The Evilest of E-Commerce Foes

It's a sad fact of life that most online gaming operators are hit with chargebacks somewhere along the road. More and more criminals are using random number generators to obtain credit card numbers and hackers are stealing numbers. Some customers, dissatisfied with service or payouts, dispute charges they made at the site. Some site operators lack stringent back office controls. The end result of all these scenarios is chargebacks.

Add it up, and there are big dollars being lost. Lest you feel alone, chargebacks are a problem for all e-commerce merchants. According to Riptide, an Internet fraud detection and solution provider, chargeback fraud amounts to ten percent of total online sales, which are about $16 billion annually. The online gaming industry probably sees one-and-a-half to two percent of their transactions ending in chargebacks, with an estimated $3.5 million in chargebacks and fees each month, suggested Chuck Crawford of Crown Management Services and Interactive Gaming Council Board member. (Crawford admitted his numbers could be off, referring to them as "blue sky arithmetic.")

Since online credit card wagers are classified as "Card Not Present" transactions, merchants are held liable for 100 percent of the bill (plus penalties and fees of at least $15-20 per chargeback), even when a bank authorizes the transactions. If your site is hit with too many chargebacks--more than one to two percent of your credit card transactions--banks will assign higher fees and may even yank your ability to accept transactions from credit cards at all. Adding insult to injury, Crawford points out that even if you videotaped a customer making the transaction, credit card companies wouldn't accept it as adequate proof for operators to collect on disputed transactions.

For frustrated operators wondering what can be done to reduce chargebacks, a few steps can be taken. Crawford says it begins with really good customer service. He explains that well-run sites lower their chargeback rate by making sure that:

customers have a satisfactory experience with the gaming site (notice it's not whether or not they won, just whether customers had fun);
if the customers request a refund, they get their money back promptly;
winnings are paid promptly;
gamblers are assured of fair play at the site;
agreements are easy to read and understand; and
the site has good customer service available over the phone.

It sounds corny, but it pays to offer good customer service. Customers who had a positive experience are more likely to pay up (and return for more fun!) than dispute payment for the visit. But, for sites that don't offer good customer service, customers are more likely to refuse to pay or dispute the transaction.

"There is no fool-proof way to protect yourself from chargebacks," asserted Steve Fein of Signature Card Services, a credit card processing company. Fein says operators can minimize chargebacks by using tools like address verification and negative databases.

Additionally, some operators just need to spend a little time "eyeballing" their batches to make sure everything looks right. Fein suggests that site operators need to manually look over batches for unusual activities--such as multiple card usage by the same cardholder--before clearing for authorization. It's not uncommon to see 50-60 attempts made to use numbers that are stolen or manufactured by number generators, he said.

It's easy to understand why some site operators are willing to take a chance on iffy transactions. After all, they could potentially lose half of the day's income by not trying to get questionable charges authorized. Entrepreneurs, by any definition, take a chance just by opening a own business. It's just one more gamble that the odds are on their side. (Pardon the pun!)

"Certain operators are very diligent about managing the back end," Fein said. "Then there are some, who quite frankly, don't care."

This could potentially be leading to dramatic changes, Fein warns. "In a very short period of time, there's going to be a lot of fallout from the banks on this," he said (such as terminated merchants who are shut off by the very banks the merchant is counting on to pay the charges).

Merchants who are terminated can face a very gloomy future trying to accept customers' credit cards. They'll be placed on a blacklist that every bank checks before opening a new account. Wherever the operator goes, the record follows.

While it hasn't happened yet, Fein warns operators that it's likely in the very near future. "It's something the industry is going to come to grips with. It's been a free ride the last few years, because they have been so new," he explained. "And, so long as the volume kept on growing, they (the sites) were able to stay ahead of the curve (meaning they had more transactions than chargebacks)."

Additionally, Fein sees a certain amount of market saturation leading to a leveling of sales volume. As a result, since credit card companies are looking at percentages, he sees sites facing an increasing percentage of chargebacks that are going to negatively affect their ability to accept the credit cards.

Most importantly, he sees a large image problem affecting the industry. "The industry itself is shooting itself in the foot. They are their own worst enemy, the way they operate," he said.

