Online merchants go too far in guarding against fraud, analyst says
Since Visa reduced the chargeback percentage that induces penalties to merchants, many online retailers have been going too far in guarding against chargebacks with transaction review policies that threaten to scare away customers, says Jeff Foster, executive vice president of payment card processing and fraud-prevention firm Retail Decisions. “I’m seeing many merchants reviewing and slowing down 80% of their orders,” he says. “That’s like hitting a nail with sledge hammer.”
Merchants have tightened their transaction review policies in response to Visa’s move that, as of Oct. 1, puts retailers into Visa’s chargeback monitoring program once their chargeback rate--the percentage of consumer payment card transactions that get charged back to the merchant when a cardholder denies having made a transaction--reaches 1% for four months. That’s down from the prior threshold of 2.5%. Inclusion in the monitoring program subjects merchants to fines of up to $25,000 plus up to $100 per chargeback.
While Visa contends that its new threshold helps more small merchants stay out of the monitoring program, Foster says the modified program imposes stricter rules on larger merchants. He notes that a merchant with 200 chargebacks out of 10,000 transactions per month would not have been in the monitoring program under the old rules, because 200 is not 2.5% of 10,000, but would be included under the new rules, because 200 is more than 1% of 10,000.
So to assure that they stay above Visa’s chargeback threshold (and a similar program administered by MasterCard), merchants have been more closely reviewing online card transactions with such policies as calling or e-mailing customers to confirm their personal identification. For international orders, some merchants have started requiring customers to fax a copy of their credit card statement as proof of cardholder identity, Foster says.
But such scrutiny goes far beyond what’s needed to catch the small percentage of card transactions likely to be fraudulent, he says. “In a worst-case scenario, 2.5% of transactions may result in chargebacks, so reviewing 80% of transactions is out of control,” he says. “Merchants are going overboard.”
The result, Foster adds, is that merchants risk irking customers, particularly the 10-25% of new ones that, on average, may become loyal customers over the long term. “When you figure the time it takes to review orders, and the resulting delay in the order, a merchant can be losing out on gaining long-term loyalty from new customers,” he says. “The reason many people shop online is because they don’t want to take the time to go to a store, but if their order is delayed a couple of days at a new site, they may presume that every time they order from that site their order will be delayed.”
Foster adds that merchants need to learn how to better focus on transactions that are most likely to become chargebacks, such as by reviewing types of transactions known to have been fraudulent in the past.
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