Modo CEO, Bruce Parker, sat down with Marty Williams of Chargeback Gurus to learn what merchants need to make sure they're getting from their chargeback partner. Read more or watch the full webinar to get a detailed guide to making sure you're not missing a beat when it comes to chargebacks!
When we were kids, what was a major pain point of parental obedience? For most of us, it was probably eating our veggies. It’s not that we were ignorant of the benefits of vegetables. It was just that there was food that appealed to us in more epicurean ways. As adults, we are much more accepting of, no, reliant on good nutrition. But when I mention the word “chargebacks,” we are automatically transported back to a state of juvenile contention. Of all the thrills and wonders payments technology has to offer, chargebacks are the least glamorous because, at best, you end up at a zero sum, right? But chargebacks can actually be positive in other ways - think customer loyalty. And upping your chargeback game can have a significant and often overlooked impact on a smoothly operating payments stack. So it’s very important merchants know what they're getting from their chargeback partner.
With that in mind, Bruce Parker, Modo Founder & CEO, got together with Marty Williams of Chargeback Gurus - someone who likely ate all his veggies as a kid - to discuss what specifically to look for in a chargeback partner.
Why do you need a good chargeback strategy?
It used to be that merchants could write off chargebacks as a cost of doing business. But that’s no longer the case. True fraud and friendly fraud have permeated the payments ecosystem in the last 5 years, and chargebacks have become a serious detriment to businesses. But having a good chargeback strategy in place is actually an opportunity to improve your business. If you take the time to investigate and understand the nature of these chargebacks, you can improve business processes and the customer journey - keeping your customers loyal.
“If you look at it from the opportunity perspective, you’d be surprised what you’d be able to accomplish.” - Marty Williams
Every chargeback tells a story, Marty adamantly exclaimed. You can glean all kinds of information from chargebacks that help every aspect of your business from operations, fulfillment, customer care, finance, marketing, and sales. These chargebacks are going to tell these teams what factors are contributing to or are outright causing chargebacks.
How valuable is this information to your business? Marty brought up Net Promoter Score (NPS) as a standard performance indicator. “The information you can get from chargebacks is every bit as important and valuable as NPS,” says Marty. So you can learn and accomplish a lot with chargeback data.
What’s at stake?
What do you have to lose by ignoring chargebacks? The most obvious is revenue loss. Since chargebacks are automatically deducted, lack of attention will result in revenue loss by default. It’s up to your business to decide if they want to pursue it.
Second is cost. A chargeback will cost a merchant anywhere from 2 to 2.5 times the cost of the transaction - about 2X for digital services and subscriptions or 2.5X for physical goods. And if you are getting chargebacks regularly, your processing fees could go up because payments processors don’t like dealing with those costs either.
Finally, your brand reputation is on the line with your customers and with your issuer. If your business processes are causing your customers to have to call their bank to request a refund, that is a big hit on your reputation. If you, as a merchant, aren’t responding to chargebacks or retrieval requests, you could develop a poor reputation with your issuer. They will become more picky with their transaction approvals leading to higher decline rates for your customer. In many cases, a customer won’t file a chargeback or contact the merchant. They’ll just move on to a competitor.
How do you “win” chargebacks?
Step 1 - Identify your motivators
How do you define success? Winning is important, but it isn’t necessarily the right approach. If you’re solely focused on winning a chargeback, you may be missing the bigger picture. Yes, winning a dispute equals more revenue. But if the chargebacks are happening because of your own error, the focus should be on those factors contributing to or outright causing those chargebacks.
“You shouldn’t have 100% focus on winning chargebacks. You should have 100% focus on achieving success for your specific motivator. “ - Marty Williams
What are your underlying motivations for a chargeback strategy? Firstly, think about the three types of chargebacks:
- True fraud - genuinely fraudulent activity
- Friendly fraud - the customer wants a refund, but files a chargeback instead causing the issuing bank to force a refund when the merchant might have done a refund anyway.
