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Chargeback Management Resources Hub

Chargeback Management Resources Hub

Understanding chargeback management is crucial for merchants. We explain where chargebacks really come from, how to manage them, and the pros and cons of internal chargeback management.

Chargeback Management:
Here’s Everything You Need to Know.

Chargeback Management

Worried about chargebacks? You’re not alone.

According to Mastercard, worldwide chargeback volume is expected to hit 615 million in 2021. Other studies suggest that global chargeback costs may reach $117.47 billion by 2023. Accounting for chargeback fees and other related revenue drains, the average chargeback will cost merchants $3.60 for every $1 in direct transaction costs.

What are Chargebacks Really Costing You?

Annual Revenue Lost:

+ Chargeback Fees:

+ Admin Fees:

+ Cost of Goods & Shipping:


Total Annual Chargeback Cost:

Chargebacks are serious business. The good news: they can be managed.

It’s not always easy to keep customer disputes to a minimum. But, with the right chargeback management strategy in place, you will save immense amounts of time, resources, and revenue. It can also increase the longevity of your business, and let you build better relationships with customers.

In this article, we’ll explore the best ways to approach chargeback management. We’ll see why it’s vital to your ongoing success, and discuss the pros and cons of trying handle the task in-house.

What Is Chargeback Management? Why Do I Need It?

A customer dispute, or chargeback, is a forced transaction refund initiated by an issuing bank. “Chargeback management” is an umbrella term that describes different ways of controlling the impact chargebacks have on your business.

Chargeback Management

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Chargeback management refers to the strategy you deploy to minimize the impact of chargebacks on your business. The tools and tactics you use to manage chargebacks are all part of a broader strategy to prevent disputes, recover revenue, and collect and analyze chargeback data to fine-tune your efforts.

Successfully managing chargebacks requires addressing both dispute prevention and revenue recovery. The end goals here are to prevent chargebacks wherever possible, contest suspected friendly fraud through representment, and keep your business’s chargeback ratio within an acceptable range.

Creating and implementing an effective chargeback system can be challenging, though. The chargeback process is complicated. There are multiple parties involved, as well as tight deadlines and regulations that change constantly. Your system must take all of this into account. Learn more about chargeback systems

You could accomplish all this through an in-house chargeback team…at least in theory. But, with the amount of work and expertise required, most find it is easier and more cost-effective to outsource the job to a trusted chargeback management company. Learn more about professional chargeback management

Why Do Chargebacks Happen?

The way consumers shop has changed over the last 50 years; chargebacks haven’t.

Chargebacks started out as a “safety net” to protect cardholders. At the time, it gave consumers the extra confidence to begin using credit cards on a wide scale. Still, the system was put into place a half-century ago—long before eCommerce was even a consideration.

In other words: the way consumers shop has changed, but chargebacks haven’t.

The direct result has been a meteoric rise in customers filing chargebacks, and many of them unwarranted. Responding to this threat is the core purpose of chargeback management.

Chargeback Management Strategy by Source

Cardholders are allowed to file chargebacks for a variety of “official” reasons. Credit card networks attach reason codes to each chargeback which are meant to explain the cardholder’s claim. These labels rarely tell the whole story, though. Ultimately, all chargeback stem from one of three fundamental sources:

Chargeback Prevention Strategy by Source

The baseline cause of a chargeback will always be one of these three things. Each one requires a unique management strategy. You need to employ the right combination of tools and tactics against each type of chargeback.

The problem arises when you don’t understand what is actually causing your chargebacks. Most merchants rely on reason codes, and end up addressing the symptoms, not the problem.

Managing your chargebacks today means fewer chargebacks in the future.

To develop an effective chargeback management strategy, you must first isolate the true reasoning behind each transaction dispute. You can learn more about identifying chargebacks by their source here.

Once you segment your chargebacks by source, you can then tackle chargeback management in three stages. So, now, let’s take a closer look at how this works, and what you can do to combat each chargeback source.

Step 1

Prevent Chargebacks from
Criminal Fraud

Third-party credit card fraud covers any unauthorized transaction made with stolen or breached payment card information. This activity is flourishing on a global scale. In fact, data from LexisNexis suggests that the average US retailer suffered 727 successful fraudulent transactions per month in 2020. Given that the average fraudulent transaction stands at $174, this translates to $126,500 in monthly losses.

Most merchants overestimate the amount of criminal fraud they experience. As we’ll see in a bit, many disputes identified as criminal fraud are actually cases of friendly fraud. However, you can’t identify those friendly fraud chargebacks until you first eliminate the possibility of criminal activity.

