Fraud disputes are not always as they appear to be. We explored that in our latest Ebook, The Three Faces of Fraud. And yet, some merchants instinctively assume that a fraud dispute results in guaranteed revenue loss. We’re going to explain how that is not the case, and why merchants should always (I repeated, always) respond to fraud disputes.
Reason #1: No Response Guarantees Revenue Loss
The most ineffective response is no response at all. Without a chargeback response, the issuing bank only has the cardholder’s claim to decide whether the dispute is valid. Merchants will be making a gamble, thinking that the dispute might be overturned in the chargeback stage.
This inaction is a guaranteed way to lose revenue. Or as our CMO explained it on PayPod:
Such implications include, but are not limited to, affecting metrics such as the EBITDA and changing share prices for public traded companies. Inaction from the merchant could result in receiving more fraud disputes. Now that a true fraudster, a chargeback fraudster, and even a friendly fraudster know that no one will challenge them, this gives them more incentive to keep submitting a fraud dispute.
Reason #2: Fraud Disputes Are Not Always True Fraud
Merchants can never assume a fraud dispute was truly a result of fraudulent activity. Indeed, they may have that assumption at first. But after taking a breath and compile the compelling evidence, they may realize the transaction was legitimate after all. Here are the reason codes merchants may receive with a fraud dispute.
EMV and Liability Shift disputes are the most difficult to challenge. And ironically, they are the easiest disputes to prevent with EMV-enabled POS terminals. For the other reason codes merchants are able to challenge and overturn the chargeback. But it requires a robust chargeback response that addresses the exact requirements from the reason code. Fortunately, we have chargeback response templates that help merchants properly format their case.
Reason #3: No Response Lowers Merchants’ Win Rate
Like Reason #1, inaction will only guarantee negative implications. One of them is it will lower your win rate. This metric helps measure the merchants’ success rate in winning against disputes overall and by dispute category (i.e., fraud dispute). A lower win rate can result in higher (and possibly more frequent) revenue loss. In short, no merchant wants to be on the losing side of any dispute, fraud or otherwise.
Once merchants understand how to calculate win rate, can answer important questions, such as:
- Ecommerce merchants: What was our win rate against card-not-present fraud disputes? How does that compare to our win rate against consumer disputes
- Ecommerce & card-present merchants: What was our win rate against card-not-present fraud disputes, and how does that compare to card-present fraud disputes?
- Every merchant: Now that our win rates are calculated, how much revenue did we save from winning against fraud disputes? Additionally, how much revenue did we lose from fraud disputes?
This knowledge will help merchants not only gain an understanding of the financial impact related to fraud disputes. It also helps them understand how well their chargeback responses are performing, and how much revenue has been saved and lost based on said performance.
Reason #4: Puts A Face On Fraud
In general, the best way to understand any problem is to actually get your hands dirty and work the problem. Merchants will not learn much about fraud disputes if they are only receiving (and ignoring) fraud disputes. They need to respond to it if they ever want to improve their win rate.
Responding to disputes can also help paint a more accurate picture of what type of disputes the merchant is receiving. This allows them to create more effective strategies to reduce their dispute volume.
Here are some tactics that can help strengthen their strategy:
Most card networks, particularly Visa, offer a Zero Liability policy for their cardholders. Basically, their cardholders will have the funds restored, and a new account created by their issuing bank, whenever they were a victim of true fraud. Unfortunately, that results in revenue loss for the merchant.
The best tactics against true fraud are fraud solutions, such as Feedzai. These tools not only help merchants mitigate fraudulent transactions. It also help lower the volume of fraud disputes.
Whenever merchants successfully challenge a fraud dispute, chances are that dispute was filed by chargeback fraud or friendly fraud. The former involves the cardholder maliciously using the dispute process as way to gain the transaction amount back while keeping the goods or services. The latter usually involves the cardholder either A.) frantically disputed an “unrecognizable” charge; or B.) had forgotten about the purchase.
The term “nuance” may come to mind when describing chargeback fraud and friendly fraud. While revenue loss may be possible, there is always a guarantee of time wasted on mundane labor. There is a better way to respond to fraud disputes, and that is to resolve it in real-time. This not only challenges the dispute’s merit; it also stops a dispute from being filed in the first place. That allows merchants to lower their dispute ratio and re-purpose time for what matters most: their business.