Net Recovery Rate: A Key Performance Indicator That May Be Overlooked

Diagnosing chargeback issues, identifying their sources, and deploying solutions is crucial. However, before taking these actions, you need to have data about the disputes filed against you.

There are many key performance indicators (KPIs) that affect your strategy: cart abandonment rate, refund request rate, manual review rate, decline rate, false decline rate, and overall fraud transaction ratio.

However, one KPI stands out in terms of its direct relevance to your chargeback strategy:Net recovery rate。

Chargeback representment and win rate

Suppose a customer purchases from you and then initiates a chargeback, claiming they never authorized the transaction. You have fairly solid evidence that the customer authorized the purchase, including multiple forms of authentication. You even have evidence of the cardholder using the product based on their social media activity.

This is actually a fairly common situation; the practice is known asfriendly fraud. Consumers engage in friendly fraud for many reasons. Sometimes they simply forget the purchase or fail to recognize the transaction when they see the charge on their statement. But in some cases, buyers may abuse the chargeback process.

When friendly fraud occurs, you can fight back through a process called "chargeback representment." This allows you to "resubmit" the transaction to the bank along with supporting documentation in an attempt to reverse the chargeback.

Your chargeback win rate measures how effectively you recover transactions through this process. As the name implies, the win rate compares the number of disputes you handle through representment (and win) against the total number of chargebacks you resubmit.

Win rate vs. net recovery rate

The 2021 Chargeback Field Reportfound that the average merchant's chargeback win rate is 32%. In other words, the average merchant wins approximately one-third of the disputes they handle through representment.

That's not bad; given the time, resources, and expertise required for chargeback representment, a 32% success rate is reasonable. However, when we compare that win rate to the average net recovery rate, the picture becomes less optimistic.

Your chargeback win rate treats successful representments as part of the total transactions represented. In contrast, your net recovery rate treats successful representments as part of the total chargebacks that occurred. This calculation is made after accounting for second chargebacks and arbitration cases.

According to the survey, when we look at the net recovery rate, the average number drops to just 12%.

Distinguishing between these two numbers is crucial. Your win rate indicates how successful you are at fighting chargebacks. However, your net recovery rate helps you determine whether you are misidentifying chargebacks and accepting losses that could have been recovered.

Data from our company, Chargebacks911, suggests that approximately six out of ten chargebacks issued by 2023 will be friendly fraud cases. This indicates that most merchants are leaving money on the table by not disputing friendly fraud. However, this raises the question: why is the average merchant's net recovery rate so low?

Often, the reason is a combination of two issues:Limited timeandlimited data access。

Requirements for chargeback representment

The time frame available for chargeback representment can vary by card network and chargeback reason code. These time frames are based on the central site business date, which is the date the cardholder filed the dispute. In most cases, you only have a few days to investigate the claim, gather evidence, prepare the appropriate documentation, and submit a response.

Chargeback representment is also very time-consuming and requires careful oversight and expertise. You cannot expect to achieve significant success with automated chargeback responses. More importantly, you only have access to internal data; there are no benchmarks for comparison, making it harder to identify suspicious chargebacks.

However, this does not mean chargeback representment is impossible. You can fight chargebacks more effectively and improve your net recovery rate by investing more resources into examining transaction data.

Despite your limited data insights, you can review historical transaction data to try to identify patterns associated with chargeback issuance. You can examine customer behavior before the dispute, the claims made by the customer, and how the bank responded.

Looking for historical patterns can help you fight chargebacks more effectively. It enables you to speed up the process and build more comprehensive, compelling cases. It may even help prevent some disputes caused by minor errors or oversights in policies, procedures, or fraud detection strategies.

Developing the right strategy

Admittedly, tracking your win rate and net recovery rate does not guarantee success. No single KPI can guarantee profitability or business continuity. What determines success is how you decide to handle the information related to your operations.

You need to examine your chargeback win rate and net recovery rate and see what insights you can gain from them. Every merchant's situation is different, and a solution that works for one business may not apply to your case.

But examining net recovery rate as a key KPI can help you build a strategy better suited to your unique needs. Ultimately, it can give you a more informed and useful understanding of the entire chargeback process.