Reducing Chargebacks and Fraud Through Data Analytics – By Suresh Dakshina

by Jenae Reid on February 1, 2017


When a merchant wants to get a handle on chargebacks, there are certain key numbers that are critical to examine.

Start with the merchant account itself. Find out how close you are to the threshold of one percent to three percent chargebacks that typically puts an account at risk.

Next, break down that total number of chargebacks into two groups: those due to true fraud and those due to friendly fraud. With modern fraud prevention tools in place, true fraud should account for well under ten percent of the total.

Friendly fraud is when the customer is aware of the charge, but initiates a chargeback anyhow. Each chargeback due to friendly fraud has a story to tell the merchant. The story may be a customer who wants to defraud the merchant, or a mistake the merchant has made.

Figure out what percentage are due to fulfillment issues, poor customer service, a sudden drop in product quality, or other root cause. We have seen instances where the fulfillment department did not track causes of problems, such as an incomplete address, which can delay or prevent delivery. Or a customer service agent may collect the information for a refund but forget to click on the refund button.

If you sell through affiliates, pay attention to which ones are responsible for unusual numbers of chargebacks. Be aware that there are a few ‘bad apples’. If most affiliates fall within one percent to three percent chargebacks, consider dropping an affiliate that produces five percent chargebacks.

Be aware that if an affiliate gets a cut of the sales price, there’s an incentive to recruit fake customers, split the commission, and then have the fake customer file a chargeback.

We have also experienced situations where affiliates buy stolen credit cards and create fake orders to earn a commission. Working for a health-and-beauty client, we were able to identify and recover $20,000 in fraudulent sales driven through a single affiliate.

An unusually high rate of refunds on an affiliate’s sales can be another red flag. A rogue affiliate can tell friends and family to place orders, and then ask for a refund after a week.

Lax enforcement tends to make the problem worse. Some vendors manage hundreds of clients and don’t provide the same degree of attention to each. When an affiliate knows you are monitoring them, they are incentivized to tighten their controls and do a better job, so as not to risk losing the account. The affiliate industry has a lot of moving parts. You must be vigilant.

The common thread for all chargebacks is to look for abnormal patterns, and analyze the numbers every month. You may feel like you are making money, but if you don’t have these numbers under control, your feelings can be misleading.

In our experience, a merchant keeping close watch on analytics can get chargebacks under control in as little as 90 days.


Suresh Dakshina is President & co-founder of Chargeback Gurus, chargeback prevention and representment specialists.

This article appeared in issue 37 of FeedFront Magazine, which was published in January 2017.


Comments on this entry are closed.