterCard recently acted to help reduce its own encumbrance by introducing its new Dispute Administration Fee (DAF). This 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 €15 fee for chargebacks they accept without filing rebuttal, and up to €30 if a non-compliant response is filed. Issuers are penalised as well with the reverse incentive.
As this year’s shopping season progresses, merchants who lack a disciplined chargeback policy are likely to be more vulnerable than ever before. The only way to avoid this is for retailers to understand chargebacks and the detrimental affect an ineffective risk mitigation system can have on their business. Beyond losing merchandise and revenue, online retailers can face additional fees and consequences, particularly if they exceed allotted chargeback thresholds.
Adhering to best practices reduces the risk of chargebacks. Superior results are obtained through the use of combined methods which leverage both in-house and outside expertise.
Recent studies performed by Global Risk Technologies revealed that 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 don’t need to 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.
Monica Eaton-Cardone is CIO and co-founder of Chargebacks911