- Merchant error - merchant sent the wrong product, product doesn’t match the description, package was damaged, etc
Most chargebacks are a mix of these.
Remember that every chargeback tells a story. By investigating and quantifying these contributing factors, you will be able to pick up on recurring themes and you’ll be able to identify - in 30-60 days - the low hanging fruit, then you can put a picture around your key motivations.
Secondly, define those motivators:
- Revenue recovery - ie winning - you simply want to recover revenue lost due to illegitimate chargebacks
- Prevention - it saves cost, hassle, and reputation
- Increasing customer satisfaction
A good winning strategy will easily cover the cost of prevention and process improvement. So this isn’t a net-negative. If you’ve got a good program in place to recover the revenue that legitimately belongs to you, that recovered revenue will more than cover the cost to make those improvements.
Step 2 - Measure success
Once you've figured out your motivators, you need to figure out what and how to measure your process and results. Every company should be measuring and benchmarking. You should be using that data for actual insights because those insights will help you not only improve how you approach disputes, but it’s also going to help you prevent chargebacks and improve your business overall. Don’t be afraid to look under the hood. You need full transparency with your data and metrics.
Take pre-arbitration (“pre-arb”), for example. In the chargeback process, when a merchant or customer responds to a dispute, it initially comes back as a win. But in later stages, the issuing bank can reverse the win after looking at the data. And unless the merchant can provide new information, they will assume the loss. So a merchant can think they are winning 50-70% of chargebacks, but in reality, they’re winning 25% because they weren’t taking pre-arbs into account.
Another metric to look at is customer support wait times. A customer may contact a merchant’s support team to dispute a charge, but they are put on hold for a very long time or don’t get a timely response. So they abandon support and call their bank instead. They intended to work it out with the merchant but they got impatient and moved on. Really good merchants who really care about customer satisfaction will have that abandonment in the low single digits, in some cases.
If your customer response time is good, how good is your customer communication? How often do you communicate with your customer to let them know about upcoming charges. If you agreed to a refund, how often are you following up with the customer to let them know a refund is coming? Some refunds take 7-10 business days so if a customer is worried a refund isn’t coming, they may go to the bank for a refund. Marty calls this “double-dipping.” And the merchant ultimately pays the price.
The correlation between chargebacks and customer satisfaction is huge! Not every customer who has a bad experience will file a chargeback. But for those that do, there is a wealth of information that a merchant can use to paint a picture of the customer journey because, chances are, you have several customers who have experienced the exact same issue. You’ll be able to learn what those issues are and how to make the appropriate fixes.
Step 3 - Achieving Success
The key to achieving effective chargeback management is to have flexibility in your decision making: do you want to outsource management, solve in-house, or do a hybrid of both? And do your decisions accommodate logistical changes: new products, new services, new subscription models, etc? As your business grows, you need to be able to handle new payment scenarios that maybe you hadn’t considered before, and handle them gracefully.
What does flexibility look like? You need to be able to adapt to those changes and you need the flexibility to execute the work with or without integration. Some questions to ask yourself:
- Are there special actions needed within your CRM when you get a chargeback received?
- Do you need to keep special notes with specific customers?
- How is your finance team recognizing or reconciling statements?
- Do you have a specific dispute package for each issuing bank?
- How am I using customized chargeback reporting?
Make sure you are measuring performance across all of these aspects - reporting, dispute packages, CRM, notes, reconciliation, and so on. The data may show opportunities for improvement so your business will be better for it.
There you have it. Although chargebacks might not be glamorous or fun, like eating your vegetables, they no longer have to be messy and arbitrary. You now know what you need to put together a top-notch chargeback strategy. And as the technology around chargebacks continues to improve, now is a great time to jump right in.
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If you have any additional questions about Modo’s enterprise payments orchestration platform, we’d be happy to answer them. Reach out to us at www.modopayments.com/contact!