The Debate About In-House, Outsourced, Automated Chargeback Management

Note: In the inaugural edition of this series, we addressed the question, “What Is Chargeback Management, and Why Do You Need It? Stay tuned for the concluding post: How to Choose the Right Chargeback Solution.”

Go back in time for a few moments. You can go as far back as the 1300s. Think of a commercial transaction. We can examine a case study of a woman exchanging her chicken for Silver pennies. The woman selling the chicken has extensive information about chickens, or at least that very chicken. Therefore, she could easily take advantage of the buyer. Right?

That’s what we call information asymmetry. That’s why the phrase “Caveat Emptor; Buyers Beware” was encoded in most commercial laws. It serves as a crucial warning to reduce post-purchase disputes.

Now, I want you to weave your way through the timelines of history to modern-day eCommerce. Specifically, I want you to observe online commerce trends and consumer behavior since the dawn of Social Media. Everything has changed! We now live in a world of Caveat Venditor; Sellers Beware.

Today, buyers have significantly more information than sellers. They can also effectively bypass merchants and undo transactions through their banks with chargebacks. And so, sellers, not buyers, must take precautionary measures to limit exposure. Hence, the debate about In-house, Outsourced, or Automated chargeback management is quite essential. The sustainability of your business in these times largely depends on your choice of how to track, prevent, and respond to chargebacks.

Overview of Chargeback Management Strategies

In the first installment of this series, we defined chargeback management as systematic measures a business puts in place to prevent, track, examine, and resolve chargeback requests from a buyer’s card issuer or financial institution. The three primary tactics businesses use to actualize that objective are:

1. In-house chargeback management
2. Outsourced chargeback management
3. Automated chargeback management

Each of these chargeback management strategies has notable merits. But you’ve got to understand their shortcomings also. Knowing the ups and downs of each approach helps you make informed decisions. Let’s examine them in full detail.

In-house Chargeback Management

In-house chargeback management can be loosely defined as hiring Customer Experience (CX) personnel or team and fraud experts to handle chargeback-related issues. In this approach, your internal operations team (often CX, finance, or dedicated fraud experts) handles the entire chargeback mitigation/mediation process.

Advantages of In-house Chargeback Management

1. Control over the process. With more control over the process, you can switch chargeback dispute gears as needed. For example, you can decide to dispute specific dollar amounts or tailor your approach to the needs of your business and customers.
2. Flexibility in resource allocation. Since you can determine whether or not to pursue a case, in-house chargeback management can be more cost-effective in the long run than outsourcing chargeback management.
3. Direct communication with customers. In-house teams can directly communicate with customers, providing pathways to gathering additional information, addressing concerns, and resolving cases without involving external parties.
4. Domain expertise. Internal teams have an accurate understanding of the company’s products, services, and business operations, which can be beneficial in presenting a solid argument during chargeback disputes.

Disadvantages of In-house Chargeback Management

1. Resource intensive. Compared to chargeback automation, in-house chargeback management is significantly resource intensive, requiring dedicated staff, time, and expertise to effectively handle and resolve disputes profitably.
2. Training requirements. Staff members involved in chargeback management must be well-trained to navigate the complexities of the continually changing chargeback rules, regulations, and dispute processes.
3. Limited scalability. Businesses experiencing rapid transaction growth must hire additional internal team members to meet associated workloads.
4. Notably lower win rates. Biases, subjective decisioning, and limited data access often result in disappointingly lower dispute win rates for internal teams.

Outsourced Chargeback Management

Outsourced chargeback management is when you employ a specialist firm or third-party vendors to handle chargeback prevention and representment, allowing your business to focus on other areas of operations. The thinking on this tactic is that since the external service provider specializes in chargeback resolution, they will have the necessary expertise, tools, and resources to navigate the complex chargeback procedures. But do they? Here’s what you should know regarding merits and demerits:

Advantages of Outsourced Chargeback Management

1. ​​Better results than internal teams. Outsourcing chargebacks are more effective than internal mitigation approaches due to the high expertise of third-party vendors. Some vendors also have access to industry best practices and technologies to manage the process efficiently.
2. Relatively scalable. External chargeback management teams can handle many chargebacks simultaneously, making them a decent option for businesses with high transaction volumes.
3. Relative cost-effectiveness. Outsourcing chargeback management is more cost-effective than building full-fledged in-house solutions from the ground up. You don't have to invest in staff, technology, and training.
4. Time-saving. With a third-party vendor handling your disputes, you free up time to focus on other areas of their operations, such as marketing and sales.
5. Access to technology. Some external vendors also have technology tools that help through the dispute process, which may be cost-prohibitive for smaller businesses to implement independently.

Disadvantages of Outsourced Chargeback Management

1. Less control and process oversight. With third-party vendors making decisions on cases and strategies, you give up control over the operation of the chargeback disputes.
2. Compliance risk. If the vendor has compliance issues, the potential legal and financial consequences will accrue to you.
3. Communication challenges. Different time zones or unique communication preferences of the external vendor may pose challenges in meeting time limits and effectively managing chargebacks.
4. Cost intensive. The opportunity cost of hiring a specialist vendor or onboarding technologies that cannot grow with rising transaction volumes leads to a negative return on investment, draining your resources.
5. Dependency on third-party performance. The effectiveness of outsourced chargeback management is contingent on the performance and reliability of the third-party service provider, and any shortcomings may impact the merchant's reputation.

Automated Chargeback Management

Automated chargeback management is a more modern approach to dispute mitigation. For this approach, you integrate a software solution, like Chargeflow, designed to learn your business process, understand buyers’ journey, and act as an enhanced second brain in managing and responding to cases. Chargeback automation improves management procedures. It automates duties, including chargeback alerts, tracking, evidence collection, and dispute response.

