Global e-commerce sales hit $5 trillion last year and by 2025, digital sales are expected to surge another 50 percent. That’s unequivocally good news for online merchants. But there are two sides to the e-commerce coin: as online transactions grow, so too does the threat of chargeback fraud.
Today, illegitimate credit card chargebacks—known as “friendly fraud”—cost sellers a staggering $125 billion per year. During a period in which businesses of all kinds are seeking to rein in their expenses, chargeback fraud is becoming too big a problem to ignore.
How can companies defend themselves? It might seem they have only two options: build their own chargeback mitigation platform, or buy one off-the-shelf from a third-party vendor. As I explained at FraudCON last month, though, there’s another option—one that involves working in partnership with vendors to build the specific solutions you need.
An Evolving Threat
Retailers don’t need to be told that building their own in-house mitigation solution is highly challenging. Chargeback rules are constantly evolving, and the volume and complexity of disputes makes it tough for in-house teams to keep pace—or come up with appropriate ways of handling “friendly fraud” disputes without damaging customer relationships.
In many cases, in-house mitigation leads to merchants simply ignoring the vast majority of improper chargebacks, or rushing the vital process of documenting, collating, and filing evidence. Even the most cursory of chargeback mitigation processes place an enormous strain on in-house teams, meanwhile, increasing the risk of burnout and making it hard to stay on top of other crucial tasks.
In the face of such obstacles, buying readymade chargeback mitigation solutions and services might seem like the only viable option. Here again, though, the challenges of the modern retail environment make finding an effective solution extremely difficult. For example, many third-party providers use offshore mitigation teams who have little understanding of the nuances of retail operations in specific geographies.
The Pros and Cons of Automation
Adding to the strain, today’s online transactions and orders generate a wealth of data that must be aggregated, analyzed, and understood in order to provide ironclad evidence of friendly fraud. Quite rightly, many retailers are looking to automate their mitigation strategies using algorithmic and machine learning-based mitigation solutions. That’s a potentially powerful approach; automated tools can streamline the work of in-house or third-party teams, sifting through terabytes of transaction information to highlight the most relevant discrepancies, detect patterns, and identify potential problems faster.
That adds another wrinkle to the build-or-buy debate, though. As my FraudCon co-panelist Tal Yeshanov, head of risk and financial operations at Plastiq, pointed out, building your own effective AI mitigation system is certainly possible—if you have a sprawling team of “data engineers, data analysts, product people, operations people,” and more.
For most e-commerce sellers, however, sustaining a division of digital fraud experts and a stable of AI experts and developers is simply too great a drain on resources, not to mention a distraction from core business priorities.
Such merchants often see off-the-shelf AI platforms as an attractive option, but beware. Many third-party providers that rely on automated software actually struggle to improve customers’ dispute success rates because their tools aren’t designed with the needs of a particular business in mind. Automation that relies on cookie-cutter algorithms might wind up being less effective—both in terms of success rate and total ROI—than manual mitigation systems.
A Better Way
So what’s the solution? We can’t expect manual mitigation alone—whether in-house or third-party—to provide the scalable, cost-effective support that today’s enterprise scale retailers need. And we can’t expect automated systems, whether built or bought, to meet our needs either.
To hack through that Gordian knot, we need a new approach: not a digital, either/or choice between built and bought mitigation solutions, but a third way that brings together the best of in-house and third-party approaches.
After all, what sellers lack in deep, technical knowledge of chargeback fraud, they make up for with unmatched insight into their own business area. When merchants and mitigation specialists genuinely collaborate to create a customized solution for the seller’s specific use-case and business needs, it becomes possible to operate more efficiently and scalably, while also tapping into the seller’s understanding of their sector to deliver a far higher dispute success rate.
As I told my FraudCon co-panelists, it’s time to start looking beyond traditional, transactional vendor-buyer relationships. Merchants should seek out mitigation providers with whom they can forge a real partnership. That means no generic templates or lazy outsourcing, but rather an honest discussion about a company’s goals, and then a real commitment to creating a customized solution, with both manual and automated elements to meet their needs.
This sharing of knowledge is mutually beneficial. The reality is that no two businesses are the same, and neither is the chargeback burden they’re shouldering. From a vendor’s point of view, understanding the subtleties of the challenges confronting sellers allows for a more informed product development process, while merchants partnered with third-parties benefit from insights gleaned not only from their own dispute data, but also from the experiences of other merchants facing similar challenges.
The Power of Partnerships
The real question for today’s merchants, then, isn’t whether to build or buy. It’s how they can find the right partner to deliver the scalable results they need. That shouldn’t be a rushed decision; as with any technology investment, it’s important to carefully consider what’s on offer, request proof of concept, and consider your own current and future needs.
A good partnership isn’t a once-and-done deal—it’s an ongoing relationship with a vendor that will adapt to and support your changing needs. In a time of volatility and economic turmoil, rapidly growing e-commerce sales, and accelerating threats, make sure you find a partner that looks beyond implementation, and commits to your company over the long haul.
Just like a good relationship, effective chargeback mitigation is a two-way street. Merchants and vendors alike should work hand-in-glove to craft effective solutions, because only through true partnership can you manage chargeback threats while reaping the rewards of the e-commerce boom.
Roenen Ben-Ami, co-founder and chief risk officer of Justt.ai, is an expert in the field of payments and chargeback mitigation. Previously, Roenen led the Chargeback and Merchant Risk teams at the payments service provider Simplex, which successfully recovered millions of dollars a year.
