The Role of Machine Learning in Reducing Chargebacks for Online Businesses

Chargebacks are killing online businesses.

If you’ve been selling online for any length of time you’ve likely had a few chargebacks.

Not only are chargebacks extremely expensive they happen more frequently every year. Merchants lose more money to them than ever before. Global chargebacks are expected to reach 337 million by 2026…that’s a 41% increase from just last year. For every $1 lost to fraud, US merchants lose $4.61 in total costs associated with fraud.

There is some good news though.

Machine learning is here and it’s revolutionizing the way online businesses can fight fraud, stop chargebacks and protect their revenue….automatically.

Let’s dive in…

Today you’ll learn:

1. Why Chargebacks Are Destroying Online Businesses
2. How Machine Learning Stops Chargebacks
3. The Benefits of ML-Powered Fraud Detection Software
4. How to Get Started With the Right Payment Processing Solutions

Why Chargebacks Are Destroying Online Businesses

Chargebacks were originally intended to protect consumers which is great! But they’ve morphed into a nightmare for any online store owner.

Chargebacks always hurt the merchant.

If a customer disputes a transaction for any reason — the merchant almost always loses. The customer gets their money back from their bank. The business is out the cost of the sale and product. Not to mention any additional chargeback fees. Suddenly profit becomes a loss.

If there are enough chargebacks a business can also be penalized by Visa, Mastercard or other payment processors. It could be placed on a monitoring program which comes with exorbitant fees, strict processing rules and some payment processors may even drop the account completely.

For online businesses looking for payment processing solutions, working with a provider like Adaptiv Payments that understands fraud prevention is critical.

And it gets worse…

74% of chargebacks are caused by friendly fraud.

Friendly fraud occurs when a customer actually makes a legitimate purchase then files a chargeback against that transaction. That means nearly ¾ of all chargebacks are avoidable!

Most customers don’t even contact the merchant. Instead of resolving the issue directly with the business the customer simply files a dispute with their card issuing bank.

This makes it nearly impossible for online businesses to protect themselves.

Here’s why chargebacks are such a big deal…

Imagine running an online store…

A $100 product is sold. The cost to goods is $60.

The profit on that sale is $40.

Now imagine a customer buys that product and files an unauthorized chargeback.

Not only is the $100 lost on that sale. There’s a fee from Visa, Mastercard or the payment processor.

That $40 of profit is gone and the business is now in debt.

This happens every single day to online businesses all over the world.

How Machine Learning Stops Chargebacks

Machine learning can identify patterns and detect anomalies far better than any rule based fraud prevention system.

Basically — ML can examine thousands of pieces of data with every transaction to identify possible risk — far beyond what any person could actually see.

The machine learning system leverages AI technology to…

1. Review past transaction data
2. Understand purchase behavior
3. Learn device information
4. Identify location patterns
5. Track real time spending habits

By processing this data machine learning systems are able to develop a risk profile for every single customer. When a purchase doesn’t fit that profile it is reviewed by the ML system.

Machine learning fraud prevention is many times more effective than old school rules based systems.

Rule based fraud prevention creates more false positives blocking real customers. Machine learning systems continuously learn and improve with each transaction.

Let’s look at how effective ML can really be…

The US Treasury Department announced that in 2024 alone their machine learning software prevented and recovered over $4 billion in improper payments and fraud.

That’s right. BILLION DOLLARS.

They were able to detect this much fraudulent activity across the board by implementing machine learning software. Imagine what that could do for an online business.

The Benefits of ML-Powered Fraud Detection Software

Fraud prevention is only the tip of the iceberg.

Machine learning can help businesses…

• Reduce Chargebacks
• Stop Fraud
• Prevent False Declines
• Seamlessly integrate with top payment processing solutions

…and so much more!

Stops Chargebacks In Real Time

Machine learning systems work by stopping chargebacks before they happen.

With ML software inspecting every single transaction merchants can ensure all risk is identified and flagged BEFORE the transaction is even approved.

This is a game changer.

Traditional rule based software struggles to find the balance between stopping fraud and approving genuine customers. Machine learning evolves with every purchase.

Prevent False Declines

Something most merchants don’t think about is that false declines are worse than fraud.

Every time a legitimate customer is blocked from making a purchase the business loses money.

False declines hurt the ability to sell and damage relationships with real customers.

With machine learning risk is identified with far greater context. ML software can easily identify that a regular customer buying from a new device isn’t actually fraud while an old credit card turned around quickly is.

Machine Learning Evolves With New Fraud Patterns

Keep in mind — hackers and fraudsters are constantly changing tactics.

As soon as merchants catch on to one scam — they create a new one.

Rule based fraud prevention platforms can’t keep up because rules must be manually entered by human beings.

Machine learning technology evolves as it’s used. It detects new risks as they happen.

Detects Friendly Fraud

Friendly fraud was mentioned earlier and it’s a huge issue for online businesses.

It’s also one of the only times a merchant can fight back against a chargeback.

With machine learning systems merchants have the ability to identify likely fraudulent chargebacks before they’re filed!

67% of merchants already use or plan to implement artificial intelligence fraud software.

It’s not a question of if a business will use machine learning to prevent fraud. It’s a question of when.

How to Get Started With the Right Payment Processing Solutions

Machine learning may be the future but where does an online business start?

First it’s important to pick out a payment processor that utilizes machine learning in their fraud prevention services. Not all processors are created equal and some still use outdated rule based detection systems.

Look for a processor that offers…

• Real time fraud analysis on every transaction
• Adaptive machine learning models that learn from specific business data
• Built in chargeback management software
• Customizable risk thresholds

…and more!

The best payment processing platforms for small businesses utilize machine learning technology alongside other tools like 3D Secure authentication, address verification and more.

The key is to use multiple tools that work together synergistically.

Machine learning detects risk before it happens but it’s important to have other tools and processes in place to prevent and dispute chargebacks as they occur.

Bringing It All Together

Online business owners cannot control chargebacks.

But they can control how their business fights back with powerful machine learning tools.

By using ML software online businesses can…

• Detect Fraud
• Reduce False Declines
• Evolve With New Fraud Patterns

…and collect evidence for disputed chargebacks.

As chargebacks rise each year online merchants need to find solutions that bring real value to their business.

Chargebacks are only going to continue getting worse unless merchants take action.

Machine learning offers that action solution.

Start by looking at the current average chargeback rate and seek out a payment processor that offers ML tools that can improve those statistics.