How to Cut Back on Chargebacks
Chargebacks are inevitable these days if you run an online business and accept credit card payments. Learn what chargebacks are, how to deal with them, and ways to reduce chargebacks.
A chargeback was originally designed as a form of customer protection and occurs when a cardholder disputes the charge after they notice a transaction they don’t recognize. Unfortunately, chargebacks don’t protect businesses from dishonest customers. In recent years, merchants observe more chargeback fraud attempts.
With time, consumers became more comfortable with chargebacks. They abuse the system and use chargebacks even when they’re not justified. This leads to an increase in friendly fraud (when a customer falsely disputes transactions). Chargebacks911 states that 86% of all chargebacks are probable cases of friendly fraud, so the scale is real.
What is a chargeback?
A chargeback occurs when a customer disputes a charge on their bill. It’s a sort of refund, but the main difference is that a refund doesn’t get the banks involved in the process of returning the money.
The reasons for chargebacks can be many, but the most common ones are when a cardholder doesn’t recognize a transaction on their bank statement, because of customer dissatisfaction, a technical error (e.g. accidental duplicate billing), or fraud. For the most common reasons go to one of our latest blog posts: Why Customers File Disputes.
When a customer files a chargeback and it’s under investigation, the issuing bank assigns a reason code to the dispute, so that the merchant knows why a customer wants their money back.
Take note that every credit card association, such as Visa, Mastercard, or Discover have its own set of chargeback reason codes.
The chargeback process
When a cardholder notices an unknown charge on their account, they contact the issuing bank and request a chargeback. So, even though a chargeback is initiated by a customer, it’s performed by the bank that issued the customer’s credit or debit card.
Then, the bank starts the dispute procedure and contacts the acquiring bank that informs a merchant about the chargeback request. Now, a merchant needs to provide evidence regarding the transaction and proper documentation within the allotted time, which is usually 10 days.
So, you need to provide all the information you can to address any doubts. It could be a valid and legible copy of the transaction receipt, a confirmation of delivery, proof that the complaint was resolved, etc. The required evidence depends on the reason for the chargeback (if you work with SecurionPay, you’ll find all the details regarding evidence on your dashboard).
If you provide all the information, the acquiring bank will send the documentation to the issuer that informs a cardholder about the result. If your case is rejected, but the evidence convinces the acquirer that the transaction was legitimate, it will submit the transaction to the issuer again. Then, the issuing bank may either agree or disagree with the acquirer. If the issuer rejects your evidence, you can send it to the card association for final arbitration.
When the card association rejects the evidence and a chargeback is lost for a merchant, the cardholder will get their money back. If not, a certain amount goes to your account and the cardholder needs to pay the appropriate amount.
Take note that if the merchant doesn’t respond to the dispute when it accepts the chargeback, or objects to it but doesn’t provide any documentation that proves its right, the funds are returned to the customer.
When a dispute is lost by a merchant and it needs to pay back the funds, it also comes with an extra fee charged by a merchant service provider—usually $25 per case. It’s the cost of investigation and chargeback resolving process.
Plus, you need to be aware that if your product was delivered, you have to accept the loss of the item or service.
Ways to reduce chargebacks
As you can guess, the process works in the customer’s favor. It’s impossible to eliminate chargebacks completely, but there are several ways to reduce them.
1. Make your website secure
Fraudsters search for every loophole and bug in outdated software, so update your website regularly and avoid clerical or technical errors. Encrypt the data on your site, consider using the Address Verification Service (AVS) that verifies the cardholder’s address, and collect the CVV/CVC.
2. Provide relevant product descriptions
When the description is incomplete or doesn’t match the product the customer receives, there are higher chances that the customer will file a chargeback. So, the more details you provide, the better. Also remove items that are no longer available.
The same goes for billing descriptors, as chargebacks can be a matter of misunderstanding. Make the descriptor match your business name so that it won’t confuse customers. If customers don’t recognize your business name, they will most likely dispute a charge.
You can also place some contact information on the descriptor—an email address or phone number. Customers will be more likely to contact you first rather than the bank.
3. Work with a reliable payment provider
Make sure the payment processor you work with provides anti-fraud tools with machine learning, AI-based solutions, and an efficient chargeback disputing mechanism. According to Chargebacks911 and CNP’s report, companies that use third-party chargeback management solutions are able to reduce chargebacks by 19%.
4. Create clear refund and return policies
Make your refund policy visible for website users and make it simple and easy to understand. Offer a refund when a customer isn’t satisfied with an ordered product. Provide detailed information on how to return the item and how to request a refund. It can help you prevent chargebacks and avoid negative reviews.
Also, set clear return policies. Return management can be less expensive and comes with less hassle than having to deal with chargebacks.
5. Use 3D Secure
3D Secure is an extra layer of security that shifts the liability from the merchant to the issuing bank. If the transaction is confirmed by a customer with the code, then in case of a chargeback, the issuer needs to cover the costs and takes on the risk and responsibility.
6. Be clear on shipping details
It’s especially important for shipping costs and deadlines. If there are any delays, inform the customer immediately and provide an alternative solution if possible. Also, provide shipment tracking information to keep customers updated about where their package is.
Sometimes, fast shipping can help. People are impatient and waiting too long for ordered items may cause a dispute of the transaction.
7. Provide high quality
Make all your products and services of the highest possible quality. Avoid damaged products, lost packages, and delays.
8. Provide accessible customer service
Make it easy to find your contact information, so that customers can reach you directly if something is wrong with their order.
If possible, run a customer service 7 days a week 24 hours a day. But, if it’s not possible, state the support hours on your website and inform about an approximate time frame for addressing customer inquiries.
Deal with customer issues promptly, as when customers know the status of their inquiries, they are less likely to file a chargeback. So, if you run open communication with customers, chargebacks can be easily avoided.
9. Monitor orders
It’s good to keep details of past fraudulent activities to quickly recognize patterns and act promptly when a transaction is considered risky.
Also, keep detailed records of all transactions, so that it will be easier for you to gather evidence and valid proof when a chargeback occurs.
Watch your chargeback ratio closely
You can calculate a chargeback ratio by taking your total number of chargebacks per month and dividing it by the number of monthly transactions.
If your chargeback ratio is higher than 0.9% and doesn’t change for a time given by credit card issuing companies to recover, it can seriously harm your business. You can be classified as a high-risk merchant, which means having to pay higher processing fees. But, too many chargebacks can also lead to freezing or terminating your merchant account.
Your merchant service provider will monitor the chargeback rate on your account. If this exceeds certain thresholds, the provider will take action.
Dealing with chargebacks is one of the hardest parts of running an online business, as it can be costly hassle. When chargebacks start to pile up, they can severely harm your business. So, it’s your responsibility as a merchant to find the right ways to reduce chargebacks and limit them to a minimum.
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