Why Do Customer Disputes Happen? How Do You Prevent Them?
Customer disputes offer important consumer protections for credit and debit card transactions. That said, the dispute process was designed to be used as a last resort, when all other options failed. It’s seldom actually necessary, and should never be the initial response to a complaint.
With all that in mind, let’s examine what a customer dispute entails, when it’s appropriate, and what you, as a merchant, can do to prevent them.
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What is a Customer Dispute?
- Customer Dispute
A customer payment dispute, more commonly called a “chargeback,” happens when a cardholder disputes (challenges) a payment card transaction and asks the card-issuing bank to reverse it. There are multiple situations in which this can occur. However, many disputes are ultimately filed without a valid justification.
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As a cardholder protection, the inherent right to dispute payments is a good thing. It’s a guarantee that consumers can retrieve money lost to fraudsters, identity thieves, and other unauthorized users. Plus, the threat of chargebacks incentivizes merchants to stick to fair practices.
You can pay a heavy price, however, when chargebacks are used incorrectly or carelessly. Not only do you lose a sale, but you also lose shipping costs, merchandise costs, and more.
This can be a real “lose-lose” situation for you and your customer. Neither party can access any disputed funds until the issue is resolved, which could take weeks or even months. Plus, even if you manage to get a customer dispute overturned, you’re still liable for bank fees.Learn more about chargebacks
How the Customer Dispute Process Works
For the cardholder, getting the customer dispute process started can be as simple as calling the bank and complaining about a billing charge. The bank will do a brief, initial investigation of the customer’s claim. They may submit a transaction inquiry through Order Insight(for Visa transactions) or Consumer Clarity(for Mastercard) to try and get more information from you.
Failing that, the initial complaint may then proceed to a chargeback. From there, you may attempt to fight the chargeback through representment if you believe it was filed without a valid reason. However, there is no guarantee that you’ll succeed.
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How the customer dispute process plays out is almost entirely dependent on the reason the dispute was filed in the first place. With each dispute notification, banks will provide a specific chargeback reason code explaining the cause of the dispute.
When you receive this information, it will succinctly explain why the customer dispute was filed and lay out the type of evidence you would need to include if you decide to challenge the dispute. That’s not to say the reason codes are reliable though. Invalid chargebacks, known as first-party (or “friendly”) fraud chargebacks, represent a large portion of all chargebacks issued by banks.
So, if you can’t rely on reason codes, that raises a crucial question: why do customer disputes really happen? More importantly, what can you do about them?
The Top 10 Reasons for Customer Disputes & How to Resolve Them
There are a lot of reasons why consumers dispute credit card charges. Not all of them are valid, but not all are malicious, either.
Sometimes a customer forgot about a purchase they made. Or, maybe they didn’t understand your return policy, or failed to recognize your billing details on their credit card statement. In these cases, the customer dispute was filed accidentally. It’s still invalid…but it’s understandable.
In other instances, you may have been the one to make a mistake that led to the dispute. For example, if you accidentally overcharged the customer, failed to accurately describe a listing, or made some other mistake during the shipping process. These situations constitute merchant error and are a common theme in disputes.
Knowing how the customer dispute happened, and how to respond, can go a long way to improving your resolution ratio. To illustrate this, we’ll go over many of these reasons and provide you with some advice about how to mitigate your losses with a few best practices.
#1 | The merchant didn't provide the goods or services in a timely fashion
Obviously, any business run by human beings is going to make the occasional error. If a customer orders something with you that takes an unreasonable amount of time to arrive (typically, anything outside of 10 days needs to be explained in your terms of service), they may file a dispute saying they never received the item. This is true even if it eventually arrives.
#2 | The item arrived damaged
When a customer receives a product that arrived damaged or missing something they believed would be included, they will often turn to their bank. As a merchant, you’d naturally assume that the buyer would use the proper customer service channels to fix the problem. In reality, though: consumers often turn to the customer dispute process because they think it will be faster or easier.
