To many, the concept of managing chargebacks and fraud loss appears to be simple. Merely manage the dollars processed in conjunction with the chargebacks in a given month and make sure the ratio remains in the “safe zone.” However, managing fraud risk is not that simple. One of the main reasons for this complexity is what Frank Hagar of Slim-CD calls the “wave of destruction.” Frank reminded me the other day of how one month’s chargebacks come in over a 180 day period. This lengthy chargeback period, coupled with the fact that merchants often ramp up on volume quickly over a few months, makes it difficult for acquirers to see the flags early. This wave can be like a tsunami for an acquirer that can not see the signs early on.
    Take for example a merchant that sells a $50 product and slowly ramps up from processing $10,000 in month one to a level of $1 million in month three. Five percent of all transactions result in chargebacks and the chargebacks are submitted in the following order: 10% month one, 50% month two, and 40% month three. In this case, many acquirers would not even catch the merchant’s chargebacks until month four, and by then the merchant would have processed $2.1 million putting $105,500 at risk. See chart below.

    Catching runaway merchants is not easy, but systems and tools are available to help identify these waves sooner rather than later. The key to spotting this trend is to match chargeback and retrieval requests to transaction date. In the above example, if we saw that in month two, six chargebacks had been processed for transactions that took place in month one (3% at a $50 average ticket) we would notice the problem much earlier. In fact, catching this merchant in month two versus month four could save the acquirer $100,000 in potential losses. The savings could be even greater if the chargeback levels caused a merchant to go completely out of business resulting in nearly 100% of the processed volume to be reversed due to disgruntled consumers.
    The sooner acquirers can notice trends the better off they will be at managing fraud loss. One runaway merchant can destroy an entire organization. Good risk tools and highly experienced personnel are the only things that can help keep merchants in-check. These advanced risk systems are the science of risk mitigation and the experienced analysts and investigators are the art. Any acquirer moving into the liability space must look to make significant investments in both the science and the art or potentially risk their entire portfolio over a single merchant.

Greg Cohen is President of Moneris Solutions U.S., and manages all U.S. initiatives and operations for Moneris Solutions. Mr. Cohen can be contacted at 847-520-6559 or via email at greg.cohen@moneris.com.