David DeCorte

Small Business Advice

DAVID DECORTE | December 08, 2020

There are plenty of adjectives we could use to describe 2020 thus far. For the sake of keeping things wholesome, though, let’s just settle on “unpredictable.”   Merchants across every vertical are learning to navigate the pandemic business environment as they go. Through it all, eCommerce has actually been one of the few bright spots, with sales up substantially according to recent U.S. Census Bureau data.   Shoppers are stuck at home, so turning to eCommerce is a natural course of action. Although it’s been a challenge, most online sellers have managed to keep pace with the rapid growth in demand. The real test is the holiday season; specifically, what comes in the weeks and months after the holidays. Optimistic Sales Figures for eCommerce Sellers At this point, the six-day period between Thanksgiving Eve and Cyber Monday has evolved into one continuous, round-the-clock digital shopping extravaganza. Looking at initial figures published by Statista, we see that US consumers spent $45.2 billion online this year during that timeframe. Sales during Cyber Monday topped $10.8 billion; a 37% increase over the 2018 total.   This is a trend that will continue through the end of the year. In fact, according to Deloitte’s annual holiday retail forecast, eCommerce sales will see 25% to 35% year-over-year growth during the 2020 holiday season. That’s more than double the rate of growth (14.7%) during the same period in 2019.   The data suggests that eCommerce holiday sales are expected to generate nearly $200 billion this season overall. Looking at the Census Bureau data cited above, though, that may prove to be an underestimate. Plus, as COVID-19 transmission rates remain high, we’re likely to see shoppers who might otherwise have hit the malls during December opt instead to stay home and avoid the crowds.   This may sound like good news for online retailers. However, we have to remember that there are pitfalls associated with this increased activity. Specifically, we can expect a surge in post-holiday returns and chargebacks to threaten merchants’ good cheer once the holidays come to a close.   Prepping for Post-Holiday Losses eCommerce returns during the 2020 holiday season are expected to reach as high as $57 billion. That’s not even accounting for the additional overhead involved in shipping, processing, and trying to resell returned merchandise (assuming the merchandise can be resold at all). When we account for these additional costs, the final total could be several times higher.   No one wants to lose money to returns. That said, it isn’t necessarily the end of the world, as a return can provide the opportunity to recover your sale. According to the National Retail Federation, more than three-quarters of shoppers who return a purchase around the holidays intend to exchange it for something else. And, when we contrast returns with the chargeback process, it’s clear that the former outcome is far preferable to the latter.   Chargebacks are forced payment reversals conducted at the bank level. With this process, a cardholder may contact the issuing bank and claim a transaction was unauthorized, or that the goods or services in question didn’t live up to what was promised. If the bank determines that the cardholder has a valid complaint, they can overturn the transaction.   If you receive a chargeback, this means you lose your sales revenue, as well as any merchandise already shipped. You also lose the costs of shipping the goods and processing the initial transaction, and get hit with a chargeback fee by your acquiring bank.   To make matters worse, each chargeback also counts against your overall chargeback-to-transaction ratio. If this ration gets too high, you could be branded as a “high-risk” merchant, and your acquirer may freeze or even cancel your account, making it impossible to accept card payments. As a high-risk merchant, you could be blacklisted and unable to secure another merchant account.   Why Do Customers File Chargebacks? There are legitimate reasons why someone could demand a chargeback. If the buyer didn’t authorize a transaction, then a chargeback would be a fair response. It would also be acceptable if a merchant failed to provide the goods or services paid for by the buyer. Unfortunately, the reason behind a chargeback isn’t always legitimate. January through March has evolved into a de-facto “chargeback season” in recent years. The uptick in chargeback activity that happens every year during this period could be due to a variety of factors. For instance, some cardholders could get their first post-holiday credit card bills and, realizing they spent more than they intended, file a chargeback. Other buyers might decide that the goods shipped didn’t live up to their expectations, or didn’t arrive in time, and demand their money back in response.   This is abuse of the chargeback process, and it’s been a growing problem for years. However, the trend is being compounded by COVID-19.   Non-fraud chargebacks (known as “friendly fraud”) were already up 17% on the year by early autumn. That nearly outpaces the growth in illegitimate chargeback issuances we saw throughout all of 2019.   You do have the right to challenge a chargeback through the representment process if you believe it was unjustified. It will be an uphill battle, though; each card brand has hundreds of pages of regulations regarding chargeback processes that you’ll need to navigate. Plus, by the time you receive notification about the dispute, you may only have a couple of days to turn around the information requested.   Prevent Losses by Stopping Fraud & Errors So, how can you ultimately minimize chargeback issuances and protect your bottom line? Well, given that this is a multifaceted problem, it calls for a dynamic solution.   The first step should be to adopt a multilayer approach to criminal fraud. You need to employ multiple different tools to identify fraud, including (but not limited to): CVV verification Address verification Geolocation Fraud blacklists Velocity limits Proxy piercing These tools should be backed by fraud scoring, which can automatically gauge each transaction’s risk and either flag transactions potential fraud for manual review, or reject them outright. You can also minimize the risk of customers filing chargebacks by reviewing your policies and procedures to ensure you’re providing optimal service: Product descriptions should be accurate and detailed, with high-res photos of products. Live customer service should be available by phone, email, or social media as many hours a day as possible. Orders should be packed safely and shipped in a timely manner. Your site should be easy to navigate, with straightforward and easy-to-understand policies.   A Return Beats a Chargeback That handles chargebacks resulting from criminal attacks and merchant errors, but what about friendly fraud? Is there any way to prevent these chargebacks before they happen?   One strategy you can adopt is to try and preempt friendly fraud by offering an incentive. As we discussed earlier, returns are never desirable, but they’re a lot better than a chargeback. Customers who are dedicated enough will get their money back, one way or another. So, it’s in your best interest to eliminate as many barriers to the return process as possible.   Customers often turn to chargebacks because they believe it will be easier than going through your customer service channel to get a refund. You have to convince these buyers otherwise.   If you normally charge a restocking fee for returns, consider waiving the fee through the duration of the winter. You could also try offering customers a 10-20% bonus value on returns if they’re willing to accept a non-transferrable store credit rather than a cash return. This could lead customers to see the return process as a faster, easier, and more m