#3 | You charged the buyer for the incorrect amount
This is a pretty common mistake for merchants who manually key in their orders. For example, if you or your staff are in the middle of a rush, it can be very difficult to make sure you’re entering every order into your system correctly. It’s easy to see how a quick slip of the finger might lead to a customer dispute.
#4 | The buyer used stolen cardholder information
This is outright criminal fraud. The cardholder is largely protected from the impact of fraud by the customer dispute process…but you won’t be.
You could be on the hook for any transactions you process that result from fraud. After the transaction goes through, there’s nothing you can really do, so the best you can hope for here is to avoid the situation in the first place.
#5 | The consumer experiences buyer’s remorse
This refers to a situation in which a cardholder makes a purchase, regrets it later, then files a customer dispute to recoup their money. This constitutes a case of friendly fraud; a situation where a customer side-steps your return policy in order to gain an illegitimate refund. A customer may do this when they know they don’t have a good excuse and are worried that their return request may be denied.
#6 | A family member made the purchase & the cardholder disputed it
This is a practice called family fraud. Many consumers fail to understand that this is another form of friendly fraud.
It’s often an innocent mistake. For example, a child of the cardholder makes an in-app purchase, then when the charge appears on their statement, the cardholder believes it’s invalid. Banks and payment processors don’t recognize these purchases as unauthorized, but the buyer may not be aware of this rule at all.
#7 | Bad affiliate traffic
Vet your affiliates carefully to avoid affiliate traffic headaches. Communicate every aspect of your expectations and agreements, and enforce your terms of service defensively. Also, if your affiliate makes promises to buyers that you can’t keep, then you need to cut those bad actors out of your program.
#8 | Buyer wants to end a subscription
Subscription services are considered high-risk because the business model features a high number of disputed charges. The reasons for this vary. But, generally speaking, people either forget about the subscription, make a mistake, or just want out of the agreement.
#9 | Inaccurate Product Description
It’s not uncommon for buyers to complete a purchase, then later dispute the charge, claiming that the item they received didn’t match what was promised. It could be that the size or dimensions of the item were oversold on your site. Or, maybe that the colors don’t quite match what the buyer saw in the pictures.
#10 | The buyer is trying to get something for free
Keep in mind: not all disputes result from errors or misunderstandings like those above.
Unfortunately, many disputes happen because consumers ignore return policies, refuse to wait for refunds, or simply want to get something for free. This is a practice known as “cyber shoplifting,” and it’s an increasingly common practice for cardholders. Buyers learn that they can abuse the customer dispute process by making a purchase, then simply disputing the transaction later.
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With Customer Disputes, Prevention is Key
You should remember that the easiest way to win a customer dispute is to keep it from happening in the first place. Below are some easy steps you can take to avoid customer transaction disputes:
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What is a customer dispute?
A customer payment dispute, more commonly called a chargeback, happens when a cardholder disputes (challenges) a payment card transaction and asks the card-issuing bank to reverse it. There are multiple situations where this can occur, but few reasons it actually should.
What happens when a customer disputes a charge?
When a customer dispute is initiated, the case is propelled through a series of steps, including initial contact, provisional refund to the buyer, issuance of a chargeback. If the merchant believes the case is invalid, the case may go on to include reprementment, and even chargeback arbitration.
What causes customer disputes?
There are three main causes for customer disputes. First is criminal fraud, meaning someone accessed the customer’s payment details without permission to complete a purchase. Next is merchant error, meaning the seller made a mistake that led to the dispute. Finally, there’s friendly fraud, which can be either accidental or intentional forms of first-party (i.e. consumer) fraud.
How do you resolve a customer dispute?
There are only two ways to resolve customer disputes. First, the merchant may process a full or partial refund for the item disputed. Second, once a chargeback has been issued, the merchant may argue against the disputed transaction through a dispute resolution platform or via the representment process.