The discipline of fraud prevention has changed dramatically over the past five years and continues to evolve rapidly. Consequently, former truths about fraud prevention are increasingly becoming outdated myths. In this series of posts, we’re tackling the four most widely circulated myths. Check out the other three parts on fraud insurance, reason codes, and manual overviews.
In this post, we’ll tackle the myth that you should focus on chargeback guarantees, not approval guarantees. That’s a convenient myth for chargeback guarantee companies to anchor on, but you should insist that your vendor guarantee both chargeback rate AND approval rate. Here are four reasons why dispelling the myth matters.
Guarantees and chargebacks are countervailing forces — you need balance
Recently, another vendor in our market wrote, “Certain vendors are promising to consistently deliver an agreed-upon approval rate. However, if you do not have insight into how a provider delivers those approval rates — are they simply taking the hit of greater chargebacks to win your business? Then you have no assurance they are making good decisions.”
That struck us as both ironic and uninformed, since the same could be said in reverse. If your vendor only promises an agreed-upon chargeback rate, couldn’t they be declining risky transactions for which they are liable? Aren’t they then making decisions that are not in your business’ best interest?
Chargebacks and approvals are like the dark and light sides of the force in Star Wars — only in this case, we don’t need Yoda to confirm that balance is required. If a vendor only guarantees chargeback rate, they’re likely declining too many transactions; if they only guarantee approval rate, they’re probably approving more transactions than is optimal. The bottom line is that your vendor must be able to guarantee BOTH rates.
And there should be real consequences for performance misses. Most vendors have clauses that allow them to credit next month’s bill when they fall short of their guarantees, but they keep you locked in your contract. Vendors with confidence in their guarantees will allow you to cancel the contract — they’ll put more on the line.
Focusing only on chargeback rate puts your customer experience at risk
Per the above, when your vendor provides only a chargeback guarantee, their incentive is to decline borderline transactions and reduce liability. Unfortunately, this results in a high rate of false declines — good customer transactions are rejected. In our research, we found that for every dollar lost to fraud, merchants lose almost thirty dollars to false declines — we see this as the invisible cost of the chargeback guarantee.
Moreover, as noted above, a chargeback guarantee is not a very good business model. And so, these vendors often have a policy of fighting every chargeback. Our data shows that about 45% of all chargebacks are good customers making bad decisions. And your vendor will fight them with few channels for communication or recourse. That’s a primary reason you see a lot of negative comments about certain vendors in public forums — you’re putting your customer experience in their hands, and your incentives are not aligned.
Approval rate enables expansion into new markets
When you focus only on chargeback rate, entering new markets is far more challenging. An incumbent vendor will be stringent in applying rules and reviews to limit their exposure. Thus, new customers are five to seven times more likely to have their transaction rejected than existing customers.
Instead of capturing more lifetime value, you’re shedding those customers to competitors — our research shows that 40% of new customers that have transactions rejected will never shop with you again. That’s where Forter’s Trust Platform can help reduce false declines and chargebacks by up to 90%, approving transactions and improving the customer experience.
As you consider expanding your reach to new demographics, geographies, and more, the ideal would be to tap into a network that already knows the vast majority of customers in a market. Rather than rely on rules, you can rely on real experiences. If a vendor can tell you that there is a 96% chance that they have seen any identity that intends to buy from you in a given market … well, you can understand how they can guarantee both chargeback and approval rates.
Approval rate transforms the impact of the Fraud team
This has been the recurring thread across this four-part series. Vendors that lead with chargeback guarantees keep the Fraud team in their current lane. After all, there’s no doubt that the Fraud team owns chargeback rate.
But what if the Fraud team could materially move the needle on approval rate? That includes optimizing the use of Secure Consumer Authentication to drive fewer failures and abandons and increase conversions. It means improving bank authorization rates to complete more transactions. In our experience, Fraud teams that focus on these changes deliver tens of millions (even hundreds of millions) of incremental revenue to their business. Those teams get noticed, they get resourced, and they get promoted.
Some vendors lead with chargeback guarantees because they do not have the ability to guarantee approval rate. In doing so, they’re keeping the Fraud team in their current lane. Driving down chargeback rates is critical, but driving up approval rates simultaneously is transformational. We work with fraud leaders committed to breaking out of their lane to have a more significant impact on their business.