Criminal fraud chargebacks are generally less ambiguous than other disputes, which makes preventing them a more straight-forward process. Once you identify the extent of the problem, you can begin developing a strategy using fraud scoring, card network verification tools, internal manual review processes, and detection processes.

Step 2

Eliminate Chargebacks from
Merchant Errors

“Merchant error” covers a wide range of seemingly minor policy and procedural missteps that can trigger chargebacks.

You may not be able to identify a singular, glaring mistake that has a measurable impact. However, issues like unclear policies, processing shortcuts, and simple oversights can collectively account for many of the chargebacks you experience. In fact, somewhere between 20-40% of all chargebacks are likely cases of merchant error.

Again, the good news is that these chargebacks are preventable...if you can identify the errors responsible. This requires an in-depth, end-to-end evaluation of your business. You need to examine your policies and practices, reviewing and rewriting them as necessary. Every phase of the sales process must be checked for chargeback triggers.

Unfortunately, the typical merchant is too close to their business to perform this type of unbiased analysis. First-hand knowledge of your operation seems like an advantage here, but it can actually blind you to missteps an outside observer would catch. That’s why the assistance of a third-party expert is almost always more effective.

Step 3

Contest Chargebacks from
Friendly Fraud

If you’ve eliminated the majority of criminal fraud and merchant-error chargebacks, nearly all remaining claims should be friendly fraud.

Preventing chargebacks from friendly fraud is a challenge. The fraud occurs post-transaction, making it hard to anticipate or mitigate the threat using traditional prevention tactics.

For most online retailers, the best option will be to challenge illegitimate claims through representment. If you’re confident that the chargebacks in question are cases of friendly fraud, you can reasonably expect a high number of chargeback reversals, regardless of reason codes. Benefits include both revenue recovery and an improved reputation with acquiring banks.

That’s not to say it’s impossible to prevent chargebacks from friendly fraud, though. Chargeback alerts and network inquiries send you notifications of impending disputes. These allow you to avoid a chargeback by refunding the order in question, or providing additional transaction details to resolve inquiries.

Benefits of Chargeback Management

Nearly every eCommerce merchant can benefit from some investment in chargeback management, whether it is handled internally or outsourced to a third-party provider.

It’s true: chargeback management requires an investment of time and resources on your part. However, neglecting chargebacks can have serious consequences. It could lead to a loss of revenue, increased chargeback rate, and possibly even the loss of your merchant account.

Chargeback management is a continuous process. It occurs both pre- and post-transaction. There are benefits to making an investment in efforts on both ends of this equation:

Post-Transaction Chargeback Management Pre-Transaction Chargeback Management
Recover Revenue Avoid Chargeback Fees
Improve Industry Relationships Increase Profits
Discourage Future Chargebacks Lower Risk
Protect Card-Acceptance Status Ensure Sustainability
Improve Customer Service Increase Fraud Prevention

The facts are clear: in terms of decreased risk, recovered revenue, and long-term sustainability, the benefits of managing chargebacks will significantly outstrip the costs.

Can I Handle Chargeback Management Internally?

No single tactic can solve all your chargeback issues. There is no “set-it-and-forget-it” solution. Someone within your business will have to learn—and stay up to date on—the constantly changing rules and regulations set by different card schemes, banks, and even local and national governments.

You’ll need to balance multiple fraud-fighting tactics. For example, fraud filters can be effective in stopping potential fraud. However, the frequency with which false positives happen means you may be losing more than you save.

Along the same lines, you may have the evidence to contest an invalid chargeback. If you miss one of the strict representment time limits, however, your case will get thrown out...no questions asked.

Writing Winning Chargeback Rebuttal Letters

Writing Winning
Chargeback Rebuttal Letters

Learn how to create a winning debit or credit card chargeback rebuttal letter. Download our rebuttal letter template and writing checklist today.

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In contrast, third-party solution providers can take dispute management entirely off your plate. Which option is best for you, though? Here’s how the two stack up:

In-House Chargeback Management:

Positives

  • Total control of the process
  • Conducted by people most familiar with the business
  • Lower up-front cost

Challenges

  • Ties up resources better used elsewhere
  • Full responsibility for all aspects of management
  • Limited data for decisioning
  • Decidedly lower ROI
  • Less effective overall

Outsourced Chargeback Management:

Positives

  • Highly customized solution
  • More effective prevention
  • Fewer chargebacks and more reversals
  • More and better data for AI decisioning
  • Allows reallocation of internal resources
  • Measurably higher ROI.

