Want to Know How to Avoid Chargebacks? Start by Identifying Them at the Source
Have questions about how to avoid chargebacks? Don’t worry…you’re not alone.
If you’re interested in learning how to avoid chargebacks, odds are you’re already taken a few basic steps. You may have already contracted with a fraud solution provider, and adopted a few fraud mitigation best practices to try and deter your next dispute. Once you exhaust those few moves you’re able to make, however, it starts to seem more and more like a game of chance.
Is there any real way to stop chargebacks, once and for all? Let’s find out.
Identifying Chargeback Sources
The first thing to understand is that not all chargebacks are the same. You may know that every dispute you receive is attached to a chargeback reason code. This is a code taken from the card scheme’s published list, which identifies why the issuer filed the dispute:
The chargeback reason code may offer some insight on your dispute, and it’s important to understand the system for that purpose. That said, you can’t rely on it to show you the entire picture. You should take a broader approach instead, rather than thinking in terms of how to avoid chargebacks based on individual codes. Codes aside, the truth is that there are three fundamental chargeback sources:
These are the seemingly-minor policy and procedural missteps that can produce a dispute. For example, assume a buyer wants to return an item. The person can’t find your return policy or customer service information anywhere, though, and so files a chargeback. While not necessarily appropriate, that dispute could have been prevented with more attention to business best practices.
When a fraudster uses stolen cardholder information to complete a purchase, that cardholder is generally entitled to file a chargeback. This is precisely why chargebacks were introduced in the first place. While it may seem unfair for merchants to bear the fraud burden, the fact remains that you’re positioned to identify and stop fraudulent transactions.
Unlike criminal tactics such as account takeover or cardholder impersonation, friendly fraud isn’t always a deliberate, malicious act. It occurs when buyers request a chargeback without justification. This can be due to a misunderstanding; in some cases, cardholders don’t even realize that a bank filed a chargeback on their behalf.
Each of these fundamental chargeback sources demands a unique response and approach. So, let’s take a look at how to avoid chargebacks by breaking the process down based on the source of the dispute.
Avoid Merchant Error Chargebacks
Mistakes will happen from time to time. It’s not a comforting thought…but it’s the truth. If you’re a merchant, your mistakes can often result in a chargeback. The occasional mistake is unavoidable, but it becomes a problem when merchant errors are a persistent, recurring issue.
Obviously, everyone strives to provide the best service possible. The core of the problem here, though, tends to be a fundamental disconnect between what your customers expect, and what you can deliver. You need to be proactive and define your customers’ expectations before they engage with you. You can go a long way toward eliminating merchant error chargebacks by adopting some basic practices:
- Describe Products/Services Accurately: Lay out what your customers should reasonably expect from your product with detailed descriptions and clear pictures.
- Optimize Billing Descriptors: Ensure the descriptor that appears on customers’ statements accurately reflects your business by including your name, URL, and phone number.
- Clarify Return Policies and Terms of Service: Don’t assume customers understand your policies. Use clear, concise language to define the ground rules.
- Make Contact Info Available: Don’t expect buyers to hunt down your email address or phone number. Make contact information clearly visible on every page.
- Provide Round-the-Clock Service: Live, 24-hour service with prompt responses to email and social media inquiries is key to intercepting issues before they devolve into disputes.
- Never Accept an Expired Card: If a customer’s payment card is expired, reject the sale. Expired cards are invalid, and you risk an authorization error chargeback by accepting one.
Avoid Criminal Fraud Chargebacks
Stopping merchant error chargebacks is one thing: eliminating errors, after all, is mostly within your control. That raises another pressing issue, though: how to avoid chargebacks when bad actors are actually trying to steal from you.
Although genuine criminal fraud attacks are the cause of fewer than 10% of all chargebacks, it’s still important to be proactive. Criminals are opportunistic; if they find your defenses weak, they’ll keep coming back. Thus, a lax attitude when it comes to fraud can, in turn, cause more fraud.
Preventative action calls for fraud scoring. We work with many of the industry’s top providers, including Kount, Radial, Sift, and more, to offer criminal fraud assessment and protection. One or two indicators won’t be enough, though; to develop an accurate impression of fraud risk, you need to use the right tools to verify customers and identify fraudulent transactions before finalizing the sale. For example:
- 3-D Secure: This is an opt-in service that works like an online PIN code. At checkout, users will be redirected to a separate page to enter a unique code before proceeding.
- Geolocation: Using geolocation allows you to see where in the world users are located. If there’s a mismatch between IP address and shipping/billing information, it could suggest fraud.
- AVS: Address Verification Service allows merchants to match the billing addresses provided by customers with those on-file at the issuing bank. Mismatched billing information suggests fraudulent activity.
- CVV Verification: Most cardholders will either have their CVV code memorized, or will at least have the physical card handy to provide the 3- or 4-digit codes printed on the card.
- Velocity Limits: Fraudsters typically try to run-through as many sales as possible before they’re detected. High transaction velocity is a fraud red flag.
Of course, those are just a few of the tools at your disposal. Encouraging mobile payments, for example, is a good antifraud strategy. Most mobile wallet apps rely on tokenized transactions with two-factor authentication methods.
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What About Friendly Fraud?
With best practices in place, you can learn how to avoid chargebacks caused by merchant error and criminal fraud. Friendly fraud, though, is where typical chargeback prevention falls flat.
Friendly fraud is a post-transactional threat source. A friendly fraud transaction doesn’t look like fraud, as it only “becomes” fraud after the transaction is complete and the customer files a dispute.
There are things you can do to reduce your friendly fraud risk. You can deploy all manner of fraud prevention tools and strategies, and have totally customer-centric, responsive service. Even then, you still can’t prevent all friendly fraud incidents. There’s always the risk of buyers simply misunderstanding processes or running out of patience and filing a dispute.
The only real response for friendly fraud is to fight back through chargeback representment. For this, you’ll need to submit compelling evidence to prove the transaction was legitimate and should be upheld. This can include:
- Order forms, especially those outlining special requests.
- Tracking numbers.
- Communications logs between yourself and your customer.
- Proof the cardholder possesses the product (photographs, social media posts, etc.).
- Delivery confirmation for items shipped to an address matched with AVS.
The most compelling evidence varies depending on the circumstances and the customer’s claim. Remember: this is a tactical process.
Of course, compiling evidence and submitting cases is a difficult, time-consuming, and expensive process. That’s why most merchants don’t bother to fight back...and that’s why the problem only seems to get worse.
Sure, there’s no way to prevent friendly fraud. But, by learning how to avoid chargebacks caused by criminals attacks and simple errors—as well as how to fight back against friendly fraud—you can see long-term chargeback reduction. Not sure how to fight? Click below, speak with the experts, and see how much you could save.