Episode 150: Fraud and Chargeback Management with Christine Wade of Payment Operations Group, Mandi Grimm of Etix and Scott Adams of Fraud Deflect and CNPMentors

In a world of increasing digital transactions, understanding the intricacies of online fraud and chargebacks is crucial. On the latest episode of the “Subscription Fundamentals” series, hosts Nick Fredrick and Josh Mathers are joined by Christine Wade of Payment Operations Group, Mandi Grimm of Etix, and Scott Adams of Fraud Deflect and CNPMentors. Their conversation sheds light on the current trends and challenges in managing fraud and chargebacks, especially in the subscription business model.

Understanding the Landscape of Fraud

It’s agreed that there is an increasing trend of both 'true fraud' and 'friendly fraud' in the subscription space. Fraud can come in many guises, and Christine brings our attention to the prevalence of the use of bots — a consequence of the COVID-19 pandemic — where fraudsters use automated systems to rapidly test multiple credit card numbers. This is exacerbated by the influx of new online merchants unfamiliar with fraud detection. "There are just a lot of fraudsters out there right now," Christine notes, highlighting the challenges faced in identifying and mitigating these advanced types of fraudulent activities.

Mandi adds that 'friendly fraud' — where customers seek refunds after purchasing or attending events — is also on the rise. She explains, "We define it as the patron trying to get a refund after they purchased the tickets or even attended the event." This type of fraud is on the increase, particularly as consumers face changing financial circumstances brought on by economic downturns. 

Mitigating Fraud and Chargebacks

The conversation then shifts to a focus on strategies for mitigating the issues mentioned above. Christine recommends clear communication at the checkout stage, ensuring customers are aware of subscription details and future charges. 

To avoid chargebacks and negative experiences, Christine stresses the importance of not 'blindsiding' the consumer. Scott concurs, emphasizing the need for a systematic approach to aligning marketing messages with customer expectations. "Make sure that checkbox is not checked before they see it, and they have to affirmatively say, 'Yes, I want this'," Scott advises, suggesting practical ways to reduce chargebacks. He also underlines the importance of transparent communication throughout the customer journey to prevent misunderstandings leading to chargebacks. 

Mandi suggests merchants regularly verify their bank statements and merchant descriptors to ensure clarity and consistency. This can significantly reduce chargebacks due to unrecognized transactions.

Marketing Tactics and Fraud Prevention

When discussing marketing strategies, the panel acknowledges that certain practices could inadvertently lead to increased fraud. Christine describes instances of 'loyalty fraud' and 'coupon code fraud,' where customers exploit loopholes in marketing promotions. She advises collaboration between marketing, sales and fraud prevention teams to preemptively identify and close such loopholes.

Mandi then highlights another form of policy abuse, where marketing promotions, such as pre-sales and fan-club offers, lead to inventory management issues. This doesn't necessarily translate into chargebacks, but it can create problems in availability for the general public.

Christine emphasizes the importance of the role of technology in detecting fraudulent patterns, such as high-velocity transactions from a single IP address. "No human is going to run through 47 cards in one minute," she remarks, highlighting the clear red flags that can be identified through data analysis. Scott reinforces Christine’s point by suggesting the implementation of device fingerprinting technologies to better track and prevent bot activities.

Decoding Chargebacks

Chargebacks are a significant challenge in the subscription model and are thoroughly examined during the interview. Christine defines a chargeback as a notification from a cardholder’s bank disputing a transaction. This could be due to fraudulent use, dissatisfaction with services or a change in the consumer circumstances. Mandi describes how consumers often bypass the merchant, going directly to their bank with their dispute, therefore complicating the situation for merchants.

Handling Recurring Chargebacks

When dealing with recurring chargebacks, Scott advises merchants to observe patterns. He suggests looking at the timing of chargebacks relative to the billing cycle. He remarks, “Look for patterns in those things… if it's really early, maybe you did a free trial or a low-cost initial purchase. Did you communicate the price clearly?” Once again, Scott stresses the importance of communicating clearly with the customer at all times. 

Mandi discusses how Etix approaches chargebacks based on whether events associated with the subscription have already taken place, prioritizing customer experience to potentially win back customers in the future.

The Impact of Fraud and Chargebacks on Customer Relations

Understanding the reasons behind chargebacks is crucial, whether they stem from real fraud or customer dissatisfaction. Here is where Scott advocates for a balanced approach, to consider both the cost implications for the business as well as the customer experience. Mandi echoes this sentiment, describing how handling chargebacks effectively can lead to better customer relationships and potential future business.

Chargeback Programs and Their Implications

When discussing card brand chargeback programs, Christine describes the threshold-based mechanisms that classify merchants into various levels based on their chargeback-to-sales ratio. She describes these programs as a form of 'chargeback jail' for merchants exceeding certain limits. This discussion spotlights the importance of understanding the implications of these programs on business operations.

Scott explains how detailed responses can significantly impact how a merchant is perceived within the chargeback ecosystem, influencing the decision of acquirers and banks. This attention to detail demonstrates a commitment to addressing the issue and can be pivotal in preventing website shutdowns or fines. Christine adds that it often takes three months below the threshold to be considered out of ‘chargeback jail,’ emphasizing the need for consistent management.

Innovations in Fraud Prevention

Looking toward future trends and innovations, Scott points out that card brands are continuously developing new products. One such upcoming innovation is RDR decisions, which allows real-time decisions via API, potentially revolutionizing how chargebacks are handled. To stay ahead of the game, businesses need to remain adaptable and embrace new technologies in fraud prevention.

Mandi stresses the importance of collaboration among merchants. Networking and sharing experiences can provide invaluable insights into fraud trends and prevention strategies. This communal approach to problem-solving is increasingly important as fraudsters become more sophisticated. Christine echoes this sentiment, urging merchants to be proactive in analyzing transactions and spotting patterns early on. "Getting a fraud tool or getting a human in-house that knows how to read your data...is so important," she asserts.

Proactive and Reactive Measures

The final segment of the podcast focuses on both proactive and reactive measures in fraud and chargeback management. Christine stresses the importance of investigating the source of chargebacks and establishing internal monitoring processes. Scott recommends contacting consumers directly in case of suspicious transactions, as this often clarifies misunderstandings or confirms fraudulent activities. Mandi emphasizes the need for cross-departmental collaboration to ensure all aspects of the customer journey are fraud-proof.

This episode of the “Subscription Fundamentals” series with Christine Wade, Mandi Grimm, and Scott Adams provides a roadmap for navigating the complex world of online transactions, fraud and chargebacks. Their expertise highlights the need for an integrated approach that combines technological innovation, collaboration and diligent monitoring.

For those who are seeking to future-proof their businesses against fraud and chargebacks, these insights offer a valuable perspective on staying ahead in the digital marketplace.

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