`How can I reduce chargebacks?’

This issue’s experts – Christopher Long of Order Trust, Kathleen Keller of Paymentech, and Tom Arnold of CyberSource – answer the question

Chargebacks – charges made by your bank against your merchant account when a customer disputes an item on his or her credit-card statement – can total as much as 4% of revenue. Because e-commerce transactions are not made face to face, the buyer cannot sign a credit card receipt and the marketer cannot validate the signature. This means that the merchant must take full financial risk for all transactions.

There are four primary causes of charges, and methods to reduce each of them:

* Consumer confusion. Did the consumer really order the product? Did he or she actually receive it? He or she may not know, and as more consumers make more purchases via the Internet, the chances become ever greater that they will lose track of purchases and returns, and ask for inappropriate credits.

To solve the confusion problem, you should provide the following:

G Easy online access to instructions and context-specific help for each step in the online purchasing process.

G Up-to-the-minute order history information on your site.

G Proactive e-mails to notify consumers of order receipts, shipments, backorders, and the like.

G Your toll-free telephone number along with your company name on credit-card statement line items.

G Local-language Internet content and customer service.

* Bank errors. Not only do banks make mistakes, but they hardly ever make mistakes in the marketer’s favor. Bank errors can account for up to half of all chargebacks. As always, it’s up to you to make sure that the bookkeeping is correct.

That means implementing solid financial accounting systems and working with a payment processor to filter out spurious or illogical chargebacks.

* Fraud. Some things you can do to reduce fraud:

G Get complete information from customers, including both “bill to” and “ship to” locations.

G Develop a “negative” file of names and addresses that have been involved in suspicious orders.

G Develop a “second look” file and have staff members contact customers directly on orders that get flagged by the negative file, that list free services (such as Hotmail.com) for the e-mail addresses, that have international addresses, or that have unusually high dollar amounts.

G Use fraud-prevention software.

Fraud prevention methods can be expensive, so cost-justify potential solutions by measuring chargebacks before and after implementation.

* Internal errors. These stem from poorly designed or implemented order management systems. There can be numerous reasons for internal errors: the inability to track order authorization vs. settlement, the inability to track returns accurately, and systems that don’t support solid bookkeeping practices. Whatever the reason, it’s clear that your internal systems need to be able to handle all aspects of order processing.

Card-not-present transactions are especially open to fraud, which is the major cause of chargebacks. Fraud losses to merchants are rising at a faster rate than sales. In 1999, according to research firm GartnerGroup, i.merchants lost an estimated $1 billion , roughly 5% of online sales. And Meridian Research projects annual online fraud to rise to $9 billion by 2001 and to $60 billion by 2005.

Why are chargeback risks greater for purchases initiated via the Internet? Some factors to consider:

* Internet merchants are not targeting customers. Anyone who logs on to a site is a potential customer.

* The Internet-expanded customer base includes international consumers. Some traditional fraud products such as AVS and CVV2 do not apply to foreign-issued cards.

* Web merchants do not speak directly with consumers. Phone operators often note something suspicious in callers’ responses and request more information, such as the bank name on the card to compare it with the card issuer’s name provided by the processor.

* Unlike other marketers, Internet merchants have to fend off hackers.

Happily, experienced card-not-present payment processors have gained significant ground in reducing fraud and managing chargebacks. For instance, a card processor can assist merchants in building and maintaining negative files of previous fraudulent names, establishing procedures for high-dollar orders and first-time orders, and setting system alerts for duplication transactions.

Then, too, technological advances and innovative solutions can help payments processors detect and prevent challenging fraud situations. For example, Paymentech’s latest smart weapons against fraud include real-time and batch processing services to “scrub” transactions against a file of known fraudulent claims across many participants, and additional integrated neural network systems with comprehensive fraud-scoring mechanisms for Internet transactions.

Keep in mind that a single maneuver rarely attacks all problems. An alliance of merchants, processors, and other solution providers will create a formidable frontline against online fraud. The battle can be won.

To prevent chargebacks, a merchant needs to implement business systems to determine the level of risk and acceptable metrics for measuring loss. He should also include an online process for implementing risk management rules, checking “hot lists” of fraudulent accounts and orders, and dealing with transaction velocity; an advanced scoring technology based on a large transactional database; and a process for following up on suspicious orders. These processes should reduce chargebacks to a manageable level while keeping false negatives – the consumer insult rate – in check.

To begin, assign a risk value to the merchandise you sell, based on its liquidity – how easy it is for a person to convert the product into cash. For example, jewelry is more liquid, and therefore carries a higher risk value, than baseball caps.

Next, establish a base set of rules regarding when to reject a transaction. This is trickier than it sounds. For instance, a seemingly basic rule might be that you will accept a transaction only if the shipping address matches the billing address. That’s a no-brainer, right? Not really. If you were to apply this rule, you would wipe out the ability of a consumer to send a gift from your site.

Once you have established and fine-tuned your rules of acceptance, you should sign up for a service that will perform the complex evaluation and scoring of transactions. In simple terms, a scoring system should accept a transaction, evaluate consistency, run deterministic tests based on Internet elements, and generate a score that is handed back to the merchant. Oh, and the system has to accomplish all this in less than a few seconds because your consumer is waiting for his or her order to be processed.

Once the advanced scoring technology is in place, you will need a process for making a decision based on the scores. Depending on the risk level of your product, you may decide to accept all orders under 40 points, investigate orders that fall between 40 and 55 points, and reject orders that score above 55 points.

One important note: It is critical that your site does not appear to flat-out reject an order or accuse a customer of fraud. Should your process reject an order, your site should display a page that says something like “Our system is too stupid to identify you at this time. Please call [your 800-number], and we will help you.”

Now comes the following-up process. This will both help determine the effectiveness of the fraud detection system and recover any lost sales opportunities. To this extent, you must train your customer service staff on how to identify and handle “social engineering” – how a fraudsters convinces a call center he is someone else and have the full authority to do something. To this extent, your risk-scoring technology must provide the factors that resulted in a given score. Your call center can then refer to these to help prevent social-engineering loss.

Even after implementing these processes, you will still have some chargebacks. But you should use the chargeback data to enhance the risk-scoring technology and to place names on a “hot list” should an abuse problem appear.

Establishing a total risk management system can be daunting. But consider the return on investment: If your business does $10 million in quarterly sales and is experiencing a chargeback rate of 3%, reducing that rate to 1% adds $200,000 a quarter to your bottom line.

Christopher Long is senior vise president of strategic marketing for OrderTrust, a Lowell, MA-based provider of online marketing solutions.

Kathleen Keller is responsible for credit, risk, and chargeback management at Dallas-based Payment processor Paymentech.

Tom Arnold is chief technology officer at CyberSource, an e-commerce transaction services provider based in Mountain View, CA.

Most e-commerce Websites have a pretty weak customer service information area. And that’s criminal, considering how easy improving it can be:

* Provide easy access to a toll-free phone number throughout your site. If customers are having problems, they must be able to speak with someone directly. But do not make customers hunt for the customer service or ordering number. Instead, post the phone numbers on your service page and, in fact, at the top of every page of your site.

* Offer an FAQ (frequently asked question) section that is well stocked with intelligent questions and thorough answers.

* Clearly articulate your return policy. Some sites offer a tool whereby users can notify the merchant that they are returning a product. This tool can even generate confirmation numbers and return mailing labels to make returns easier and more secure.

* Clearly state your Internet privacy and security policies. At the very least, post links to your policies on your home page and your customer service page.

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