Fraud

[Matt_White]

We often receive questions about chargeback ratio and how to use it as part of an overall strategy. The card associations have a magic 1% line, over which they warn, fine, or, in extreme cases will revoke a merchant's ability to process credit cards. I won't go into great detail about how the ratios are calculated, and the rules about number of chargebacks allowed, we're just focusing on the ratio, and specifically how it can be used as a key performance indicator (KPI) to tune how strict or how lenient a fraud prevention strategy can be.

Typically in the digital space, I tune for between 50 and 75 basis points (0.5 - 0.75%, I try to target about 0.25% for merchants shipping physical products), depending on the level of risk tolerance, and the impact of fraudulent transactions on the business as a whole. In community-based services, where users are frequently interacting with each other (like MMORPGs and Online Dating Sites), a few fraudsters could potentially do a great deal of harm to the community, irrespective of the ratio of fraudster to good customers, so you might tend towards the low end of the chargeback range.

Chargeback rate should not be the sole determining factor, in fact, I use it as an indicator that I can relax other criteria. For example, if I have a 15% reject rate at a 0.20% chargeback rate, I will take this as an indicator that my reject rate is too high, and work to relax rules that are causing the bulk of the rejected transactions. For many merchants, a high number of rejected transactions will typically be due to AVS "No Match," so I look at ways to allow some of those "No Match" transactions to be converted into good ones by adding evaluation additional criteria. Instead, I will only reject "No Matches" on certain types of transactions, or "No Matches" that have a score above a certain level.

What can you do if you have a low reject rate and your chargeback rate is still "too low"? Consider yourself lucky for one, but more importantly, try to bring in more customers! The more visibility your service receives, the more fraud is likely to make its way into the system, since more customers means more targets in the case of dating/social networking, and more potential customers willing to buy gold or items in the case of games, or software in the case of digital downloads. Adding affiliate channels can often be a great source of revenue, but it is inevitable that some fraud will arrive through those channels, so adjusting where your ad dollars are spent can be a good way to control (both increasing and decreasing) the chargeback rate.

[Matt_White]

We often receive questions about chargeback ratio and how to use it as part of an overall strategy. The card associations have a magic 1% line, over which they warn, fine, or, in extreme cases will revoke a merchant's ability to process credit cards. I won't go into great detail about how the ratios are calculated, and the rules about number of chargebacks allowed, we're just focusing on the ratio, and specifically how it can be used as a key performance indicator (KPI) to tune how strict or how lenient a fraud prevention strategy can be.

Typically in the digital space, I tune for between 50 and 75 basis points (0.5 - 0.75%, I try to target about 0.25% for merchants shipping physical products), depending on the level of risk tolerance, and the impact of fraudulent transactions on the business as a whole. In community-based services, where users are frequently interacting with each other (like MMORPGs and Online Dating Sites), a few fraudsters could potentially do a great deal of harm to the community, irrespective of the ratio of fraudster to good customers, so you might tend towards the low end of the chargeback range.

Chargeback rate should not be the sole determining factor, in fact, I use it as an indicator that I can relax other criteria. For example, if I have a 15% reject rate at a 0.20% chargeback rate, I will take this as an indicator that my reject rate is too high, and work to relax rules that are causing the bulk of the rejected transactions. For many merchants, a high number of rejected transactions will typically be due to AVS "No Match," so I look at ways to allow some of those "No Match" transactions to be converted into good ones by adding evaluation additional criteria. Instead, I will only reject "No Matches" on certain types of transactions, or "No Matches" that have a score above a certain level.

What can you do if you have a low reject rate and your chargeback rate is still "too low"? Consider yourself lucky for one, but more importantly, try to bring in more customers! The more visibility your service receives, the more fraud is likely to make its way into the system, since more customers means more targets in the case of dating/social networking, and more potential customers willing to buy gold or items in the case of games, or software in the case of digital downloads. Adding affiliate channels can often be a great source of revenue, but it is inevitable that some fraud will arrive through those channels, so adjusting where your ad dollars are spent can be a good way to control (both increasing and decreasing) the chargeback rate.