Debt Collection for eCommerce Startups – The Definitive Guide

February 21, 2019         By: Ohad Samet

Losses and why they happen

Payments losses are a fact of life for eCommerce businesses because of chargebacks, ACH returns, and unreturned products. Unlike lending businesses who have to accept a large percentage of losses as part of their business model, many startups treat payments losses as a nuisance that doesn’t require much attention. This can lead to spikes in losses because of unchecked customer behavior. It’s not only risky for your merchant account or ACH credentials but is a viable threat to your bottom line and can add up quickly. Even leaders in online payments and retail, such as PayPal, use internal and external collections to augment their underwriting, representation, and loss mitigation activities.

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 remorse and the feeling of a “victimless crime”, and not because of fraud or identity theft, which is shockingly low compared to “friendly fraud”. Retailers who ship physical products also struggle with returns and refunds that they must process, but often end up without the actual product because the consumer doesn’t ship it back.

How much loss is too much

Ecommerce startups 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. Even a 1% loss rate accumulates over time. eCommerce and retailers are notorious for slim margins, and a 0.5-1% loss rate can make the difference between a runaway success and bad unit economics. As more businesses move online and reach scale, optimizing your cost structure is crucial. Losses don’t only stop in chargeback cost: the cost of processing, disputing, and managing accounting and restocking all accumulate. Using a combination of prevention tactics and vendors who can help you recover lost funds can make a meaningful difference.

Prevention vs. servicing

Businesses often spend a lot of time, energy, and money on detection and prevention mechanisms to reduce fraud and losses. Finding the right balance between acceptance rate and loss rates is the main trade off for risk departments for major online retailers. However, many of these spend much less time, often none, on servicing and minimizing loss that has already happened.

Losses are a part of any business, because optimizing for zero losses means too much prevention—you’re turning away good business. FraudSciences, an 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 are too restrictive, and what else you could do if you had lower loss rates.

While some losses are real and could be prevented, much are the result of a misunderstanding or service disagreement. Over-correcting for losses without accounting for post-loss mitigation and collection creates a too restrictive environment, often limiting your growth because, burned by past loss events, you limit sales to various customer segments and geographies that you saw losses from. By building a servicing flow that combines representation, collection, and feedback gathering from customers who return and chargeback, you’ll be able to reduce your losses tactically, but also continue to inform your underwriting and fraud prevention activities to make sure you don’t block legitimate purchasing behavior because of friendly fraud or abuse cases.

The early default days

The first step to every loss recovery activity must be in house, using a team that’s familiar with your product and company. There are several reasons to do that:

  1. You are more likely to reconcile with confused customers and retain them since you’re reaching out with your own brand, and your team is aware of the customer’s overall purchasing behavior, as well as best equipped to answer any product or billing question.
  2. These customers can provide valuable feedback – to your risk team, your billing team, and your product overall. Your team is both more likely to receive this feedback and act on it. It’s important to set up that feedback loop between your recovery activity and your product and risk teams.

Your early attempts should include at least these elements:

  1. An automated recovery process, attempting to re-charge this payment method or any backup payment method you have on file. 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, and NACHA rules on returns more demanding, so I’d recommend being careful). If you have more than one payment method attached to the account, trying charging that one.
  2. Set up light reach out attempts via email, and sporadic phone calls, through your internal team. Make sure this is a structured process, with an email the day the loss happens and at least 5-8 days later, and a call coming around days 7-10. Unless you’re committing to a full time in house recovery effort, this process should focus on reaching customers who want to be reached and getting them back on track.
  3. Start disputing the chargeback or return with your payment provider. With time you will learn what type of evidence is required for this process and get better at overturning chargebacks. You could get up to 20-30% back as long as you collect the right data. You may also choose to use success fee-based vendors who’ll handle these for you, either as a full solution or while you build your internal capacity.

When early attempts fail

The debt collection industry has a bad reputation and for a good reason: many vendors provided aggressive service to business owners who didn’t consider their brand when sending customers to collections, leading to 25% of consumers in debt feeling threatened by collectors. But collections are a vital tool in loss reduction, as long as you choose a vendor who understands your customers, your brand, and a focus on user experience and flexibility.

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.

Beyond the emotional outlet, the best vendors are experts in using data and consumer feedback to improve their process and increase recovery rates over time. They should have models already trained for your industry based on past experience, or the ability to automatically improve as they collect more interaction data. That focus on recovery, together with the handoff process from you to a vendor that handles late stage collections, nudges customers to action and unlocks better recovery and engagement.

Closing thoughts

Chargebacks and returns are a part of retail 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.

Ohad Samet is the co-founder and CEO of TrueAccord, the first-of-its-kind algorithmic recovery platform. TrueAccord is using machine learning, behavioral analytics and a humanistic approach to help enterprises and small businesses recover outstanding payments and maintain positive customer relationships.