Beauty and the Chargeback
Mascara, lipstick, facial cream and other ointments aren’t just ways to look good and ensure vitality. They are big business in the U.S. and elsewhere in the world. In fact, health and personal care is the second-largest retail category in the U.S. behind groceries and the industry is worth an estimated $511 billion per year worldwide. The health and beauty world covers a wide range of online market segments: health supplements, cosmetics, natural products, nutraceuticals and much more. But this economic heft doesn’t come without its own problems, namely chargebacks.
Why are beauty merchants high-risk?
Merchants in the beauty category are considered high-risk by payment service providers (PSPs) with most processors unwilling to work with them. What’s so risky about a transaction to purchase some mascara you might ask? Well, there are at least several reasons for the classification of beauty as high-risk:
- A significant amount of beauty and health sales are made on a subscription basis and recurring payments are considered high risk for chargebacks.
- Typically, beauty and health products cannot be returned, leading to increased cases of buyer’s remorse and, consequently, chargebacks.
- Reputational issues stemming from some merchants promoting unfounded claims about product effectiveness or positive health effects.
- Many skin and haircare products that are retailed online use third party manufacturers and fulfillers. Separating orders and fulfilment lead to increased likelihood of shipping problems and, consequently, chargebacks.
Friendly fraud, when customers wrongly claim that they didn’t authorize a purchase or receive the goods in question, is a common problem in the health and beauty category. It doesn’t help that a lot of the customers are young, impulse buyers purchasing medium to high ticket items that they can’t return. They may be using their parent’s credit card. Even if not, they are more likely to experience buyer’s remorse when the bill comes due.
A recurring (payments) problem
Beauty boxes, a successful strategy for bringing in more customers at lower price entry points, are also a problem. Companies like Glossybox and Birchbox built their entire business model on it. These subscription based baskets of goods are a cheap way for customers to sample new products ahead of potential upsells. However, they rely on recurring billing. This billing method is very susceptible to chargebacks as consumers often forget that they are part of a recurring payment plan and when they find out they are still being billed for something they request a payment reversal.
Some 38 percent of U.S. consumers who regularly purchase health and beauty products online utilize subscription billing, according to a survey from 2015. Since then, the popularity of beauty boxes and services like the Dollar Shave Club could only have pushed this figure higher.
Many PSPs also don’t like the beauty industry’s use of free trials and multi-level marketing to drum up business. Often these tactics confuse customers, who do not necessarily understand that signing up for these offers typically incurs monthly fees.
Working with niche PSPs
For beauty businesses it’s usually necessary to work with a PSP that specializes in handling high-risk merchants. Often these processors will have a history of working with specific high-risk verticals such that they are better able to evaluate a merchant’s risk. Even so, it’s not unusual for these PSPs to make certain demands of their merchants to ensure service at reasonable rates. Some things a processor might request are transparency about recurring billing, avoiding any exaggerated health claims for products and making sure terms and conditions are easy for customers to read and understand and prominently displayed on the merchant’s website.
While working with a PSP that isn’t afraid of working with a high-risk category may be necessary in the beauty space, it often isn’t sufficient to prevent significant losses to chargebacks. You still need to fight the cases that will inevitably come your way as people try to scam the system. Not only is it important for preventing lost goods, but it will also have a deterrent effect. Some 40 percent of consumers who commit friendly fraud are likely to reoffend within the next 90 days. You don’t want your store developing a reputation of being weak on preventing chargeback fraud, neither with your customers nor with your payment processor.
Work with AcroCharge to fight your illegitimate chargebacks while taking on zero financial risk. Our hands-off solution allows you to focus on growing your business while pushing back against friendly fraud. Contact us to find out more.
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