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Managing Merchant Chargebacks

Pros & Cons of Handling the Merchant Chargeback Process

Managing the threat of chargebacks can seem overwhelming to merchants. The occasional customer dispute is bad enough, but the overall number of chargebacks has risen exponentially in the past few years, especially in the eCommerce space.

Those dealing with a steady or growing number of cases stand to lose revenue, and may even see long-term threats to their businesses’ survival. Chargebacks can be managed, however, if the merchant is willing to put consistent effort into doing so.

Chargebacks: Seeing the Full Picture

Customer disputes, or chargebacks, exist to fulfill a federally-mandated right for payment card users. This capability was designed to be used as a “last resort” to protect consumers from fraud or dishonest merchants. While still effective in this function, the system is increasingly being used in dishonest ways that spell trouble for merchants.

Anyone who accepts payment card transactions is vulnerable to chargebacks. For merchants in high-risk, card-not-present, or eCommerce verticals, though, the risk is even greater. While many simply consider chargebacks a cost of doing business, savvy merchants understand that a management strategy is the smarter approach.

Still, designing and implementing such a strategy is easier said than done. Merchants must select the most effective tool to use against each type of chargeback. This is a near-impossible task, as most don’t understand where their chargebacks come from.

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The Hidden Sources of Chargebacks

One of the most challenging facets of chargeback management is identifying the true sources of each customer dispute. Most merchants are surprised to discover that despite the range of available reason codes, all chargebacks are caused by one of three things: merchant error, criminal fraud, or friendly fraud.

Merchant Error

Merchant Error

An estimated 20-40% of chargebacks are caused by seemingly minor missteps that lead to substantial revenue loss. Only through a detailed, unbiased analysis can these preventable errors be identified and resolved.

Criminal Fraud

Criminal Fraud

Merchants spend the bulk of their chargeback management budget trying to prevent criminal fraud, which is perceived as the biggest threat. In reality, criminal fraud may account for less than 10% of all chargebacks.

Friendly Fraud

Friendly Fraud

In a growing number of situations, customers initiate chargebacks instead of dealing with the merchant directly to handle issues or returns. For the average merchant, an astounding 60-80% of chargebacks may be attributed to friendly fraud.

Choosing a Prevention Strategy

There are two critical components to managing merchant chargebacks: prevention and representment. Starting with chargeback prevention, there are two pathways merchants can take in an attempt to decrease cases: outsource the job to professionals, or try to handle things in-house, usually with existing staff.

The DIY Approach

Merchants who wish to try handling chargeback prevention in-house must first learn as much as possible about chargebacks. They need to know what causes them, how they can be avoided, and how they can impact a merchant’s reputation with customers and banks.

Some basic prevention tips include:

  • Providing “above and beyond” customer service
  • Updating and clarifying shipping and return policies
  • Leveraging tools provided by banks and card networks
  • Learning to recognize potential fraudulent activity
  • Marketing products and services comprehensively and honestly

Through painstaking analysis and an ongoing investment of time and man-hours, merchants can learn to identify procedural missteps and weaknesses that could be triggering chargebacks, and establish strategies to prevent future transaction disputes.

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Professional Assistance

“Do-It-Yourself” efforts can sometimes prevent a minimum number of more obvious chargebacks; the “low-hanging fruit,” as it were. In a discouraging majority of cases, however, DIY strategies deliver disappointing results. Most in-house teams lack the wide range of experience and expertise necessary to be effective.

To prevent revenue loss, merchants need a professional, unbiased strategy that goes beyond the obvious. This is where the input of experienced chargeback experts can make a significant impact.

With the right help, merchants can eliminate virtually all chargebacks from criminal fraud and merchant error, while dramatically reducing the occurrence of chargebacks from friendly fraud. This result is rarely if ever achieved through in-house means.

