Digital goods and the challenge of chargebacks

From online games to newspaper subscriptions, music streaming to electronic concert tickets, the growth of online commerce has catapulted almost all services into the cyber world, turning once tangible amenities into ‘digital goods.’

While the boom in online services provides customers with 24-hour access and convenience they can no longer live without, it brings new challenges to merchants – that of “family fraud” and “friendly fraud”.

Although “friendly fraud has become a common term in the payments industry, “family fraud” is a somewhat new term entering into our lexicon. It involves someone, often a child of their cardholder parent, making unauthorised payments on an account – typically in an in-app purchase, but sometimes for a physical item ordered from an online retailer.

Today, nearly half of the chargebacks experienced by digital goods merchants are considered to be the result of either friendly or family fraud, according to a report by Javelin Strategy & Research and commissioned by Verifi. The issue is especially challenging for merchants who offer purchases only in digital channels, where friendly fraud results in chargebacks in more than 40% of in-app purchases.

Chargebacks: the blind side of innovation in online commerce

The challenge when dealing with digital goods comes from the multiple choices of payment methods now available to consumers buying online. With so many payment options available, it can be easy for customers to forget making a purchase. Multiple payment methods can add to consumer confusion, which in turn can lead to increased chargebacks.

In addition, not all payment providers have such a well-defined process for dealing with chargebacks. A straw poll of the top 10 payment providers (according to Finance Online) shows that 40% don’t mention chargebacks anywhere in their FAQs or terms and conditions. From those providers that do, every process is different – with the majority opting to manage disputes internally between a customer and merchant.

A newly added challenge is around contextual commerce, which is at the heart of the trend towards seamless payments that are built into a customer’s daily routine. Today, typical examples are the buy buttons on Instagram or Pinterest. But tomorrow, it could be shopping through automatic speech recognition (ASR) or even virtual reality. Whatever commerce solutions may be forthcoming, speed will be king and there is a demand on businesses to decrease the cycle time between engagement and purchase in a bid to maintain a competitive advantage.

Historically, with every gold rush there are unseen consequences, and as a result of contextual commerce, customers don’t always remember what service they had subscribed to or the products they bought. Initiating a chargeback is a simple way to “roll back time” and obtain a refund without engaging with the merchant.

What does this mean for digital goods?

What makes digital goods fraud different from other card-not-present (CNP) fraud is that in the case of the former, it is more difficult to discover the identity of the customer. Because purchasing is faster, and even lacking in visibility, it is easier and more tempting to make fraudulent purchases.

Unfortunately for merchants, when you combine the complexity of chargebacks specific to digital goods with the various methods of payment, it’s difficult to find and assemble the appropriate documentation to respond with a successful representment of the disputed transaction. It has got to the point that merchants often have to rely on tenuous identifiers, such as email and IP addresses, to establish that the customer in the disputed transaction is the one linked to the card account - and not a 10-year-old buying a video game.

Added to the fact that merchants often face the blame for problematic transactions, the consequential brand damage can be terminal for the merchant and their relationship with the customer. Cited in the Javelin report commissioned by Verifi, up to 63% of consumers decrease or stop their patronage following a negative chargeback experience with the associated merchant.

The easy solution might be to just accept the chargeback, but at what cost for the merchant? A complete solution geared towards protecting digital goods purchases may be a long way off, but merchants and issuers can work together to bring down the rate of chargebacks. Building multiple checkout stages online to avoid the risk of genuine errors; creating multi-layered fraud screening filters that protect digital payments from end-to-end without stopping legitimate sales; requesting account registration; using chargeback alerts; and, finally, standardising and upholding customer service policies, are all steps that merchants and issuers can take to help tackle the challenge of chargebacks from digital goods.

About Gabe McGloin

Gabe is the Head of International Sales and Merchant Development for Verifi. He has an 18-year career in global ecommerce with key roles in Merchant, Payment Services/eWallet and Acquiring/Processing organisations. He has extensive experience in building and leading business support and subject matter expert teams, developing relationships with external stakeholders, and managing top revenue clients.

About Verifi

Verifi is the leading provider of merchant-issuer collaboration and dispute management services. Verifi’s innovative Order Insight and CDRN solutions leverage our proprietary global network of issuing banks and merchants to resolve billing disputes in near real-time. Combined with Verifis industry leading Chargeback Representment – Self-Service and Managed Service – our comprehensive platform of products services provide our clients the most effective dispute prevention and management solutions available. Verifi supports 27,000 merchant accounts globally and maintains offices in Los Angeles, San Diego, Las Vegas, and London.