Pay attention to the conflict of interest in fraud prevention “guarantees”

Posted by Rurik Bradbury on June 10, 2015

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Chargebacks are a nightmare. And while you know better than anybody how the time, money and resources spent avoiding them make third-party chargeback guarantees so attractive, here’s the problem: chargeback guarantee service providers don't want to take the risk, either.

Drill, baby, drill!

To illustrate, consider this scenario. A major oil company has two specific fields it wants to tap: Existing Site A which produces oil now, and Speculative Site B, which doesn’t. The oil company hires Sinking Roots LLC, a drilling company. Under their contract, Sinking Roots is paid a small percentage of the oil drilled, as a fee. The more oil they produce, the more money they make.

However! Since their operating cost comes out of their production percentage, Sinking Roots cannot afford to strike out. They would quickly go out of business.

So Sinking Roots will not risk drilling Speculative Site B, even though there may well be lots of oil there. They would rather just drill within an established site, and decline the new opportunities.

The same in retail

The third-party chargeback guarantee service provider faces similar risks. But in e-commerce, the new customers are exactly the people you need to let through, and not block. Stopping them has catastrophic effects for CLV (customer lifetime value) and higher CAC (cost of acquiring a customer). See our post: the true cost of declining a good order as fraud.

For the risk of assuming sole responsibility for all chargebacks, the third-party service provider might receive one percent of all processed orders. So, for every $300 order, they retain $3. If just one of those orders results in a chargeback, the third-party service provider covers the $300 loss plus any associated penalty fees. To put that into perspective, the company would need to fulfill at least 100 new orders before they merely cover the one chargeback.

Given that reality, processing even one order with the risk of resulting in a chargeback would simply be too great; the third-party service provider will only fulfill orders from guaranteed legitimate customers and deny received orders with any red flags, many of which will be legitimate orders from customers wishing to transact without malice.  And, as clearly illustrated in our previous post, false positive declines compound losses far beyond face value.

Trustev’s approach

The reality is that, in e-commerce today, far too many real customers are blocked. Trustev's embedded software helps retailers avoid online fraud and enables real customers to transact. By scanning online customers in real time, our software proactively identifies fraudsters before they reach your till, which greatly reduces the risk of chargebacks plaguing you in the first place.

Topics: fraud, ecommerce, chargebacks