Misconceptions on chargeback guarantee model and fraud detection

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Misconceptions on chargeback guarantee model and fraud detection

As an online merchant, you’ve surely had to deal with your share of chargebacks. They are unavoidable, quite damaging, and can come out of the blue. But surely enough, they should not become a ruin of your business. There are various chargeback solutions helping to minimize the damaging impact of chargebacks — from manual investigation to using Machine Learning models or the Chargeback Guarantee model. However, there are caveats in this decision too.

As an end-to-end anti-fraud system, Covery has in-depth experience in chargeback management. Today we discuss various ways to prevent chargebacks and why some of them are not as great as they seem. 

What is a chargeback?

Chargeback is a forceful return of funds from the merchant’s account to the customer’s account. While being envisioned as an anti-fraud tool, customer chargeback can quite easily be used with malicious intent. Customers can use them instead of going for a refund for various reasons, when they don’t recognize the transaction or consider it fraudulent, etc.

Once a chargeback complaint is filed by a customer to their issuing bank, a dispute starts and a merchant has a chance to provide evidence in their defense. However, the merchant pays all the fees applicable during the customer chargeback dispute resolution process, whether they win it or not.

What is even more important, every merchant should maintain a healthy chargeback ratio. If the percentage of chargebacks is below 1% of your total monthly transactions, you are considered a low-risk merchant, but if this ratio exceeds 3%, you become a high-risk one. While some industries are inherently considered high-risk, for a majority of merchants entering the high-risk category is an unwanted challenge. Bear in mind this entails increased payment processing fees and the risk of going through Visa/Mastercard redemption programs. These programs involve paying substantial fees ($25.000-50.000) or account closure in case of non-compliance.

Is chargeback considered fraud?

While chargeback is not clear fraud, many fraudsters use it as a tool for maximizing their revenues after account takeovers, bonus abuse, and other types of fraud.

Naturally, every merchant tries to minimize the number of chargebacks they have to deal with. The Chargeback Guarantee model is one such way. We describe it in more detail below.

What is a Chargeback Guarantee?

Some anti-fraud software vendors offer CBG service, where they promise to pay the chargeback costs, should any fraudulent transactions take place on your website on payments they considered safe. Remember that this service does not protect you from affiliate fraud, friendly fraud, bonus abuse, account takeovers, and other fraud types. But it does cover the most damaging CNP fraud cases, so many smaller e-Commerce merchants go for it.

However, there are several problems with the CBG model:

  • excessive false positives. Anti-fraud system vendors prefer to overreact in order to minimize the chance of a fraudulent transaction becoming a chargeback. Thus said, they would rather declare a risky transaction fraudulent and decline it. This leads to a drop in revenue
  • lack of transparency. CBG is a black box and merchants gain no insights into why or how these transactions were declared fraudulent. 
  • lack of analytics. By not learning from these fraud cases, merchants miss out on the opportunity to improve their services and close these fraud loopholes.
  • lack of uniformity. As the CBG model does not cover various other types of fraud, these require using different anti-fraud solutions, which leaves the merchant with a need to manage a vast lineup of tools.

One more point worth considering is that while for small businesses CBG approach can be a good investment, for mid-to-large companies the volumes of potential revenue lost due to false positives might easily exceed the size of money savings from prevented chargebacks.

As you can see, going for a chargeback guarantee is not always the best decision. This is why Covery follows another approach — supervised Machine Learning combined with a rule-based risk logic engine.

How can chargeback fraud be prevented?

Covery addresses this issue through a combination of anti-fraud tools and chargeback merchant services that work on every stage of your customer’s journey: from registration and logging in, all the way through to checkout.

Device screening enables you to identify a user’s device and alerts you in real-time if any of the identifiers associated with this device were used in fraudulent schemes before. We use data from TrustChain for that — a global reputational knowledge base gathered and daily updated by all Covery community members.

Device fingerprinting stores information regarding all the history of interactions with every device. Over the course of several visits, this anti-fraud system creates a digital fingerprint of every device, enabling you to quickly identify any abnormal elements and decline potentially risky transactions.

Trustchain we mentioned earlier stores 12 unique identifiers for every device, enabling Covery to trace all software and hardware components of fraudulent schemes performed against your website, your industry, or globally. This knowledgebase works like Blockchain, so it regularly updates and stores the data in a transparent and immutable manner, ensuring you can easily check the reputation of any user or device and make an informed decision regarding every transaction. There are more than 500 million reputation records in Trustchain as of April 2022, and the number is growing rapidly.

The supervised Machine Learning model used by Covery in tandem with the rule-based risk logic engine allows preparing a variety of pre-configured scenarios for any situation. Due to precise risk scoring based on information from device fingerprinting, Trustchain, and behavioral analysis, the ML model suggests and executes the best scenario, securing your revenues and automatically declining risky transactions while dramatically reducing the number of false positives.

Finally, should a chargeback occur, Covery provides two integrations with chargeback solutions — Ethoca and VMPI. They provide the means to either prove your position as a reliable merchant or to pay for a chargeback claim before it becomes a dispute to avoid paying all the fees and affecting your chargeback ratio.

Conclusions

Chargeback is an omnipresent danger that every online merchant should just learn to deal with. There are several approaches to handling chargeback risks. While smaller merchants might prefer a chargeback guarantee model like a one-size-fits-all solution, bigger businesses can benefit from more sophisticated chargeback merchant services.

Covery is reliable risk management and chargeback risks prevention platform operating in the US, UK, Germany, and 170 more countries worldwide. Chargeback merchant services are just one aspect of business that Covery can assist you with. To learn the full range of our capabilities, order a free demo and see firsthand how Covery can deliver value for your business.