It also helps reduce chargeback issuance. You can close loopholes, enhance customer relationships, and improve chargeback rates by identifying chargeback patterns and trends.

Yet, it’s vital to note that all chargeback automation solutions are not built the same. Choosing the right option for your business model makes all the difference.

Types of Automated Chargeback Management:

a) Fully automated chargeback solution

This is a hands-off solution where you onboard a SaaS product like Chargeflow. By analyzing millions of chargebacks and using proprietary algorithms, the system determines, with high accuracy, the chances of recovering each chargeback. It also files the dispute on your behalf.

The system automatically alerts you when a cardholder initiates a chargeback, categorizes chargeback reasons, and generates data-driven responses to challenge the chargeback.

Advantages of Fully Automated Chargeback Management

1. Optimum operational efficiency. The system automates time-consuming and manual chargeback tasks, such as notifications, tracking, and responses, helping you regain time to focus on building your business. You also have data to streamline operations and plan revenue.
2. Cost-effectiveness. Automating chargeback management processes reduces chargeback-associated costs like chargeback fees, lost revenue, and administrative expenses. And you save money as well since you only pay for cases won, not by contract.
3. Comprehensive risk mitigation. Chargeback automation gives you robust data to pinpoint loopholes, identify dispute trends and risk centers, and proactively manage cases to minimize the risk of future disputes.
4. Enhanced return on investment. By generating the most formidable representment case, automated chargeback management solutions give you quick and accurate tools to increase your win rate, fend off criminals, and retain legitimate customers.
5. Ease of doing business. By winning disputes on autopilot, you keep your brand reputation intact, have better relationships with your stakeholders, and plug sales cannibalization gaps. Chargeflow offers real-time chargeback alerts to help you circumvent disputes before they happen.

Disadvantages of Fully Automated Chargeback Management

1. Reliance on technology. Automated chargeback management solutions rely on technology, and if you onboard the wrong solution and the software malfunctions, it may lead to missed chargebacks or inaccurate data.
2. False positive. Depending on the solution you onboard, the system could flag legitimate transactions as chargebacks, unnecessarily initiating disputes. That can lead to increased workload and costs for businesses.

   b) Hybrid automated chargeback solution

A hybrid automated chargeback management solution is when a team complements technology-enabled third-party chargeback services with in-house dispute remediation efforts. In most cases, the team selects transactions and chargebacks to dispute while relying on the full-service contractor for the actual disputes. While this can seem like a perfect blend of control and expertise, you should weigh the trade-offs critically.

Advantages of Hybrid Automated Chargeback Management

1. Oversight and control. You could reduce your costs by choosing specific cases to pursue without losing the privilege of technical know-how and maintaining greater oversight.
2. Risk mitigation. Diversifying chargeback management methods helps prevent tunnel vision or a single process dependency risk.
3. Strategic focus. With a hybrid approach, businesses can focus on their core competencies while leveraging external expertise for specialized tasks.

Disadvantages of Hybrid Automated Chargeback Management

1. Implementation cost. You might need to onboard multiple programs from service providers, giving your team additional bills to pay.
2. Training and requirements. Using the hybrid option means working with more agencies, and managing and coordinating those with partner programs can be difficult.
3. Unreliable results. Some chargeback management agencies use offshore unskilled or semi-skilled labor, which often compromises efficiency and turn-around time and negatively impacts win rates.
4. Resource allocation. Determining optimal resource allocation between in-house and outsourced vendors can be challenging.
5. Unpredictable win rates. Compared to a fully automated chargeback solution, where you’re sure of considerably high win rates and control over the entire process, you will lose the case if your external provider faces issues or fails to meet expectations.

So there you have it. The ROI of your preferred option depends on how effectively your chargeback management strategy meets the demands of dispute stakeholders.

Industry Perspectives and Case Studies

We’ve seen a meteoric rise in chargeback volumes over the past three years. A recent publication by Mastercard estimates by 2026, global chargeback transaction volumes will reach 337 million, a 42% increase from 2023 levels. The rising chargeback cases only mean one thing: more downstream costs for businesses. These fees and operational expenses hurt your balance sheet significantly.

For example, Maverick Drone Systems recently lost over $100,000 to chargebacks. Although the Minnesota-based B2B high-tech dealer has a solid reputation in the industry, such high-profile disputes mean deeper scrutiny and fines from banks. Maverick recognized they needed a tool to identify the underlying causes of the disputes to prevent future cases.

Enters Chargeflow. Upon examining historical chargeback data and patterns, it became evident their refund policy was the primary contributor to chargeback cases. In response, Chargeflow optimized the process by establishing clear sales-final points and other policies issued to customers. Chargeflow further helped the team recover ~90% of the disputed revenue within four months! But more than revenue recovery, Maverick has recovered its relationship with the card network and banks. You can also read more on how Wordtune increased their chargeback win rates by 4.3x, even as their chargeback volume grew by 3x.

Conclusion

There’s no gainsaying the fact that you need definite tools and strategies to prevent chargebacks and recover lost revenue when they happen – without screwing your relationship with existing customers.

Unfortunately, the sheer number of chargeback management options in the market today makes deciding a path daunting. Choosing the wrong chargeback management system means you’ll forever be pissing off your hard-earned money against the dispute mediation wall. Not to mention the constant hit on your operations budget due to excessive fees.

Pay attention to the pros and cons discussed above. At the very least, whatever strategy you choose must provide ease of activation, cost-effectiveness, guaranteed dispute win rate increase, seamless integration with existing systems, and compliance with the payment industry regulations.

Learn how to recover chargebacks on autopilot.