Enhancing the consumer experience has long been touted as the path to eCommerce growth. So much so that many non-fintech companies turned to embedded banking solutions. Embedded banking solutions are tools provided through convenient apps and application programming interfaces. With embedded banking, customers can avail themselves of reloadable debit cards, credit cards linked to rewards, and buy-now-pay-later (BNPL) financing, all while checking out on their favorite eRetailing site.
Particularly while the economy was relatively buoyant, and even during the early COVID years, embedded banking and finance was a proactive strategy to claim customer loyalty and add multiple revenue streams. And it worked.
But times have changed, and a more defensive stance is needed as merchants are fighting an insidious threat that could hemorrhage any gains these solutions have provided—chargebacks and the associated fees.
The consumer landscape is rockier. It’s one where supply chain woes and soaring inflation are causing delayed deliveries, stock-outs, and high prices. Embedded banking services are unlikely to stymie consumer frustrations and their increasing use of bank-facilitated dispute resolution.
This article looks at the problem of chargebacks, why it is a growing one, and how new solutions from two finance steamrollers, Visa and Mastercard, are helping merchants retain their hard-earned profits and look again toward long-term growth.
A Growth Strategy That Worked
In relatively stable economic times, increasing revenue streams is a sensible strategy for growth. For a while there, non-financial online retailers were increasingly subscribing to embedded banking to complement a streamlined customer experience and boost loyalty.
Embedded banking is a form of banking as a service (BaaS), where non-financial online companies offer customers convenient services on their platforms through an application programming interface (API). These services include branded reloadable debit cards, credit cards linked to rewards programs, bank accounts, and financing. These services even stretch to insurance. Tesla offers car insurance direct to buyers, and Home Depot insures lawnmowers, refrigerators, washers, and driers. Customers love the convenience of having all their needs taken care of in one place or on one platform.
According to Statista, venture capitalists went mad over the embedded banking concept with worldwide VC investments reaching almost 4.2 billion U.S. dollars as of September 2021, double the investment value during the whole previous year. Retailers too jumped on the bandwagon with 55% of non-financial businesses stating that they would offer digital banking and financial services within the next two years.
This type of response to a new eCommerce trend leaves little doubt that new digital embedded banking solutions are shaping the consumer experience for the future. But while companies are focusing on how to capture additional revenues, it’s of little use if they don’t also find ways to retain them.
Changing Times for eCommerce
Even with the best products and the utmost in customer service, chargebacks are inevitable for the merchant that accepts credit cards. Most providers accept them as part and parcel of doing business, but recent economic times have shown a dramatic increase in chargebacks.
Just as consumers were enjoying all the benefits of online ordering, one-day delivery, and BNPL financing programs, the pandemic hit. During the pandemic, however, many online retailers actually saw their profits soar as customers were forced to stay home, and brick-and-mortar retailers were forced to close their doors and, in many cases, fire their staff.
But the fallout from the pandemic two years later has left the supply chain in a weakened state. The “great resignation” has left suppliers and transportation companies desperate for workers and unable to fulfill orders and meet demand. China, the biggest exporter to the United States, is experiencing shutdowns in its cities as COVID is belatedly blazing its way through the population. And geo-political crises, the Russia-Ukraine war for example, are further impeding global trade routes and supplies.
For merchants, the result is unhappy customers who love their branded credit cards but hate stock-outs, shipping delays, and the high prices caused by inflation.
Based on a study by Juniper Research, eCommerce merchants’ estimated losses in 2020 due to chargebacks were $17.5 billion. For 2021, they are expected to rise to over $20 billion, up by 18% in one year. And, according to Juniper, fraudsters are exposing merchants “who are unfamiliar and unprepared for the continuing fraud challenges in this market.”
Let’s become a bit more familiar with those fraudsters.
Why the Banks Win
Disputing a charge is getting easier to do, whether it is an honest action or not. Chargeback fraud, or friendly fraud, occurs when a consumer knowingly disputes a valid transaction with their bank rather than contacting the merchant directly.
There are many reasons a consumer might commit friendly fraud. It’s not that consumers are suddenly becoming criminals, but they are becoming increasingly frustrated with delivery delays, and economic pressures are affecting their pocketbooks due to rapid inflation.
Let’s say a provider tells them a product delivery will be delayed. A customer might order from another provider who can deliver the item in less time and then try to cancel the original order. Or they might claim that a product did not arrive or was defective. In some cases, another family member might place an order that the cardholder is unaware of, leading them to dispute the charge.
It used to be that consumers would contact the merchant directly if there was a problem with an order, but banks have made it easier for buyers to dispute a charge. Most banks don’t even require a reason for the dispute because they have no way of verifying it anyway. And with so many players involved in a dispute, it’s difficult to sort out the truth. If a merchant does not want to tarnish their reputation by challenging the customer, they must accept the chargeback and fees. Meanwhile, the customer is let off the hook, and the bank wins.
A Better Growth Strategy for Merchants—Chargeback Management
There are a number of mechanisms merchants can use to avoid chargebacks and the associated fees. To start with, they can build a stronger consumer relationship.
Frequent contact with customers will encourage customers to come to the merchant first before initiating a dispute with the bank. Responsive customer relationship management that includes chatbots, regular emails about discounts and deals, and clear billing statements can build trust between the merchant and the consumer so that the customer is more likely to deal directly with the eCommerce site.
Managing social media with timely response to consumer reviews, offering no-hassle returns with prepaid return labels, making it easy for customers to cancel subscriptions and recurring billing contracts will all earn customer goodwill.
Great customer relations will go a long way, but these strategies will not change the underlying cause of increasing chargebacks, which is the mindset of the consumer in an economy that is coping with tremendous challenges. Until the tide changes, there are defensive strategies to use in the meantime.
Leave the Chargebacks to Visa and Mastercard and Then Focus on Growth
A top-notch customer experience is critical for customer loyalty, and securing multiple revenue streams through digital solution like embedded banking is a low-cost strategy that is paying off for many merchants. However, faced with the likely prospect of continued increases in chargebacks and fees, a low-cost digital solution that can stem the flow of lost revenues is a better first step for future growth.
Two new solutions that are making a difference for merchants are Verifi by Visa and Ethoca by Mastercard. These solutions alert merchants of potential disputes before the chargeback process is initiated. Once alerted, merchants can reach out to customers and refund disputed transactions and avoid costly chargebacks.
If the merchant decides to refund the customer, Verifi or Ethoca will automatically perform the refund based on the rules set up by the merchant. There is a fee for each alert, but the fee is much lower than a chargeback fee, and merchants does not have to lose money on shipping because they can stop an order before it is fulfilled.
Ethoca and Verifi —Tourniquets for Chargebacks
Investment in growth strategies like embedded banking and finance are effective when the economy is buoyant and consumers have money to spend. But when not, merchants should take a close look at where their systems and processes are bleeding and take quick action to stem the flow.
To find out more about how Ethoca or Verifi can reduce your revenue loss by managing chargebacks, partner with Cartis Payments. Cartis is a merchant services provider of streamlined digital payment gateways, fraud protection, and chargeback prevention tools.