The first quarter of the year is traditionally a slower sales period for retailers. Following the holiday mania, shoppers’ wallets tend to be tighter. But limited cash flow does not mean things calm down; on their part, merchants are left to contend with the consequences of the golden quarter’s increased consumer volume.
Chargebacks are an inescapable part of e-commerce. The high sales (and increased fraud) of November and December translate into a significant volume of chargebacks in January and February. Much money is sunk into marketing campaigns intended to draw new customers, but the return on investment is low if those customers fail to come back for subsequent shopping trips. Account takeover attacks (ATO) are a heightened risk during the holidays, but their damage is often felt months after. And of course, the flood of returned items is a growing phenomenon—$222 billion in the US alone for the 2021 holidays—and one that’s vulnerable to abuse.
So what can merchants do to start the year in the best position possible?
Keep on Top of Your Chargeback Rate Year-round
E-commerce fraud losses reached $20 billion globally in 2021, an 18 percent YoY increase. Without a robust fraud prevention strategy, merchants run the risk of ending up on the monitoring programs of various card networks, with their compounded fees and restrictions. Different card schemes calculate chargebacks differently—some divide a month’s chargebacks by that same month’s transactions, while others divide it by the transactions of the preceding month. That means a merchant can have a low chargeback rate with one issuer and a high rate with another, for the same month.
Riskified’s data shows that when it comes to physical goods, the majority of chargebacks are filed within two months post-transaction. Digital goods, on the other hand, have a much quicker turnover, with the majority filed in half that time. As peak sales periods are often followed by a spike in chargebacks, merchants should keep the pattern in mind and plan ahead.
A good tip for retailers who want to take advantage of annual sales peaks without risking the card networks’ excessive chargeback programs is to closely monitor their chargeback rate throughout the rest of the year to allow more leeway when it counts.
Prioritize Account Creation—and Protection
Store accounts are a central tool for fostering customer loyalty. In a Riskified survey, 62 percent of merchants reported that account holders shop more frequently, and 55 percent said they spend more per purchase. And when the cost of acquiring new customers is more than five times that of retaining them, encouraging account creation is an ROI no-brainer.
There are two flies in this ointment, though. First, new accounts (younger than 24 hours at the time of purchase) are a risky segment. Take the 2021 holiday season: the average fraud attempt level of brand new accounts jumped by over 50 percent compared to the preceding nine months. And though new accounts spent more than guest shoppers, their fraud was more costly on a cart-by-cart basis. One way to avoid over-declining while still guarding against risk is sharing cross-merchant data to identify shoppers who may be new to you, but not to e-commerce in general.
The second hurdle is ATOs. Riskified estimates that the volume of ATO attempts has increased more than fivefold over the past three years, and shoppers penalize it severely—43 percent would never again shop at a store where their account was compromised. The main challenge of ATO prevention is the lack of reliable data at login, meaning merchants should prioritize technology that generates additional data points such as linked identities, behavioral analytics, and spoofing detection to make informed permit or block decisions.
Return Fraud Is About Your Acceptable Threshold
According to the NRF, $761 billion worth of goods were returned in 2021 in the US alone. How much of that was legitimate? Industry experts estimate that 7-10 percent of returns are fraudulent—not surprising given that merchants are highlighting various forms of policy abuse as a growing problem. The challenge is that oftentimes, this type of fraud is performed by otherwise legitimate, even loyal customers that merchants are hesitant to insult.
Lacking the ability to differentiate between occasional and habitual abusers, some retailers might choose to look at return and refund abuse simply as the cost of doing business. It doesn’t have to be, though. Merchants need to look beyond a customer’s surface identity, which might be split over several personas—multiple emails, credit cards, and addresses—to the individual and the sum of all their actions. Only then will they be able to narrow down their pool of potentially abusive customers to those who still generate positive revenue according to each merchant’s individual threshold, and those who are loss makers to the business and should be blocked or penalized.
Interested in learning more? Download Riskified’s guide to optimizing your Q1 downtime.