A Guide to Chargebacks – How to Reduce Them?
It’s hard to avoid chargebacks these days. No matter what kind of business you run and no matter what you sell. Learn what chargebacks are, how to deal with them, and how you can reduce your chargeback ratio.
Check first if you don’t know: What is a chargeback.
The 2016 AFP Payments Fraud and Control Survey shows that 73% of organisations experienced actual or attempted fraud activity in payments (link to PDF). Even if it hasn’t happened yet, your company could face chargebacks related to fraudulent activities. It’s up to the merchant to avoid a situation where someone uses a stolen credit card to purchase items at your store. Many payment providers offer fraud services with solutions like Address Verification Service to make payments safer. It’s important to know how to choose the right payment gateway, because as a merchant, you take the responsibility for a disputed purchase.
What is a chargeback?
A chargeback occurs when a customer disputes a charge on his or her bill. There are many reasons for a chargebacks including accidentally charging an account twice, the transaction charge was for a different amount, a customer is not satisfied with the ordered product, or the product wasn’t delivered. In most cases, a chargeback is the result of an unauthorized transaction, stolen data or a stolen credit card. In all these situations, a customer can request a chargeback.
When customers notice that there is fraudulent activity on their credit card, the transaction is investigated by their issuing bank (what is an issuing bank) and the merchant’s processing bank (processing bank). If the bank determines the funds should be returned to the customer, a return is initiated by the issuing bank on the cardholder’s behalf.
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One of the major problems for the online merchants and companies that accept credit card payments is the possibility for the cardholder to try disputing the claim. Is it possible to prevent chargebacks?
You should also be prepared for a situation called “friendly fraud”. It’s when a customer made a legitimate transaction but still wants to dispute it. There are a few reasons this might occur. For example, a customer might not recognise a transaction on a credit card statement or claims the product wasn’t delivered. Be careful because sometimes this can be an attempt of fraud (the item was ordered by the cardholder and delivered, but he/she claims they didn’t receive anything).
If a customer isn’t liable for the transaction because someone stole their personal data or card details, you are responsible for the purchase and the cost of the transaction. Chargebacks can be major costs. If the bank doesn’t see enough proof that the customer isn’t right, the merchant will lose the sale and have to pay the chargeback fee.
The chargeback process
As said above, when the cardholder notices an unknown charge on their account, they contact the issuing bank and request a chargeback.
Then, the bank starts the chargeback procedure and contacts the acquiring bank, which tells the merchant about the chargeback request. From now, a merchant has a specific time period to react (e.g. it could be 7 days) and provide proper documentation. As the merchant, you need to prove that a customer shouldn’t get the funds returned. Provide all the information you can to answer any doubts. It could be a valid and legible copy of the transaction receipt, the confirmation of delivered items, proof that the complaint was resolved, merchant’s statement that the product wasn’t returned by a customer, etc.
After that period, the acquiring bank gives the issuing bank documentation that proves the merchant is right or wrong. Then, an issuing bank informs a cardholder about the result and returns the funds, if the chargeback was accepted.
Note that if the merchant doesn’t respond, accepts the chargeback, or objects it, but doesn’t have any documentation that proves their right, the funds are returned to the customer and the merchant needs to pay the fees.
Is it possible to prevent chargebacks?
Remember that customers usually try to contact the merchant before they request a chargeback. However, there are many things you can do to prevent chargebacks. They are almost unstoppable and it’s impossible to eliminate them completely, but you can reduce their number.
One of the most important things that can limit chargebacks is to ensure that your website is secure. Is the data encrypted? Are you updating the website and fixing things regularly?
- You need to be prepared for fraudulent activities, so make sure that you always verify customers with the card-issuing bank. You should choose the secure payment provider with anti-fraud tools that can help you manage the risk. It’s important, especially when you run a high-risk business.
- It’s also a good idea to provide up-to-date product or service descriptions on your website to make customers aware of what they are ordering. When the description doesn’t match the product the customer receives, the chances that they will issue a chargeback are high. Your customers need to be sure what they’re buying.
- To limit disputes, use a recognisable descriptor (a name showed on a customer’s credit card statement). If it’s different from your store’s name, a customer could have a problem with recognising the purchase. Also, put some contact information on the descriptor, an e-mail or phone number. Customers will be more likely to contact you first rather than the bank.
- Fast shipping can also help. People are impatient and waiting too long for ordered items may cause the disputed transaction. Provide shipment tracking information to show your customer where their package is, and to make your business legitimate. Another good idea is to send a confirmation e-mail after the purchase with all the details.
- Make the refund policy clear and offer a refund when a customer isn’t satisfied with an ordered product. Give detailed information that tells your customers how to return the item and how to request a refund. It will help to prevent chargebacks and you’ll avoid a negative review.
- It’s also good to keep all the details of past fraudulent activities (if there were any) to quickly recognise when a transaction might be considered risky.
When you see a disputed transaction, you should react instantly. Show that your company cares about customers and do your best to solve the problem.
Watch your chargeback ratio closely. In general, you can calculate it by taking your total number of chargebacks per month and dividing it by the number of monthly transactions (the best is to keep the ratio below 1%). But it can depend on the card’s network. For example, MasterCard calculates the chargeback ratio by going to the previous month. They take the number of chargebacks from the current month and divide it by the number of MasterCard transactions in the previous month. Visa calculates it by taking all the volume for the current month.
Chargebacks provide protection for shoppers, but can be costly for merchants in every situation. For that reason, it’s crucial to deliver secure payments with anti-fraud tools and security solutions. It’s not impossible for merchants to win a chargeback, but it’s not easy either.
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