What's a Chargeback Reduction Plan: a Step-by-Step Guide

How Do You Create a Chargeback Reduction Plan? When is a Plan Necessary?

Chargebacks are hard on you, as a merchant. They eat into your profits, cost you merchandise, and tie up your workers with extra responsibilities.

The problem gets even worse over time, though. If left unaddressed long enough, chargebacks can compromise your entire business.

Banks and credit card networks understand the threat chargebacks pose to you, and by extension, to them. That’s why banks will only allow so many chargebacks before they intervene and ask you to draft up a chargeback reduction plan.

Having a strategy for managing customer disputes seems like a good idea anyway. So, what’s the big deal? In this post, we explain how to create a chargeback reduction plan, why the bank may demand one, and what might happen if the plan isn’t successful.

What is a Chargeback Reduction Plan?

Chargeback Reduction Plan: A chargeback reduction plan refers to a formal document, requested of a merchant by a bank or card network, that outlines specific steps the merchant will take to reduce chargeback occurrences and mitigate future risk.

A chargeback reduction plan (sometimes referred to as a chargeback mitigation plan) is a comprehensive blueprint for preventing future chargebacks. More than just a management guide, the reduction plan we’re referring to here is a formal document created in response to a card network’s request.

There are strict requirements regarding the information included. The details may vary depending on each situation. Overall, though, the bank is saying it’s concerned about the number of customer disputes you are receiving, and wants to know exactly what you plan to do about it.

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The bank’s or card network's demands may seem punitive. Ultimately, though, creating a chargeback reduction plan is in everyone’s best interest.

Over time, a well-constructed risk mitigation plan can go a long way toward lowering your chargeback ratio. It will also help protect processing rights and lead to increased revenue.

The banks and card networks just want reassurance that you have a workable plan in place to stop disputes. This is important to them; the bank will face more chargeback liability should you be unable to cover the disputes lodged against you, while the card network could lose consumer confidence and hurt their brand integrity if their network sees too many disputes. A chargeback reduction plan should avert the need for them to take more drastic measures.

Learn what happens when you receive too many chargebacks

What Does a Chargeback Reduction Plan Entail?

An effective chargeback management plans must address both fraud and chargebacks. While the specifics of each plan will differ, there are some key elements that should be part of any plan.

Four key facets should be present in any chargeback reduction plan. These include:

Business Description

Your business type, marketing channels, and billing methods are just some of the factors that can affect your plan. The network will need to know what kind of business they are dealing with.

Policy Outlines

Refund and return policies, terms, and conditions of sales, and other internal procedures could contribute to your chargeback situation. In some cases, it may explain why you see so many chargebacks.

Chargeback Description

To combat chargebacks successfully, you must know their true source. That’s not always as it sounds; customer disputes always come with a reason code, but those codes seldom tell the whole story.

Prevention/Risk Mitigation Strategy

This is the heart of the whole plan. You need an in-depth schedule of methods, tools, and procedures that will be used, as well as how those items will help prevent chargeback issuances.

Action plan

How the above solutions will be implemented, what results are expected, and a reasonable timeline for those results. This would also include secondary steps should the planned strategy fail to produce the desired results.

When Do You Need a Chargeback Reduction Plan?

To reiterate, all merchants (but particularly card-not-present retailers) need to have processes in place to reduce fraud and manage chargebacks. A formal request for a chargeback reduction plan, however, will come from either the card network directly, or from your bank (at the network’s insistence).

The trigger for this is an excessive chargeback-to-transaction ratio. Card brands, as well as acquirers and payment processors, monitor the percentage of disputes you receive, as compared to the total number of transactions. This chargeback ratio must remain below a certain threshold (relative to your monthly transaction volume).

Reducing chargebacks isn’t a “one-and-done” task. It requires consistent monitoring for new threats and adjusting your plan to combat them. Good news: you don’t have to do it alone.

It’s important to note, however, that the networks will usually intervene long before that threshold is reached. Acquirers typically want to address the situation before it goes critical.

If your chargeback numbers start making the other stakeholders nervous, you may be placed in a chargeback monitoring program. The Visa Dispute Monitoring Program and Mastercard Excessive Chargeback Program are examples of this.

