VISA Chargebacks Breaks the Budget. Can You Solve the Problem Before the Board Meeting?

VISA Chargebacks Breaks the Budget. Story #1

Can You Solve the Problem Before the Board Meeting? (4-minute read)

In the second year of our ecommerce start up, all was great. Looked like we would break the $1 million sales barrier and the year would be profitable. Every employee across the company was smiling.

Then the beautiful wall came tumbling down and all hell broke loose. A hidden demon emerged and soon a huge conflict between the VP of Sales and our Controller erupted. The demon would drive our start-up into a desperate dilemma not only for the month but for the year and beyond.

I was sitting at my desk when Sally, the customer service clerk who daily reconciles credit card cash, came to me in tears. “VISA hit us with 10 chargebacks last night, totaling $30,125. It will break our budget”

Comforting her, my mind went to the meetings next week with our bank and our Private Equity partner. All the positive messages we had sent about sales and profits would be thrown to the wind. Sally was crying, and my stomach was in a knot. The positive month was turning into a disaster. I went to the phone, called VISA and studied the detailed reports to understand what happened. Yes, 10 fraudulent purchases had been identified and reversed by VISA. With the chargeback, we lost the cash from the sale and the product was stolen.

Then Joe, our Controller, told me what to do – it is easy, he said. “You can report the loss; it is just a routine accounting transaction”. 

 “NO NO” I said. Not only will we lose money but it destroys our business model and it will have a long-term serious impact on our enterprise value. These fraudulent orders will kill us. Sales growth must continue and the chargebacks must be controlled.  I must solve this so I can address the disastrous topic at the board meeting with our bank and Private Equity partner.

Sally was still crying when Joe, our Controller, said, we have to stop any and all of “those transactions” that might be fraudulent. Then Jen, VP of Sales, walked in and said If we cut off “those transitions” we will kill sales and never come close to our budget. She went on to say most of “those transactions” are gifts—at the heart of our holiday business.  Now we have a conflict and a pain and a problem. How do we find the truth and get clarity and achieve action to move forward? How would you become a HERO, and Increase the Enterprise Value eroded by these continuous fraudulent actions? 

You become the HERO by reaching beyond the tools of accounting and finance and focusing on the consumer behavior of the fraudulent buyers. The impactful step you can take is to use your consumer research team. Consumer researchers know customer behavior—they study both good stuff and bad stuff about customer behavior. I asked my Director of Customer Research to help and they went to work. They regularly work on products, packaging, advertising, pricing, and branding to positively impact sales growth. I figured you can use the same skills to understand and then avoid fraudulent behavior. This makes Joe, our Controller, happy and maintains good sales, making, Jen, the VP of Sales, happy.

The consumer research team analyzed over 250 transactions, both good and bad transactions, which appeared to have similar patterns and characteristics of the fraudulent transactions. They interviewed multiple customers, and they found behavior patterns. My goal was to move beyond the accounting rule, suggested by the Controller. His rule blocked all questionable transaction, thus totally avoiding any VISA chargebacks. My goal was to become the HERO controlling chargebacks, maintaining sales and increasing Enterprise Value.

The moral –

 Booking the loss using accounting rules does not make you a HERO.

Uncovering the behavior causing the fraud losses makes you a HERO and increases Enterprise Value.

Details: The patterns and ultimately the procedures coming from the consumer research are different for each company. You should use consumer research tools to understand fraudulent patterns and set up customer service procedures to maximize sales and to minimize fraud chargebacks. You must do the hard work to find the patterns. Just like consumer research identifies purchase decision patterns, consumer research will identify fraudulent patterns leading to preventive procedures. For my company, the fraud always was associated with the delivery address being different from the billing address. Once the difference in mailing and billing address is identified, we used a series of emails and phone calls to validate a successful transaction before the product was shipped.