As we edge closer to the cheerful holiday season, the U.S. online retail sector is poised for a healthy showing of consumer spending. Holiday eCommerce sales are anticipated to increase between 10.3 percent to 12.8 percent compared with the same period in 2022, according to Deloitte. Even when accounting for inflation, this is a sizable gain.
This forecast is not based on unfounded optimism but is rather based on the foundation of solid wage income-based spending, as echoed by Michelle Meyer, Mastercard’s chief economist for North America, at the Merchant Advisory Group (MAG) 2023 conference hosted in Atlanta, GA. Meyer's assertion in September that "the household balance sheet is perfectly healthy" is a beacon of hope for merchants gearing up for the year-end rush. Unlike during COVID-19, healthy household balance sheets also haven’t discouraged U.S. consumers from resorting to the plastic in their wallets. Credit card usage is up among consumers, with credit card balances soaring to a record $1.03 trillion in the second quarter, according to the New York Fed.
So what does this mean for merchants this holiday season?
Inflation and consumer behavior
Inflation, the specter that loomed large over the economy at the beginning of the year, has been significantly reined in. The 12-month inflation rate, which stood at a daunting 6.4 percent in January, has been nearly halved to 3.7 percent, according to Consumer Price Index figures from the U.S. Bureau of Labor Statistics. This easing of inflationary pressures has been a crucial factor in shaping consumer behavior. With rapidly rising prices, consumers had little incentive to wait on making purchases, as their purchasing power declined the longer they kept their needs unmet. With a more stable economic outlook, consumers are strategically timing their spending sprees. They are acutely aware of the discount-driven retail landscape and are choosing to delay significant purchases until the post-Black Friday period, when substantial discounts become the norm. A survey from Statista shows that more than 66 percent of Gen Z shoppers and 67 percent of millennial consumers are willing to wait to buy things until they go on sale. In a May survey conducted in the UK, 39 percent of shoppers said that they would even hold off shopping for six months to wait for Black Friday sales and avoid paying full price.
This calculated approach to spending is a clear indicator of the price-conscious modern consumer who is willing to bide their time for the best possible deals. It is incumbent upon merchants and industry professionals to recognize these patterns and prepare for a significant uptick in sales activity as we move toward and past Black Friday. The holiday season, with its promise of strong consumer spending, presents an opportune moment for merchants to capitalize on the confluence of favorable economic indicators and consumer spending behaviors. It is also a prime time to reflect on the year gone by and to strategize for the year ahead, ensuring that merchants can turn the challenges presented during this period of heightened sales into a healthy bottom line.
Chargeback challenges and strategies to anticipate
The holiday season, while a boon for sales, also heralds a challenging period for businesses in the form of increased chargebacks. As transactions multiply, so does the potential for payment disputes, making it imperative for businesses to adopt a strategic approach to chargeback management. This involves a concerted effort across multiple departments, each playing a crucial role in mitigating losses and safeguarding the company's revenue.
Customer support: The first line of defense
The Customer Support team is often the first to detect the early signs of a chargeback even happening. Their role extends beyond resolving customer queries to actively engaging customers in a way that reduces the likelihood of chargebacks. Positive customer engagement can deter customers from initiating chargebacks, but when disputes do arise, the meticulous documentation of these interactions is vital. This information becomes invaluable evidence for the Fraud and Payments departments when it comes to chargeback representment. By accurately recording customer service interactions, Customer Support ensures that the narrative of each transaction is clear, factual, and readily available for defense against illegitimate chargebacks.
Fraud and disputes department: Ensuring a unified front
The Fraud or Disputes department must maintain a close liaison with Customer Support and Payments. This collaboration is essential to prevent instances of "double dipping," where customers may seek and receive refunds while also filing chargeback claims – receiving back twice the initial sum they spent on the goods. The departments should also generally avoid issuing refunds based on TC-40 data reports, which provide insights into reported fraudulent transactions. Typically, TC-40 reports precede chargeback claims for the same transaction by several days. That means a refund provided on a TC-40 usually won’t prevent a chargeback claim for the same amount that is already on its way, doubling the loss to the merchant. When refunds are issued, it is crucial to document them thoroughly and use this documentation as evidence in chargeback representment to avoid additional financial losses. Investing in the right level of collaboration, teams can improve their payment processes through enhanced fraud prevention measures coupled with the ability to address the root issues of chargeback more effectively.
Executive education: Investing in chargeback management
Executive education is a pivotal component of an effective chargeback strategy on an organizational level. Before and after the surge in holiday sales and associated chargebacks, educating the executive team on the need for and impact of chargeback management is critical. It is essential for the leadership to understand the direct impact of chargebacks on the bottom line and the importance of allocating sufficient resources to the teams handling them. With the executive team's support, the chargeback management process can be fortified with the necessary tools, personnel, and strategies to not only contest chargebacks effectively but also to win them.
Scaling chargeback operations
As the holiday season amplifies sales volumes, it concurrently inflates the volume of chargebacks, presenting a significant operational challenge for businesses. The key to managing this surge lies in scaling chargeback operations effectively. Let's explore the options available and their implications.
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Hiring Additional Staff: A Temporary Fix with Long-Term Challenges
The intuitive response to an increase in chargeback volume may be to hire additional staff. However, the time and resources required to train new employees to a level where they can maximize win rates are considerable. The post-holiday period often sees a normalization of chargeback volumes, which could necessitate the uncomfortable decision of downsizing or the personnel challenge of reallocating staff to other functions within the company. -
Outsourcing: The Band-Aid Approach
Turning to outsourced service providers can seem like an attractive option to handle the surge based on seasonal fluctuations. However, these vendors often face the same dilemma as businesses that choose to hire additional staff. They are likely to recruit temporary workers for the peak period, who may lack the nuanced understanding of a company's products, services, and customer base necessary to achieve the highest possible win rates. This assumes more risk of leaving funds on the table should the dispute rebuttals not be as air-tight as they need to be. -
Automated Solutions: A Sustainable and Scalable Approach
Probably the most scalable option, an automated solution offers a sustainable approach to managing chargebacks. Such systems are designed to handle fluctuations in volume, eliminating the need for additional holiday manpower. There are even some options that utilize machine learning to become more effective over time, as they learn from the outcomes of your chargeback cases and those of similar merchants. This continuous learning process optimizes win rates and alleviates the need for additional resources that can also assume more costs than necessary.
The retention of knowledge within the system is also a significant advantage for the merchant. Unlike human employees, the system does not leave for another position (or even take a lunch break!), and continually optimizes the approach based on the learnings from each outcome. The system's ability to experiment with different ways of presenting evidence to various issuers and retain successful strategies further enhances its effectiveness, especially when applied at scale.
Are you prepared for a crazy chargeback season?
The anticipation of robust consumer spending, set up by strong labor income and increased utilization of credit card spending, should be matched with an equally robust strategy for managing the resultant rise in chargebacks. To navigate this holiday season profitably, scaling up chargeback operations is a must. Businesses must ensure that their chargeback management systems are primed to handle increased volumes.
The holiday season's chargeback wave is a test of a merchant's foresight, preparedness, and strategic acumen. By expecting and planning for increased volumes, fostering interdepartmental coordination, and securing executive support, businesses can turn a crazy chargeback season into an opportunity for refinement and growth, setting the stage for success this year and in the year to come.
