Debt Collection for eCommerce Startups: The Definitive Guide

E-commerce

Transaction-based losses are a fact of life for many businesses,
because of chargebacks, unpaid bills, reversals, or unreturned
products. Unlike lending businesses who have to accept a large
percentage of losses as part of their business model, many startups
treat transaction losses as a nuisance that doesn’t require much
attention. This can lead to spikes in losses because of unchecked
customer behavior, and a backlog of losses that could be
significantly reduced with a few simple steps. In the following
guide we will review these losses, why they happen, and what can be
done to reduce them.

This guide will be particularly helpful if you are either a
marketplace dealing with chargebacks from consumers and vendors who
are technically liable but often can’t or won’t pay, a postpaid
service (advertising, SaaS, and others) unable to charge customers
that have no or an expired payment instrument on file, an eCommerce
and subscription company dealing with chargebacks and refund
requests or a money management and financial services experiencing
ACH returns and other missed payments.

Losses and Why They Happen

Successful businesses have many customers, and many repeat
customers. A great transactional business attracts a vast majority
of customers who buy, receive products and/or services and leave
happy. Yet, every business model is subject to some level of
losses. While a lot of it could be intentional, research shows that
a growing percent is not.

The dynamic of online purchases has changed completely in the
past decade. Buying online is now the norm. Whether it’s a
laundry service or a new book, we have our credit cards stored and
1-click purchases set up, with landing pages designed to reduce
friction. This virtual purchasing environment, coupled with easy
chargeback rules, made even easier with low friction purchases,
leads to increased buyer’s remorse and a sense that customers can
refuse to pay because businesses will simply accept that. Research
shows that as much as 40% of returns and chargebacks are because of
these reasons, and not because of fraud or identity theft. It’s
easy, it feels harmless, and there’s no talking involved with the
merchant.

Depending on your business, some losses will be caused by fraud
and identity theft (the Chargeback
Gurus put that number at a shockingly low 10-15%
compared to
friendly fraud). It’s not uncommon for children to use their
parent’s card without their knowledge, but there are still busy
scammers out there, especially as real-world credit card fraud
increases. In these cases, you wouldn’t be dealing with the real
customer, but someone using their details.

How Much Loss Is Too Much?

Transaction based businesses need to consider their margins and
the requirements of the payments provider. Most providers require
less than 1% in chargebacks and less than 0.5% in ACH returns. You
can “hide” some high risk, profitable segments in your volume
if your overall loss rate is low, but you must keep it low overall.
In the long run, even a 1% loss rate accumulates over time.

Prevention Versus Servicing

In the transaction risk world, it’s common knowledge how much
time companies spend on prevention and detection before a
transaction goes through, only to completely neglect post-loss
mitigation and servicing. 

Losses are a part of any business, because optimizing for zero
losses means too much prevention—you’re turning away good
business. FraudSciences, and early fraud prevention provider, was
able to help merchants quadruple business by insuring against
chargebacks. You should consider how much business you’re
rejecting because of criteria that’s too restrictive, and what
else you could do if you had lower loss rates.

If you’re providing a service and simply turn it off for
customers who don’t pay, you probably experience much lower loss
rates. You should consider how many of those customers you could
win back by trying to resolve the outstanding balance and hearing
them out. Good post-loss servicing focuses on the customer
experience by resolving service issues as much as it recovers money
owed to you. 

The same is true for fraud losses. While some of these fraud
cases are real, many are the result of a misunderstanding or
service disagreement. By building a servicing flow that focuses on
understanding the customer’s intention, you’ll be able to
improve retention, teach your team how to prevent losses better,
and get paid.

The Early Default Days

We recommend that you work on losses in-house in the first few
weeks. Working on losses yourself has two advantages:

  1. Since you’re using your brand to contact the customer, you
    are more likely to reconcile with confused customers and retain
    them.
  2. Dealing with upset customers can be an invaluable lesson about
    your business, and you don’t want to count on others to give you
    that feedback early on.

There are two things to do after default:

  1. Start an automated recovery process. If a card
    payment failed, try charging it again after a few days. If an ACH
    payment failed, consider trying again (the fee structure for ACH is
    different and retrying is more complex). If you have more than one
    payment instrument attached to the account, trying charging that
    one. This should be accompanied with light reach-out
    attempts. 
  2. Start representation with your payment
    provider
    . With time you will learn what type of evidence
    is required for representation and get better at overturning
    chargebacks. You could get up to 20-30% back using this
    method.

When Early Collection Attempts Fail

Many businesses recoil at using debt collection agencies to
recover losses. The industry has gained its bad reputation by
continuing to use aggressive tactics and bad UX. This is where
choosing the right partner is crucial; working with a technology
company that specializes in the user experience of debt collection
can actually help your brand. 

Outsourcing collection work can support your brand by giving
customers a way to vent their frustrations before making a payment.
For customers who refuse to talk to you, offering a robust dispute
process while asking for payment is an effective outlet to
understand why they reversed their payment in the first
place. 

This is also true for fraud victims: giving customers an easy
way to express themselves to a third party often helps
differentiate the real victims of fraud from remorseful buyers and
gives fraud victims a sense of protection and understanding.

Closing Thoughts

Transaction losses are a part of doing business and they require
attention. Using a simple in-house process with a strong
outsourcing partner can help you get paid, understand your customer
better, and even improve retention.

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Debt Collection for eCommerce Startups: The Definitive Guide