How much do subscription services invest in chargeback protection and why do they need it?

People locked down at home have finally found time to take yoga classes, learn to cook, solve brain puzzles and subscribe to a variety of services. The COVID-19 pandemic has led to rapid growth in the subscriptions market with up to 74% increase in the number of purchases over 2019 – but the fraud and chargeback wave has followed.

There is a way to both decrease the chargeback losses and the expenses on fraud prevention tools

The numbers of fraudulent actions rose by 113% in 2020, as compared to 2019, and cost the businesses globally more than $42 billion, according to an Experian report. Based on a quarterly report on financial crime, there were 60% more fraudulent actions in 2020, and they were at least 5% more costly than average attempts back in 2019.

The legislators try to take action and stop the fraud – but as always, they do it all wrong. The Stop Scams UK group, a conglomerate of banks and telecom providers, demands that tech giants like Amazon, Google, and eBay take more severe measures to combat the fraud. The best solution they came up with so far is issuing large fines to technology providers who don’t delete illegal content immediately.

This is so 1995, eons behind the current situation, and sounds like suing the warehouse for keeping counterfeit goods, whose illegal nature can only be revealed once they are unpacked by the end customer. The obvious monetary ramifications left aside, these politicians and bankers try to punish the bat that struck them, instead of getting at the people who swing it.

What causes the volume of chargebacks to grow?

There are three components to the overall chargeback numbers:

• Fraudsters, who use friendly fraud, triangulation fraud, account takeover, and other schemes for illicit gain. They form the main source of fraudulent actions.
• Defrauded customers who want to get their money back start chargeback disputes.
• Some merchants suffering losses due to chargebacks also start doing merchant fraud to recuperate at least some of their expenses.

The main reason for this situation is the anonymity of the evildoers in digital fraud schemes, so culprits can perform fraudulent actions and remain undetected for long. Quite expectedly, the volume of fraudulent actions like account takeover grew 282% from Q2 2019 to Q2 2020, based on Sift findings.

Why is it so damaging for subscription services providers? Because, as you know, once the number of chargeback disputes on your payment processor account surpasses a certain threshold, Visa and Mastercard stop accepting payments to that account, effectively bankrupting your business. Such outcomes must be prevented at all costs.

This is why in the real world, every company small and large invests in fraud prevention and chargeback protection measures. However, approaches differ. While giants like Facebook develop internal anti-fraud projects and large enterprises like Equifax acquire anti-fraud platforms whole, most businesses prefer to subscribe to Software-as-a-Service (SaaS) chargeback protection solutions.

Spread of chargeback prevention costs

Let’s take a closer look at how much money you’d have to invest in chargeback protection and how to actually not overpay for it.

Businesses lose up to 5% of their income on chargebacks, 2-3% more on chargeback dispute processing fees, other 1-3% go to pay for the working hours of the employees involved with chargeback processing. As a result, chargebacks amount to 8-11% leaks in your bottom line.
This is the sad reality of our coronavirus times, but once the situation becomes dire and the merchants risk getting banned by the brands – they start looking for a solution.

There are three common approaches to ensuring chargeback protection for your company:

1. Subscribing to a specialised chargeback management SaaS like Chargebacks911 or Midigator. Yay, we’ve solved the problem… but wait, why do we still pay the same and even 1-2% more? Because now you have to pay for chargeback prevention services too!
2. Let’s build our own tool then, the one that will work! $100,000+ of wasted investment and a year later a business gets a product that does exactly the same as the aforementioned ones. Nothing. By the way, add around $10,000 a month in the expenses for supporting the product and paying the salaries to the staff that runs it, generously add a layer of reputational losses and closed banking accounts for that year, and you get the picture.
3. Let’s move away from Visa and Mastercard then! We will accept Bitcoin and other alternative payment methods, yes? Yes, but it will take you years to restructure your business model and go back to pre-COVID income levels. Is your business resilient enough?

What should one do then?

Subscribe to integral anti-fraud solutions that cover chargebacks as a part of a holistic fraud prevention strategy. Based on the API complexity and the integration fee, the initial investments can vary from $1000 to $10,000, but after that, the chargeback losses are usually diminished at least by 50%, and in some cases up to 80%.

Conclusions

As you can see, there are several unsatisfactory results stemming from the current situation:

• The shift to remote work and subscription-based services has resulted in soaring numbers of fraud and chargeback cases.
• Businesses cannot prevent the entirety of fraud and chargeback attempts, all they can hope for is to reduce their numbers.
• Specialised chargeback prevention solutions cost a hefty sum annually, forcing the companies to spend as much on chargeback prevention, as they would have paid through the disputes, or even more. According to the aforementioned FT report, NatWest Bank in the UK has to spend nearly as much on solving chargeback cases and compensating fraud victims as it spends on running its entire branch network.

However, every coin has two sides. There is a way to both decrease the chargeback losses and the expenses on fraud prevention tools. It can be done by deploying Covery – the end-to-end risk management, anti-fraud protection, and chargeback prevention platform. While enabling KYC checks, device fingerprinting, and chargeback resolution capabilities, Covery is much more affordable than specialised chargeback prevention tools.

This way, you will be able to do more with fewer resources and safeguard your revenues by preventing many chargeback attempts before they can affect your bottom line.

For more in-depth insights on the latest anti-fraud tech trends and innovations, join the Covery webinar on the 27th of May, where industry experts will discuss risk management and anti-fraud protection best practices in 2021.