Fraudulent Chargebacks: How Marriott's Data Breach Could Cost the Company

For companies such as Marriott that experience a data breach – customer concern over their data – is just one problem they will have to contend with. The cost of a data breach can continue for months afterwards as fraudsters and unscrupulous customers can take advantage of Marriott’s weakened position through fraudulent chargebacks.

In our experience, when there are data breaches of this kind, fraudulent payment chargebacks can spike by up to 5 percent. This could tack on, in the case of a company like Marriott, many millions of dollars to the cost of recovering from the hack. While dealing with a data breach, breached companies and their banks will often side with the customer and write off the chargeback claims as a cost of doing business. But this is an unnecessary loss they may be accepting.

Here are a few suggestions for how to mitigate this wave of chargebacks:

• Be proactive and create an action plan to tackle the chargeback spikes. Utilize your inhouse team or hire a chargeback management company to fight friendly fraud chargebacks
• Don’t just accept every chargeback as legitimate, have a team available to review the analytics and reason codes to determine the true nature of the chargebacks
• Closely watch chargebacks for the next six to 12 months to help understand if they are a result of the data breach, fraud or quality of service issues
• Do a full post mortem using all available analytics with independent experts who can help build a plan to mitigate future issues and determine how the customer experience can be improved

A data breach experience does not have to be completely negative. For large businesses like Marriott, this experience can be an opportunity to better understand their customer, tracking each chargeback to determine if it was due to a hack, a fraudulent claim or attributed to a quality of service issue.

Every chargeback tells a story and it is best to apply industry-standard analytics to determine where chargebacks are originating from and how a company, big or small, can gain insights into their customer’s experience.

Considering chargebacks are growing at alarming rates (increasing an estimated 20% per year and eating up $4 billion in revenues from merchants across the world), accepting them as simply a cost of doing business isn’t just expensive—it’s a downright threat to your livelihood.

How so? Chargebacks don’t just cost the company the loss of the product or sale. When you factor in transaction fees, marketing costs, operational expenses and chargeback fees, the average "true cost" of a chargeback is two times the sale price (essentially $200 on a $100 sale.)

On top of this, rising chargeback rates can mean higher payment processing fees or, in really bad scenarios, even put your entire merchant account at risk. For independent and franchised hotel owners, this just isn’t a risk they should be willing to take.

The Consequences of Not Fighting Chargebacks

Chargebacks also come with these expenses that companies often don’t think about – or even know exist – until it’s much too late:

• Transaction fees – Payment processors typically charge 3.5 to 4% of the transaction value just to process a purchase. If that transaction results in a chargeback, it means serious cash wasted, especially on large purchases.
• Operational costs – There’s a lot that goes into processing an order – picking, packing and shipping it, managing the warehouse and inventory, arranging logistics and transportation, and dozens of other factors. These costs typically amount to about 20% of merchant revenue – revenue that’s lost when a charge is reversed.
• Marketing and acquisition costs – More than likely, that sale didn’t come for free. You probably put lots of hard-earned marketing and advertising dollars into winning that business, and you might even be paying full-time sales and marketing reps to do it around the clock. 
• Chargeback fees – Finally, chargebacks also come with penalty fees from your bank – usually anywhere from 15 to 40% of the transaction value.

As an example, let’s look at a chargeback on a $100 purchase.

• Transaction value                          $100
• Transaction fee (4%)                     $4
• Product costs (23%)                      $23
• Marketing costs (35%)                   $35
• Operational costs (20%)                $20
• Chargeback fee ($25)                    $25

TOTAL   $207

Options for Handling Chargebacks

Fortunately, as a business owner, you don’t have to go it alone if you want to fight chargebacks (or, more importantly, prevent them). If you don’t have the resources and industry knowledge to handle it solo or build an in-house team, you can instead use automated tools to fight them or hire a chargeback management firm to provide the knowledge and resources necessary to attack chargebacks head-on.

No doubt about it, data breaches are bad news, but if you plan ahead and prepare, you can avoid the aftershocks and costs from the chargebacks that follow.