Retail Chargeback Costs Reach $40 Billion Per Year
A new report shines a light on the state of fraud within the Card Not Present (CNP) channel, including key facts and figures such as chargebacks, disputes and win rates.
The 2018 State of Chargebacks Survey by Kount, found that while most merchants are actively disputing chargebacks (82%), 10 percent are in excessive chargeback programs and almost one in four (24%) state they had no idea what their actual win rate was when it came to those disputes.
While 70 percent of merchants have a target chargeback rate of 50 basis points (0.5%) or less, the survey found that just 47 percent of organizations reported achieving chargeback rates below this level. What industries have the highest chargeback rates? The survey found that approximately 40 percent of organizations in the Financial Services and Education/Training industries have chargeback rates exceeding one percent (39% and 43%, respectively). Merchants selling digital goods and services are more comfortable maintaining a higher target chargeback rate as well.
- Nearly 80% of merchants selling only physical goods have target chargeback rates at or below 0.5%
- More than half of these merchants set their target chargeback rate at or below 0.1%
- By comparison, less than two-thirds of merchants selling digital goods or services have a target chargeback rate below 1%
- Only 35% have their goals set at a chargeback rate of less than 0.1%
Organizations in the Event Ticketing, Apparel/Accessories/Jewelry, Home/Kitchen/Pets/Toys and Travel/Entertainment/Leisure industries have the lowest chargeback rates, with at least half of these organizations reporting chargeback rates of 0.5 percent or less.
Of the 82 percent of surveyed organizations that reported they are actively disputing chargebacks, one-fifth of merchants are winning less than 15 percent of their dispute cases and more than one-third win less than 30 percent of their disputes.
But some merchants do give up the good fight -- 11 percent of respondents said they do not dispute or re-present any of the chargebacks they receive. Reasons for not doing so included:
- They don't believe they have a large enough volume of chargebacks to warrant re-presenting them (28%)
- A lack of resources within the organization (27%)
- They are discouraged from disputing chargebacks, stating they couldn't win any of their re-presentments when they tried (15%)
- 16% of respondents did not know why they don't dispute chargebacks
The survey found significant variation in chargeback dispute win rates. When asked about chargeback revenue recovery win rates, 24 percent of the respondents said they did not know what their actual win rate was. The next two most likely responses were at opposite ends of the spectrum, with 19 percent citing a win rate of less than 15 percent, and 18 percent citing a win rate of more than 60 percent.
Chargebacks continue to be a big issue for merchants, especially in Q1 where merchants are likely to see an influx of chargebacks following the busy holiday retail season, due to the typical 60-90-day lag time in chargeback reporting.
Nearly half of respondents overall (48%) claimed CNP fraud was their biggest source of chargebacks, followed by friendly fraud (28%), account takeover fraud (7%), and merchant error (4%). Meanwhile, 12 percent of organizations reported that they don't know the cause of the majority of their chargebacks.
- Approximately 60% of merchants in the Travel/Entertainment/Leisure and Education/Training industries report that CNP fraud is the primary source of their chargebacks
- More than half of Dating/Social and Digital Download/Streaming organizations acknowledge that most of their chargebacks result from friendly fraud
While the majority of organizations surveyed (70%) operate or do business in the United States, 45 percent of organizations surveyed operate in Western Europe, more than one-third do business in Asia, and more than one-fourth operate in Latin America. The survey found significant differences in regional chargeback distribution across these organizations based on where they operate.
- More than 20% of merchants doing business in Western Europe say that the majority of their chargebacks originate in that same region, compared to 11% of organizations overall
- 39% of organizations operating in Asia indicate that the bulk of their chargebacks are originating from the United States, while 16% say that most of their chargebacks are coming from Asia.
The two most cited challenges with chargebacks were disputing them (59%) and being able to identify friendly fraud (58%). Gripes with disputing chargebacks, a process known as re-presentment, can include low win rates and the operational requirements or burden of conducting chargeback re-presentment. Friendly fraud is another major source of frustration as merchants struggle with how to handle dishonest customers and a payment chargeback system that can often favor cardholders. Other challenges cited by respondents include:
- Reducing chargeback rates (50%)
- The balancing act of reducing fraud and chargebacks without negatively impacting sales or causing false positives (42%)
- The cost of chargebacks (39%)
- Lack of expertise or strategy with chargeback management (21%)
- Not having enough resources (21%)
Most of the organizations surveyed (88%) deploy multiple tools or services for fraud and chargeback prevention, with more than three-quarters using three or more fraud fighting features or technologies, and nearly two-thirds using four or more. The most used fraud fighting techniques include:
- Address Verification Services (AVS) (62%)
- Card Verification Value (CVV) (62%)
- Disputing or representing chargebacks (42%)
- Email verification (42%)
- Decline/Negative Lists (38%)
- Velocity Limits (37%)
- Phone Number Verifications/Reverse Lookup (31%)
The survey also uncovered trends in fraud team compositions, finding that 45 percent of the organizations have two or fewer fraud prevention team members. This is true for only 17 percent of organizations with more than $250 million in online revenue. 59 percent of these high online revenue organizations (250M+) have fraud prevention teams of more than five people.