Debt Collection for E-Commerce Startups: The Definitive Guide

Transaction-based losses are a fact of life for many businesses because of chargebacks, unpaid bills, reversals, or unreturned products. Unlike lending businesses that have to accept a large percentage of losses as part of their business model, many startups treat transaction losses as a nuisance that doesn’t require much attention. This can lead to spikes in losses because of unchecked customer behavior, and a backlog of losses that could be significantly reduced with a few simple steps. In the following guide, we will review these losses, explain why they happen, and explain what can be done to reduce them.
This guide will be particularly helpful if you are either a marketplace dealing with chargebacks from consumers and vendors who are technically liable but often can’t or won’t pay, a postpaid service (advertising, SaaS, and others) unable to charge customers that have no or an expired payment instrument on file, an eCommerce and subscription company dealing with chargebacks and refund requests or money management and financial services experiencing ACH returns and other missed payments.
Losses and Why They Happen
Successful businesses have many customers and many repeat customers. A great transactional business attracts most customers who buy and receive products and/or services and leave happy. Yet, every business model is subject to some level of loss. While much of it could be intentional, research shows that a growing percentage is not.
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.
As much as 40% of returns and chargebacks are because of these reasons, and not because of fraud or identity theft. It’s easy, it feels harmless, and there’s no talking involved with the merchant.
Depending on your business, some losses will be caused by fraud and identity theft (the Chargeback Gurus put that number at a shockingly low 10-15% compared to friendly fraud). It’s not uncommon for children to use their parent’s card without their knowledge, but there are still busy scammers, especially as real-world credit card fraud increases. In these cases, you wouldn’t be dealing with the actual customer but someone using their details.
How Much Loss Is Too Much?
Transaction-based businesses need to consider their margins and the requirements of the payment 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 loss rate is low, but you must keep it low. In the long run, even a 1% loss rate accumulates over time.
Prevention Versus Servicing
In the transaction risk world, it’s common knowledge how much time companies spend on prevention and detection before a transaction goes through, only to neglect post-loss mitigation and servicing completely.
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 their business by insuring against chargebacks. You should consider how much business you’re rejecting because of too restrictive criteria and what else you could do if you had lower loss rates.
If you’re providing a service and turn it off for customers who don’t pay, you probably experience much lower loss rates. It would be best to consider how many of those customers you could win back by trying to resolve the outstanding balance and hearing them out. Good post-loss servicing focuses on the customer experience by resolving service issues as much as it recovers money owed to you.
The same is true for fraud losses. While some of these fraud cases are real, many result from a misunderstanding or service disagreement. By building a servicing flow that focuses on understanding the customer’s intention, you’ll improve retention, teach your team how to prevent losses better and get paid.
The Early Default Days
We recommend that you work on losses in-house in the first few weeks. Working on losses yourself has two advantages:
- Since you’re using your brand to contact the customer, you are more likely to reconcile with confused customers and retain them.
- Dealing with upset customers can be an invaluable lesson about your business, and you don’t want to count on others to give you that feedback early on.
There are two things to do after default:
- Start an automated recovery process. If a card payment fails, try charging it again after a few days. If an ACH payment fails, consider trying again (the fee structure for ACH is different, and retrying is more complex). If you have more than one payment instrument attached to the account, try charging that one. This should be accompanied by light reach-out attempts.
- Start representation with your payment provider. With time, you will learn what type of evidence is required for representation and get better at overturning chargebacks. Using this method, you could get up to 20-30% back.
When Early Collection Attempts Fail
Many businesses recoil at using debt collection agencies to recover losses. The industry has gained a bad reputation by continuing to use aggressive tactics and bad UX. This is where choosing the right partner is crucial; working with a technology company that specializes in the user experience of debt collection can actually help your brand.
Outsourcing collection work can support your brand by giving customers a way to vent their frustrations before paying. 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. It gives fraud victims a sense of protection and understanding.
Closing Thoughts
Transaction losses are a part of doing business, and they require attention. A simple in-house process with a strong outsourcing partner can help you get paid, understand your customers better, and improve retention.