Chargebacks: The Ghost Troubling The Growing Market Of Digital Goods

Retailers dealing in digital goods and services like newspaper subscriptions, online gaming, music & video streaming, among others are gaining popularity by the day. But because online business runs round-the-clock, digital goods have also come with challenges like friendly fraud and friendly fraud.

And while you’ve heard of “friendly fraud,” the term “family fraud” is relatively new to most us. But this is just when a family member, e.g. a child, sibling or parent of a cardholder makes an unauthorized payment, only for the card owner to come claiming the charge.

According to research by Verifi, currently, almost half of all chargebacks recorded by retailers handling digital goods are as a result of family or friendly fraud. And the issue is a major concern for merchants who sell only on digital platforms, where friendly fraud leads to chargebacks in over 40 percent of the purchases.

Why chargebacks are a forgotten aspect of the fast-upgrading ecommerce market

While e-commerce has offered customers a range of payment options, this has been the primary challenge when handling digital goods. With many payment avenues present, a customer can easily forget to make a purchase. Several payment options can confuse customers and lead to higher rates of chargeback.

What’s more, not all the payment providers operate under well-defined chargeback policies. According to a poll by Finance Online on the 10 leading payment providers, 40 percent have not included chargebacks in their terms and conditions—or even in their FAQs. And for the ones that have, processes differ largely—most of the firms opting to settle claims internally between a buyer and seller.

A freshly developing challenge centers on the booming contextual commerce, where continuous payment cycles are being built into a customer’s buying habits. The buy buttons on social sites like Pinterest and Instagram are an excellent example today, but the future may see virtual reality or automatic speech recognition (ASR) shopping come true in a bid to speed up the buying and selling process.

And while developers may achieve this speed they are looking for; still, customers won’t remember all the services and products they buy and chargebacks will remain their option when they have a payment claim.

Chargebacks, the future of digital goods and the merchant’s fate

What makes digital goods fraud challenging than CNP (card-not-present) fraud is that with friendly and family fraud, it is more difficult to know the customer’s identity. A faster purchase pace with no visibility allows a loophole for deceitful purchases that lead to chargebacks.

Merchants, on the other hand, are still finding it difficult to draft a reliable all-inclusive chargeback policy due to the complications that arise when trying to deal with various payment avenues. As a result, retailers are now forced to use weak identifiers like IP and email addresses to ascertain if the card owner (and not their kid or parent) is using it.

Furthermore, the blame for any flagged transaction falls on the merchant, and this may damage brand image, and the worst that could happen is ruined customer relationships.  So, merchants accept the chargeback but at a very high cost, and depend on resources like chargeback insurance providers to control related costs.

Wrapping Up

Because avoiding and reducing chargebacks is a challenge, cutting the cost of each reversed charge is the most practical remedy. Hopefully authorities will work to lower the chargeback rates for merchants.

Author Bio: Electronic payments expert Blair Thomas is the co-founder of high-risk payment processing company and chargeback insurance providereMerchantBroker. He’s just as passionate about holders as he is with traveling and spending time with his dog Cooper.

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