Imagine losing billions in e-commerce revenue because consumers are taught learn how to game the chargeback system. That is the tough reality facing digital marketplaces like Uber, Airbnb, Turo, and Etsy as they grapple with an escalating wave of fraudulent chargebacks.
The worldwide online marketplace sector is projected to succeed in a gross merchandise value (GMV) of $3.832 trillion by the tip of 2024, reflecting 10% growth from the previous 12 months.
This rapid expansion brings opportunities and a rise in chargeback claims. As these marketplaces evolve into more complex ecosystems, they need to navigate the intricate landscape of chargeback disputes, balancing their roles as connectors between consumers and merchants.
Chargebacks occur when consumers dispute transactions, resulting in payment reversals that cause the merchant to lose funds for the products or services provided. While the chargeback process is meant as a consumer protection mechanism, it is commonly exploited.
Friendly fraud is a selected kind of chargeback fraud wherein consumers dispute legitimate charges, claiming they never made the acquisition or didn’t receive the products or services. This kind of fraud is especially difficult for marketplaces because, often, the marketplace just isn’t the entity that gives the products or services.
Social Media Fuels Friendly Fraud
A troubling and expanding trend amplifies this challenge: the proliferation of social media videos that teach consumers learn how to dispute credit charges, resulting in a big rise in friendly fraud. These videos fuel a surge in illegitimate chargeback claims, impacting various industries, including digital marketplaces.
To combat this growing threat, marketplaces must transcend merely responding to claims. AI-powered solutions help marketplaces gather the strongest evidence to get well lost revenue from fraudulent disputes by tailoring each chargeback response at scale and using machine learning to optimize and improve the outcomes over time.
AI can discover patterns that indicate opportunities for improving operational processes. By adopting these solutions, marketplaces can comply with card network regulations, distinguish between legitimate chargebacks and friendly fraud, and create a safer, efficient, and user-friendly environment.
Marketplaces and First-Party Fraud Risks
First-party misuse, or “friendly fraud,” is a growing concern for digital marketplaces. Unlike traditional merchants who’ve direct control over their transactions and customer interactions, marketplaces operate as intermediaries, connecting buyers with multiple independent sellers. This unique position makes them particularly vulnerable to first-party misuse.
In a direct merchant-to-customer scenario, the merchant manages all facets of the transaction, from the initial sale to customer support, with direct access to buy records, communication logs, and the standard of products or services provided.
Nonetheless, this process is more complex for marketplaces. They need to depend on data from potentially 1000’s of sellers, often scattered across various systems and databases, making it difficult to collect the needed evidence to contest chargebacks effectively.
Marketplaces must also manage the trust and integrity of their entire platform, balancing the interests of each buyers and sellers.
When a buyer engages in first-party misuse — corresponding to falsely claiming that an item was never received or was not as described — the marketplace is left in a difficult position. They risk financial losses from the chargeback itself, and in the event that they pass the chargeback on to sellers, there may be potential reputational damage if sellers feel inadequately protected or supported.
Marketplace as Merchant of Record
Chargebacks present heightened risks to marketplaces once they assume the role of “merchant of record.” On this capability, marketplaces will not be only liable for processing payments and managing customer disputes but in addition bear the complete financial impact of chargebacks.
Moreover, repeated chargebacks can severely damage a marketplace’s status, eroding trust with consumers, sellers, and card processing firms. To effectively mitigate these risks, it’s crucial for marketplaces to implement AI-driven measures.
An answer that utilizes AI properly can play a critical role in streamlining dispute management and enhancing win rates at scale, ensuring that marketplaces get well more to their bottom line and their status stays in good standing in an increasingly competitive environment.
Transparent and fair refund policies are essential, as they reduce customer dissatisfaction and preempt chargeback disputes. Providing excellent customer support, including quick access to resolution channels, ensures that issues are addressed promptly, potentially stopping disputes from escalating to chargebacks.
Simplifying and clarifying end-user flows — corresponding to checkout processes and post-purchase communications — may significantly decrease the likelihood of chargebacks.
Accurate transaction descriptors, which appear on customers’ bank card statements, are crucial. Using dynamic descriptors that include the merchant’s and the marketplace’s names can reduce customer confusion and reduce the probabilities of accidental chargebacks as a consequence of unrecognized transactions.
AI for Efficient Chargeback Management at Scale
In digital marketplaces, where data is commonly dispersed across multiple vendor systems, AI is an indispensable tool for consolidating and analyzing this information. AI functions as an intelligent organizer, synthesizing scattered data right into a cohesive, actionable framework that streamlines chargeback management and fortifies defenses against payment disputes.
By analyzing data from chargeback claims — especially when categorized by specific reason codes or customer complaints — AI can discover patterns that reveal systemic issues or areas for improvement on the platform. For instance, frequent chargebacks tied to a specific service aspect may highlight flaws within the end-user experience or transaction process, which, once corrected, can significantly reduce future chargebacks.
Unlike traditional, static template-based manual or automated systems, AI adapts chargeback mitigation strategies by considering various aspects corresponding to market trends, issuer types, and product categories. This level of detail enhances each response while reducing manual efforts.
As AI learns from each chargeback case, refining its approach based on the outcomes, it becomes increasingly effective. The more data AI processes, the higher it becomes at distinguishing between winning and losing cases. Over time, this results in continuous improvement in win and recovery rates, making AI a progressively more powerful tool for mitigating chargebacks.
Constructing Trust With AI-Driven Chargeback Defense
As digital marketplaces expand, managing trust and transactions becomes increasingly complex. Given their role as intermediaries, AI-driven chargeback solutions are essential. These tools help marketplaces consolidate and analyze vast amounts of knowledge, streamline dispute management, and improve win rates, especially once they serve because the “merchant of record.”
AI’s ability to detect patterns and reply to chargebacks at scale is crucial in protecting marketplaces’ reputations and financial stability.
In a competitive landscape where trust is paramount, leveraging advanced AI solutions allows marketplaces to safeguard their platforms, ensuring they continue to be secure, efficient, and user-friendly. By doing so, they protect their bottom line and foster lasting trust with consumers and sellers, setting the stage for continued success.