These programs have different tiers, some of which mandate the submission of a chargeback reduction plan. This is actually a proactive step designed to help reduce claims and prevent the need for more drastic action. Again, this is crucial: you want to exit the program as quickly as possible and avoid consequences such as being added to the MATCH list.

How Do You Create a Chargeback Reduction Plan?

Your plan is the first component of a workable, measurable strategy. What that will look like depends largely on the specifics of your business, and the main source of your chargebacks.

For example, many chargebacks are triggered by minor policy or procedural errors. Merchants with this problem will need to chart out a step-by-step game plan for assessing their operating procedures and resolving any trouble spots.

Similarly, merchants dealing with a high level of criminal fraud may need to make plans for stricter user validation and increased use of fraud filters.

A strategy for addressing first-person fraud issues will be much more difficult. After all, this type of claim happens post-transaction, and it’s hard to prevent something you have no reason to believe will happen.

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Second, methods of decreasing chargeback fraud tend to be aimed at long-term reduction. Fighting all invalid claims can eventually lead to a higher reputation with banks, which could cause them to consider customer claims more closely. You also won’t be seen as an “easy target;” serial chargeback abusers who get beaten will take their scams elsewhere.

Representment can be a powerful tool to use against friendly fraud, but you won’t see results overnight. This may mean that your chargeback plan may not be able to decrease chargebacks sufficiently within the card network’s time window.

Create a Chargeback Reduction Plan: Step-by-Step

So, ready to get started? Below, we’ve pulled together a complete list of the questions you’ll probably be asked to respond to as part of your chargeback reduction plan. You should be prepared to answer all of these in as much detail as possible.

Want a quick reference guide to take with you? Download your own pre-set PDF version of a dispute reduction plan below.

Download the dispute reduction plan

Key Questions

What type of products or services do you sell?
How do you market your products or services?
Where do you sell your products or services?
What billing model do you use?
Do you use a single DBA (doing business as) name?
How do the service providers' prices compare to competitors?
What is the cause of your chargeback issue?
Which fraud detection and chargeback management tools or processes are you currently using?
Which fraud detection and chargeback management tools or processes do you plan to implement to reduce chargebacks?
How will you monitor your progress as you work to reduce chargeback issuances?

You’ll be required to submit several piece of documentation along with your plan, including:

Proof that usage of your DBA name is consistent
A copy of your cancellation and/or return policy
A copy of your terms and conditions
Examples of form emails sent to customers
Supporting documentation regarding alleged dispute causes

Download Our Comprehensive Template

Getting the Most from a Chargeback Reduction Plan

Having a well-written, well-thought-out chargeback reduction plan can help keep you out of a chargeback monitoring program. In addition, it can help you save time and effort, not to mention retain more of your revenue.

That said, effective chargeback management demands a lot of valuable resources. If you’re like most merchants, you might struggle to stay one step ahead of the situation, which will increase the likelihood of additional losses.

The experts at Chargebacks911® can help detect friendly fraud, reduce risk, prevent disputes, and keep your chargeback rate in check. We can help you design and implement a prevention and management strategy that’s tailored to your business. To learn more, contact us today.

FAQs

What is a chargeback reduction plan?

A chargeback reduction plan refers to a formal document, requested of a merchant by a bank or card network, that outlines specific steps the merchant will take to reduce chargeback occurrences and mitigate future risk.

How do I create a chargeback reduction plan?

Several steps are involved in developing a chargeback reduction plan, including a way to identify valid sales versus unauthorized transactions. The source of each chargeback must be located, and illegitimate chargebacks must be challenged through representment.

How can I reduce my credit card chargebacks?

Chargeback reduction is a three-phase process. You need to first eliminate criminal fraud using a multilayer fraud strategy backed by professional fraud scoring. You must then diagnose any potential merchant errors that might trigger a chargeback. Finally, you can fight any remaining chargebacks caused by friendly fraud through representment, which will support long-term prevention efforts.

When might your bank require a chargeback reduction plan?

Card networks like Visa and Mastercard set predetermined limits for acceptable merchant chargeback rates. If your chargeback cases for one or another card brand start creeping up on these thresholds, they may require you to put together a chargeback reduction plan.