Monica Eaton-Cardone is co-founder and COO of Chargebacks911, a chargebacks management software company. Views are the author's own.
It’s important to diagnose chargeback problems, identify sources and deploy solutions. Before you can do that, however, you need to have data about the disputes being filed against you.
There are many key performance indicators that can influence your strategy: order abandonment, refund requests, manual review rate, decline rate, false decline rate and overall fraud-to-transaction ratio.
However, there’s one KPI that stands out in terms of direct relevance to your chargeback strategy: net recovery rate.
Representment and chargeback win rates
Let’s say a customer purchases a product from you, but then files a chargeback, claiming to have never authorized the transaction. You have pretty airtight evidence suggesting the customer authorized the purchase, including multiple forms of identity verification. You even have evidence of the cardholder using the product based on their social media activity.
This is actually a pretty common occurrence; it’s a practice known as friendly fraud. There are many reasons why consumers engage in friendly fraud. Sometimes they simply forget about purchases, or don’t recognize charges when they turn up on their billing statement. In some cases, though, a buyer might abuse the chargeback process.
When friendly fraud happens, you can fight back through a process called representment. This allows you to “re-present” the transaction to the bank, along with supporting documents, to try to reverse the chargeback.
Your chargeback win rate measures how effective you are at recovering transactions through this process. As the name implies, your win rate takes the number of disputes you fight — and win — through representment, and compares it to the total number of chargebacks re-presented.
Win rate vs. net recovery rate
The 2021 Chargeback Field Report found that the average merchant has a chargeback win rate of 32%. In other words, the average merchant wins roughly one in three disputes that they fight through representment.
That’s not too bad; considering the amount of time, resources, and expertise that representment demands, a success rate of 32% is decent. When we compare that win rate to the average net recovery rate, though, the picture is less rosy.
Your chargeback win rate looks at successful representments as a portion of overall transactions represented. In contrast, your net recovery rate looks at successful representments as a portion of total chargebacks issued. This is calculated after accounting for second chargebacks and arbitration cases.
When we look at net recovery rate, the average figure drops to just 12%, according to the survey.
It’s important to distinguish between these two figures. Your win rate indicates your success at fighting chargebacks. Your net recovery rate, however, can help you figure out if you’re misidentifying chargebacks, and accepting losses that could be recovered.
Data from our company, Chargebacks911, suggests that roughly six in 10 chargebacks issued by 2023 will be cases of friendly fraud. What that suggests is that the majority of merchants are leaving money on the table by letting friendly fraud go unchallenged. However, this raises the question: why is the average merchant’s net recovery rate so low?
Generally, the reason is a combination of two problems: limited time and limited data access.
The timeframes available for representment can vary based on card brand and reason code. These timeframes will be based on the central site business date, or the date on which the cardholder submitted the dispute. In most cases, you’ll only have a few days to investigate the claim, gather evidence, prepare the right documentation and submit a response.
Representment is also time-consuming and requires careful oversight and specialized expertise. You can’t automate chargeback responses and expect to see much success. What’s more, you only have access to internal data; there’s no benchmark to compare it against, which would make it much easier to identify suspicious chargebacks.
None of this is to say representment is impossible, though. You can fight chargebacks more effectively and boost your net recovery rate by dedicating more resources to examining transaction data.
Even though your data insight is limited, you can look at historical transaction data to try to identify patterns associated with chargeback issuances. You can look at customer behavior leading up to the dispute, the claims made by customers and how banks respond.
Looking for historical patterns could help you fight chargebacks more effectively. It can give you the ability to fast-track processes and build more comprehensive and compelling cases. It might even help prevent some disputes that result from minor errors or oversights in your policies, procedures or fraud detection tactics.
Develop the right strategy
To be sure, tracking your win rate and net recovery rate will not guarantee success. No single KPI is going to guarantee profitability or business continuity. The factor that determines success is what you decide to do with the information as it relates to your operations.
You need to examine your chargeback win rate and net recovery rate, and see what insights you can gain from them. Every merchant’s circumstances is different, and solutions that work well for one business might not apply in your case.
But examining your net recovery rate as an important KPI can help you build a better strategy adapted to your unique needs. Ultimately, it can give you a more informed, useful understanding of the entire chargeback process.