Choosing a Representment Strategy

The second component to combating merchant chargebacks is representment. Representment is the only way to recover funds that the merchant never should have lost in the first place. When done correctly, representment actually helps prevent future chargebacks.

As is the case with prevention, merchants have two options: handling the task in-house or seeking professional assistance.

The DIY Approach

Many merchants prefer to keep chargeback representment in-house. They feel this option gives them greater control and requires less of an investment. On the surface, this may appear to be true, but in most situations, there are downsides of which the merchant isn’t aware:

  • Most in-house teams lack both the necessary chargeback education and an established working relationship with banks and card networks.
  • Policies and procedures are complex and constantly changing. It’s a full-time job to simply stay current on network requirements.
  • Without a way to isolate the true sources of chargebacks, merchants end up fighting the wrong problems with insufficient solutions.
  • The time and effort needed to learn chargeback management nuances and execute necessary tasks in-house eats up valuable resources.
  • While the initial investment may seem lower, the resulting ROI typically shows that the cost is far more expensive over time.

It’s not impossible for merchants to buck the odds and manage chargebacks on their own. To accomplish this, though, there are two critical areas they absolutely must address:

Learn card network guidelines, especially Visa and Mastercard.

Learn card network guidelines, especially Visa and Mastercard.

Find out how each specific card network handles the representment process for each reason code. Because networks update their policies on a constant but irregular schedule, merchants must also routinely check for any changes to the representment process.

Avoid automation.

Avoid automation.

Certain products offer automated representment response capabilities. While it can be tempting to rely on such “labor-saving” tools, they’ve proven to be highly ineffective. Dispute responses must be custom-crafted to each individual chargeback for any chance of success.

Professional Assistance

Ultimately, in-house representment is a balancing act between risk and reward: the rewards are statistically small, but the risks are substantial. Using in-house labor may seem like the less expensive option, but any solution that does not actually resolve the issue is too expensive.

Merchants may feel that using existing staff to dispute chargebacks is better than nothing. If we compare the immense amount of time spent and the revenue recovered, though, we see that the merchant is typically losing money. Internal teams tend to spend more time per case, yet win fewer cases, because they have limited access to industry data, and limited insight regarding changes to industry rules and procedures.

For representment with a tangible ROI and the best possible win rates, merchants should seek at least some measure of professional assistance. This has the added bonus of freeing staff members to focus on activities tied to directly growing the business.

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Fighting Chargebacks on All Fronts

What makes chargeback management success so elusive? Mostly the fact that merchants are often only fighting one aspect of the problem, and using the wrong tools.

The true reasoning behind a transaction dispute can’t be accurately identified by reviewing the reason code or the bank’s description. That’s why Chargebacks911 created Intelligent Source Detection, a combination of proprietary technologies and human forensics capable of looking beyond reason codes, to the true source of each chargeback.

Once the true causes of chargebacks are known, a multi-tiered strategy can be implemented that addresses all aspects of the problem:

Combatting Merchant Error

The Chargebacks911 Merchant Compliance Review helps find and eliminate merchant missteps that commonly lead to transaction disputes. This proprietary solution includes an unbiased analysis of the merchant’s policies and procedures, plus expert assistance in implementing a preventative action plan.

Combatting Chargebacks With Alerts & VMPI

Not only does Chargebacks911 provide the widest combined chargeback alert coverage, we’re Visa-authorized VMPI facilitators. Combining these two important services offers merchants ample opportunities to intervene and prevent issues from becoming chargebacks.

Combatting Friendly Fraud With Tactical Chargeback Representment

Throughout the industry, Chargebacks911’s Tactical Chargeback Representment is recognized as the gold-standard for both revenue recovery and merchant reputation repair. We deliver positive ROI and the highest win rates in the industry, guaranteed.

Ready to forget about chargebacks and get back to the business of running your company? Contact Chargebacks911 today to see how much ROI you can expect with our services.


Prevent Chargebacks.

Fight Fraud.

Recover Revenue.