"When I hear things from merchants like, 'Well, I never come into the United States'… Eighty percent of your business is with U.S. cardholders, but yet you tell me you're scared to step foot in the United States," Fein explained. "What does that say about your business? And I heard that from a major operator this week!"

"And guess what... The credit card companies hear about that stuff, too. It makes them less likely to keep approving cards," he added.

Crawford also sees the potential for credit card companies to take action against gaming sites, since the bad reputation of some is rubbing off on the industry as a whole.

According to Fein, there are two things Net betting site operators need to do: improve their back office procedures and improve their image. "If they were willing to do the things they need to do, yes, they would get more support (from the credit card companies) for their cause. But, they operate like a bunch of criminals," he said.

"How does it look to MasterCard and Visa that every one of these guys is using the 'Bank of the Bananas'?" Fein said, adding that many of the overseas banks are really not capable of processing the high volume of transactions that sites are sending them.

Additionally, the foreign banks don't impress major credit card companies. Fein suggests, instead, that site operators need to look at how they can improve their business practices so they can use more reputable banks for credit card processing.

On the upside, Riptide President Michael Meeks said his company is developing some pretty nifty tools to help fight chargebacks. Riptide has created a fraud detection and risk management system (eSuccess Citadel) that offers a rules based engine for more complete fraud level checks. It's intended to save merchants money by avoiding fraud while allowing more transactions to be accepted, thereby generating additional revenue.

Citadel provides a database of negative history for gaming customers who have charged back with gaming sites, as well as a positive database that shows other payment methods used by customers. The two databases used in combination will provide a better history of customers, and reduce false positive scorings, allowing gaming sites to accept charges from customers that may have been mistakenly refused.

The unique part of the negative database is that much of the information is garnered from a number of site operators who have provided the information. "The data we have--that is going to be shared--has to be safe, secure and not used for any other purposes," Meeks emphasized. He added that the database is not going to be parceled out to individual operators. "We can't use the data to sell to gaming operators; it will not be compromised," he said.

(Riptide has developed this product at the behest of the Interactive Gaming Council, which has put a priority on the development of such an industry-wide database. The company was chosen among a group of some 20 vendors who responded to a Request for Proposals for development of such a service for the interactive gaming industry.)

Riptide also reports that it has negotiated a "license and development agreement with a company holding patents on fraud detection using predictive modeling within a neural network." The company says the custom neural network will undergo benchmarking and training against the rules based system, and the "enhanced" system will be released early in 2000.

It's currently being used to control traffic signals where it monitors traffic flow, weather conditions and even how fast an individual car is moving and adjusts the signal patterns accordingly, said Meeks.

Riptide's product "is built upon sophisticated system architecture of its own design that is planned to continuously evolve and provide enhancements to its customers," according to company literature. It added, "Each new customer is provided with its own profile such that the system performs its analysis of that customer's transactions according to the particular requirements defined in the profile.".

Eventually, individuals will be able to voluntarily block their own credit cards in order to restrict their addictions, minors, and fraudulent and undesirable use of their cards. The jurisdictional screening, which will enforce legal standards and policies, required by gaming licenses, is also an anticipated function.

In review, site operators can take a number of precautions to prevent or lessen chargebacks. As both Crawford and Fein pointed out, the first step is providing good customer service. Not only does this allow you to offer a better gaming experience for your customers; it will positively affect your bottom line.

Second, a review of back office procedures can be beneficial. Taking the time to manually review batch authorizations before sending them on can save you time and money, in the long run.

Third, by reviewing the products available (such as Riptide's Citadel), you'll find invaluable tools to not only detect fraud, but also actually increase the number of acceptable transactions. You can better determine whether some customers that fail traditional fraud detection methods would actually be acceptable, thereby increasing your income.

Another credit card database is available at www.stopchargebacks.com. The Chargeback Coalition, a co-operative service among online gaming operators to counter credit card fraud, operates the site.

Finally, work on your public image. Not only is the gaming industry battling politicians around the world, the Net betting industry has a jagged image that many banks are unable to swallow. In a very real sense, part of your product is your image. A flawed image indicates a flawed product. A good reputation is a priceless part of your product line-up.