Challenges

  • Depends on the provider; many only offer certain services or rely totally on less-effective automation
  • Some require additional investment in hardware
  • Many are not equipped to scale.

Of course, it doesn’t have to be an “either/or” choice. You can combine different aspects of outsourced and in-house management and create a solution tailored to your needs.

Learn more about in-house vs. outsource options

Other Important Aspects of Dispute Management

There are other factors to think about as part of your chargeback management approach, too. These will be key considerations, regardless whether you manage chargebacks internally or are looking for a third-party solution:

Reporting

Reporting

Transaction disputes are rife with case-related data. Analyzing this data and monitoring key performance indicators (KPIs) can help you see trouble spots. You pick up on trends or patterns and fine-tune your management strategy.

you need this information in an accessible form to utilize it effectively, though. You need a way to compare key performance indicators (KPIs). For example, cases vs. false declines, net win rate vs. ROI, chargeback ratio across different card schemes, and so on.

Customizable reporting should be an ongoing part of chargeback management. You’ll want the ability to easily create tailored reports, using as much or as little data you need at any given point.

Learn more about customized chargeback reporting
Net Win Rate

Net Win Rate

One of the most important KPIs to track is your net win rate. Understanding your win rate is essential to determining the ROI generated from representment. That number, however, is often inflated by misleading calculations.

Your win rate should be based on reversals as a share of total disputes filed. Many providers prefer to advertise win rates based on reversals as a share of chargebacks challenged. Even that number can be misleading, though, if it doesn’t take into account second chargebacks.

Before you hire a third-party provider, be sure they calculate win rates based on disputes received, not just disputes contested. Then, use that number for comparison.

Learn more about chargeback win rate KPIs
Chargeback Ratio

Chargeback Ratio

In simple terms, your chargeback ratio (also called a chargeback rate) is a metric that compares your sales to the number of chargebacks you receive each month. Careful analysis of this is an important part of chargeback management.

Monitoring chargeback ratio can offer insight for fine-tuning, as well as informed decisioning. It serves another function, as well; chargeback ratios come with a threshold which, if breached, can result in fines, higher processing costs, and even the loss of card processing rights.

Before you hire a third-party provider, be sure they calculate win rates based on disputes received, not just disputes contested. Then use that number for comparison.

Learn more about chargeback ratios
Chargeback Management Software

Chargeback Management Software

Chargeback management software is indispensable for keeping your efforts organized. The right platform can facilitate and streamline functions, such as analyzing data, flagging potential fraud, and processing transaction errors. It can also increase accuracy and ensure response deadlines are met.

That said, chargebacks are mostly built on human choices. That means there will always be some unpredictability. Relying on fully automated systems can expose you to issues. In a high number of cases, specialized—i.e. human—attention will still be necessary.

Chargeback management software is a powerful and important tool. However, beware of any provider who suggests that automated systems are all you need.

Learn more about chargeback management software
Chargeback Accounting

Chargeback Accounting

Even using chargeback management software, it’s essential to understand the extra complications involved with accurate chargeback accounting.

Unlike checks or deposits, for example, you won’t have a set number of chargebacks each week. Individual cases can even extend over fiscal years. You’ll constantly be juggling different payable amounts across inconsistent time frames. Even then, you may still lose the case.

Learn more about chargeback accounting
Chargeback Policies

Chargeback Policies

Chargeback policies generally outline your chargeback management philosophy as a merchant. They also cover the standards you impose for preventing and contesting customer disputes. Well-crafted policies can be effective fraud deterrents, and can help you recover money that would otherwise be lost to illegitimate chargebacks.

Many merchants don’t have an official policy. That’s fine; even just having clear chargeback terms and conditions can help you prevent customer disputes.

Concentrate on creating transparent, customer-centric policies that are intentionally written to discourage disputes. They should clearly explain the conditions that warrant a chargeback, as well as situations where they are not appropriate.

Learn more about merchant chargeback policies

Comprehensive Chargeback Management Services

Chargeback management involves a great number of moving parts that can shift with little or no notice. There are few service providers on the market that offer true, transparent, end-to-end management services that can handle all your chargeback needs.

Chargebacks911® is the exception to the rule.

In addition to customizable strategies that take chargebacks off your plate, we offer proprietary technologies and experience unmatched by anyone. Our solutions are flexible, scalable, and global in scope. Our error/risk/threat notifications are accompanied by actionable real-time solutions. And we offer the only performance-based ROI guarantee in the industry.

Chargebacks911 delivers ongoing support for all aspects of chargeback management, from consultations to wholly implemented strategies. For more information, contact us today.

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