Security & Fraud

For Chargebacks, A 50 bp Rule Of Thumb

Chargebacks can sink profits and reputations — and more often than not they’re tied to fraud. Once they hit 50 bps of transactions, says a new eBook by Kount, it’s time to dig deeper. Here’s why ignorance about chargebacks is anything but corporate bliss

In eCommerce, chargebacks are the silent killer of revenues, profits and, possibly the most damaging over the long term, reputation. The firm that is beset by fraudulent transactions must scramble to undo damage, while the company that is ever vigilant about fraud screening has a number of weapons in the arsenal against cyber-chicanery.

In a recent eBook titled “What You Don’t Know About Chargebacks…Can Hurt You,” Kount, the eCommerce and fraud detection company, noted that fraud is the No. 1 reason behind chargebacks, driven by fraudulent transactions themselves, customers claiming fraud, and what is known as friendly fraud. The costs are staggering as fraud causes $100 billion in annual losses, and to put that in perspective, that tally is more than the GDP logged by more than 100 countries globally. 

Kount posited in its eBook that there are six warning signs of fraud, and also of ineffective screening for fraud.

1)      Chargeback rates: If the rate of chargebacks exceeds 50 basis points, it’s time to dig deeper. That rule of thumb – and it’s only a rule of thumb – may help uncover nefarious trends at work. That 50 bps threshold may not hold given a firm’s individual risk tolerance or vertical, or digital presence, cautioned Kount.

2)      High decline rates: Kount stated that most online businesses in the U.S. will in fact live with a decline rate of 2.8 percent of transactions, while fraud rates stand at about 1 percent.  Logic dictates, then, that a lot of perfectly good orders are getting tossed by the wayside, and profits are being missed in the interim.

3)      Manual reviews: If they exceed 10 percent of orders, then time and money are being misspent and it is also likely that recurring fraud is a root cause.

4)      Refund Rates: Should not be more than 1 percent, according to Kount, and also represent the lesser of two evils, as a refund may in fact be less than the fees and penalties tied to chargebacks yet nonetheless have a (negative) financial impact.

5)      Look to the Affiliates: A high turnover rate in the affiliate network dictates that there may be fraud at work, with criminal networks manipulating the system to generate fraudulent commissions.

6)      Though not necessarily fraudulent, shopping cart abandonment dictates that customers are impatient with the existing process – and if they see two charges on their statements, then the chargebacks are sure to follow.


Merchants typically don’t know they’ve been attacked until the attackers have been long gone. In fact a few months long gone, said Kount, with a long gestation of distorted numbers (and assumed profits) that in essence go down the rabbit hole and become transformed into losses and falling sales.

All is not lost, however, as Kount noted that there are five habits of successful fraud fighting:

1)      Dial in Profitable Chargeback Rates:  Kount noted that the “sweet spot” of a chargeback rate that is best suited to a firm is in fact an individual choice, and one that must take into account risk tolerance.

2)      Real-Time Data, an Invaluable Resource: Order processing is slow if third party providers are slow. Conversely, owning data and making decisions in milliseconds, said Kount, can make a world of difference in processing transactions correctly and directly.

3)      Integration between technology platforms and tools is essential for cross communication and thus, exponentially better protection against fraud.

4)      Fewer Rules, Better Rules: Many fraud prevention systems require 200 rules (or more) to function, while other systems, said Kount (noting its own 15 rule parameters), can be tailored to individual businesses.

5)      Machine learning and artificial intelligence can help delve into and detect fraud patterns, and in tandem with human oversight, only strengthens the fraud prevention programs in place at enterprises.


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The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.

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