Be careful what you wish for: how merchants kneecap customer loyalty while combatting chargebacks

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Online merchants are constantly trying to win repeat business from the customers they’ve worked so hard to convert.

It takes an ocean’s worth of website traffic to get a trickle of conversions out of the sales funnel, so naturally eCommerce companies strive to maximize the total revenue generated from a single account. Key to that strategy is building customer loyalty by delivering a great experience to customers as they make their retail journey.

The need to fight fraud

Customers aren’t the only ones on a journey, however. Card not present (CNP) fraud is an ongoing challenge for any merchant doing business online, and fraudsters armed with stolen credit card info are ever adapting their tactics to get past the tools, teams, and methods put in place to block them. When an online retailer accepts a fraudulent order and the cardholder successfully disputes the charge and wins, the merchant’s card is debited the amount of the fraudulent charge. In other words, the merchant is hit with a chargeback.

…But not your own customers

In order to prevent losses due to chargebacks (and to deprive fraudsters of revenue), eCommerce companies turn to fraud prevention solutions which reduce chargebacks (some companies also offer a chargeback-guarantee), but also generate losses of their own by declining good orders, or by adding so much friction for legitimate shoppers that they abandon their carts before they even reach checkout.

Your customer’s retail journey of a thousand miles began with one step, and a customer’s prompt journey away from you can begin with a single misstep on your part. That’s why it’s so important for merchants to not undermine customer loyalty with bad chargeback fraud prevention methods.

Chargebacks themselves can seriously harm customer loyalty and repeat business. Just the process of disputing a chargeback is a great inconvenience to the victim, who has to explain the situation to their bank and then wait for the funds to be reversed.

Although the merchant may not be responsible for the theft of credit card information – and of course the merchant didn’t make the fraudulent purchase – the etailer did approve the transaction when it had an opportunity to decline the order. Just the association of your brand with the ordeal may prevent that person from ever considering shopping with you if they’re not already a customer, and if they are, they might be inclined to give your competitors a try.

False declines = frustrated customers

Of course, as we hinted earlier, inadequate fraud prevention solutions can also prevent new customers from becoming loyal ones. Here are just three ways:

  • Insult by mistaken identity:customers who have been falsely declined because a merchant labeled them as a fraudster are very likely to stop doing business with that merchant.
  • Friction:Onerous fraud prevention tools like 3D Secure, which lengthen the checkout process and increase customer frustration, increase cart abandonment and motivate your customers to seek out a smoother experience with some other merchant.
  • Misidentifying friendly fraud:While it’s true that there is a small number of customers who abuse the chargeback process in order to get merchandise for free, merchants should gather sufficient evidence before treating a customer as a “liar buyer”. A false accusation is just as insulting as a false decline, even more so if the merchant mistakes friendly fraud for real criminal fraud.

By letting fraudsters slip through and rejecting good orders from legitimate customers, merchants undermine customer loyalty and lose money on two fronts by sticking with fraud prevention tools which fail to do what they need to. When a merchant falsely declines a repeat customer, that company forfeits all the remaining customer lifetime value. This is in addition to the cost spent on marketing to that customer to entice him or her come back.

What can be done to improve customer loyalty and the bottom line

 Merchants can improve customer loyalty and their profits by utilizing next-generation fraud prevention solutions, built on machine learning and data gathered from multiple order details and from tools invisible to the customer: storefront web beacons, device fingerprinting, proxy detection, and IP address geolocation. Merchants are always working to grow their ranks of loyal, returning customers and reducing friction is one of the best ways to achieve that.

These same solutions not only reduce friction but are much faster than manual order review and more accurate than crude tools like blacklists or AVS filters. They can thus help merchants reduce the amount of money they lose to both false declines and chargebacks, and increase revenue and market share.