How do Digital Goods Sellers Combat Fraudulent Chargebacks?

Identifying digital goods fraud is but half of the equation in the metaverse.

The real kicker is recovering digital goods chargebacks, as digital goods are prone to extreme friendly fraud - with monthly fraudulent transactions up by 37.1%, according to Digital Commerce 360.

Unless you’re an eCommerce veteran with battle-tested fraud mitigation strategies and a sizable team capable of working with all the intricacies of payment processing and chargeback mitigation, you will only be scratching the fringes with primary identifiers:

• Address Verification System occasionally verifies the buyer’s address, although sometimes hardcore criminals can outsmart the system.
• Ticket Amount Filter flags or holds orders of specific dollar values.
• Card Code Verification system makes unauthorized transactions technically tricky but not impossible.

You might also have more sophisticated tools like geo locational IP filters or language per device recognition. Granted, these protocols are an excellent starting point to combating digital goods frauds leading to chargebacks. The problem is, unless your business is so big that you have a dedicated fraud prevention unit and investment in software becomes cost-effective, there’s no way you can keep up.

Your job is to build the best company you can, not to combat, penalize or challenge frauds.

But not to worry. This post will give you easy-to-apply tips that will shift the odds in your favor. And ensure you can quickly prevent con artists from taking your lunch money while making it easy for real prospects to access your offerings.

How to fight digital goods frauds and chargebacks: 5 ideas and one guide

Before putting our magnifying glass to work excavating answers for the day's question, it’s crucial to observe how digital goods sellers differ from other eCommerce merchants regarding chargeback fraud.

For starters, the ancillary chargeback costs differ between digital and physical goods merchants. While both categories of vendors bear the brunt of lost revenue and other incidental chargeback costs, digital goods sellers have about 10x more chargeback exposure than physical goods sellers.

Further, a digital goods merchant’s most significant direct fraud cost is the chargeback fee ($15-30 of the transaction), with the impending threat of excessive penalties ($5000-$25,000) if their chargeback rate goes beyond 1% (see Visa excessive chargeback program details here). An enormous side effect of fraudulent digital transactions is that they later appear on secondary markets, cannibalizing sales and destroying merchant reputation.

With that in the note, let’s review how you can combat the cannibalization issue of digital goods chargebacks and protect your business effectively.

#1: Standardize and establish optimum customer service policies

Investing in customer service is crucial to make it easy for your customers to obtain remediation for any transaction issues. Whether hiring freelance or full-time staff or using customer engagement tools, there are many ways to keep in touch with your customers.

Tools like private messaging, consumer insights for new and returning buyers, or a customer directory can help you optimize communications and track potentially vital information.

#2: Keep proper documentation and records

Carefully document your digital goods transactions. Maintain copies of all customer correspondence and server logs that prove that they downloaded or used the digital goods they purchased.

What makes digital goods fraud unique from general card-not-present (CNP) fraud is that it's pretty challenging to track down the identity of digital goods fraudsters. Digital goods transactions are faster and often devoid of visibility, making it easy for scammers to make fraudulent purchases.

Now, combine digital goods-specific chargeback complexity with the plethora of payment options that help your customers conveniently access your goods. You have a nightmare scenario of assembling requisite chargeback representment documentation.

Establishing standards to ensure a seamless, organized back office is crucial.

#3: Work with payment providers with a well-defined process for dealing with chargebacks

Carefully scrutinize the fraud protection offered by any payment platform you are using.

Working with service providers that understand your business model ensures you don't end up in a sorry case due to excessive digital goods chargebacks.

According to Finance Online, their poll of ten notable payment service providers shows that 40% of those firms don’t mention chargebacks anywhere in their FAQs or service terms and conditions. The processes differ for service providers who care about helping merchants deal with chargebacks. The majority opt to manage disputes internally between a customer and a merchant.

Ideally, you should know what you're signing up for before onboarding a service provider.

#4: Make contextual commerce work for you with clear service terms

Tech Crunch recently announced that contextual commerce would be the game-changer for merchants. Merchants can seamlessly construct purchase opportunities into everyday activities and consumers' natural environments.

Customers can buy anything, anytime, anywhere, with the click of a button … or even their voice. It’s the concept behind the buy buttons rolling out on platforms like Instagram, WhatsApp, Pinterest, and Facebook.

Enlisting friend networks in your prospects' shopping experience is a new contextual commerce strategy that disrupts the traditional customer-merchant relationship.

Increasing the cycle time between engagement and purchase could help you prevent buyers from “rolling back time” and obtaining a refund without engaging with your business. Also, consider making your service terms crisp and clear to your prospects.

#5: Use chargeback alerts to stay up to date

One of the difficulties merchants face when mediating chargebacks is staying ahead of disputes. Several weeks or months may have passed before a merchant gets a chargeback notice. At that point, it’s too late to combat the fraud or resolve the dispute with the buyer: costs go through the roof, and the customer relationship is hampered.

But with chargeback alert services, your transaction data integrates into your merchant account. As soon as a customer files a dispute on any transaction, the system will notify you of such activity. With that, you have the opportunity to decide on whether to proceed with the transaction, offer a refund, or start gathering pieces of compelling evidence for representment.

Pre-empt digital goods chargeback losses with chargeback automation

To minimize chargeback costs directly, you must avoid fulfilling suspicious orders. And to achieve that at scale, you must be able to invest heavily into fraud-detection technology to gather as much information as possible on each transaction.

You can scrutinize the speed and behavior of prospects going through your order signup flow: did they enter the card number and address or copy/paste their details? Did they capitalize their name? Where are their IP address and billing address located? The more data you can excavate, the more you can pinpoint chargeback fraudsters.

The upside? You can block digital chargeback frauds before they happen.

Unfortunately, that's quite an expensive endeavor. And unless you're building your own infrastructure, which does not guarantee 100% protection, you might end up with a significant opportunity cost of lost sales. Again, as digital goods merchants have significantly less data than physical goods merchants (such as billing/shipping address distance), it’s harder to evaluate fraud probability with traditional technology.

Chargeback automation helps you level up. Several research studies show that brands using automated chargeback management outperform others that manage chargebacks manually. Aside from chargeback automation giving you an increase of 800 to 1,500% ROI, you also get other crucial benefits.

The merits of chargeback automation for digital goods sellers

Automating digital goods chargebacks gives you unmatched benefits, such as:

1. You can quickly pinpoint fraud and stop digital goods chargebacks before they happen.
2. You data enrichment and tools from over 50 data points to search out online shoplifters from legitimate buyers and beat them in their own game.
3. With Chargeflow's fully automated chargeback solution, you also increase your win rate (you can get up to 75% win rate and recover at least $35,022 of chargeback revenue) and save 150 business hours each month without lifting a finger.

In the final analysis, combating the growing digital goods chargebacks rate today require that you have a framework that taps into your prospects' buying pattern and account history details in real-time to offer economical and highly effective chargeback protection. That's why Chargeflow exists.