Learn why chargeback prevention is such an important issue for merchants. We cover the three types of chargebacks, available prevention tools, and tips for creating a custom management strategy.
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Chargebacks are not a subject that most people think about on a day-to-day basis.
A lot of consumers don’t know what a chargeback is, even when they file one. And because cardholders dispute a relatively small percentage of overall sales, many merchants find it easier to simply write off the losses as a “cost of doing business.”
Generally speaking, though, retailers drastically underestimate the damage that chargebacks could cause. These disputes are a real and rapidly growing threat that drains revenue, damages bank and customer relationships, and could ultimately impact your ability to process payments.
The right chargeback prevention steps, however, can dramatically reduce disputes. In fact, preventing chargebacks may be the best thing you can do to increase revenue retention and ensure the sustainability of your business.
In this article, we look at the true costs of chargebacks, and why it’s critical to discover the real reason disputes happen. We’ll also explore different types of protection tools, and take a look at how to prevent chargebacks and payment disputes before they happen.
If you’d like an even deeper dive, consider downloading our free Chargeback Prevention Guide, which includes dozens more chargeback prevention tips:
To appreciate the dangers of chargebacks, it’s important to understand the true price you’re paying.
Beyond the lost sales revenue and the cost of the merchandise, each dispute will also mean incurring ancillary expenses. These include chargeback fees, administrative costs, and overhead expenses like shipping, fulfillment, and customer acquisition costs. Other sources of loss, such as false declines and return fraud, will also likely increase.
When you account for all these additional expenses, the price of chargebacks spirals quickly. One study shows that, on average, merchants ultimately lose $3.75 for every dollar disputed.
Want to see what this means for your business, specifically? This interactive tool provides a realistic view of your current chargeback losses:
Right up front, you should know that if you’re fighting against chargebacks, you’re not alone.
Payment service providers (PSPs) don’t like chargebacks any more than you do. That’s why the most popular PSPs also offer some form of merchant protection of their own:
Offering chargeback protection or assistance is really in every party’s best interest. It’s true that these programs won’t always help to prevent eCommerce chargebacks. Still, they may help deflect or resolve a number of claims that would otherwise impact your business, and extended use may discourage future fraudsters.
Rather than work on prevention, some merchants consider the option of pursuing chargeback insurance. This only offers limited protection, though. It also comes with a host of caveats and carve outs. In effect, it’s a policy that will only guarantee you against some losses resulting from some criminal fraud chargebacks.
If a fraudster makes purchases from you using stolen cardholder information, that cardholder would be entitled to file a chargeback. If the claim qualifies, your chargeback insurance would then cover the loss, so that you don’t have to pay for the fraud incident. However, you’ll still be saddled with admin fees, and would see a hit to your chargeback ratio.
Chargeback insurance isn’t an inherently bad thing, but it was never intended to provide complete protection. That means it’s imperative to consider the cost of the insurance and measure it against the return on investment before you sign up.
Learn more about chargeback insurance
For most merchants, the best way to avoid chargeback losses is to concentrate on prevention. This calls for two distinct tacts; one to stop chargebacks in the immediate sense, and one to eliminate those long-term threats.
When you’re dealing with chargebacks, your first response should be to triage and “stop the bleeding.” Using tools like chargeback alerts and network inquiries will help you stop chargebacks now. This will give you sufficient space to develop and deploy a more comprehensive strategy.
In the long term, you should aim to identify chargebacks by their source. You can then develop and deploy the best strategy to adapt to your needs. This is the true secret to prevent chargebacks like the pros.
Learn more about chargeback management
The direct financial losses associated with chargebacks can be substantial. However, payment disputes also impact your business in less obvious ways. Banks, for example, use chargeback volume as a key indicator of the risk you pose as a merchant. An excessive chargeback rate can lead to the withholding of funds and more restrictive processing requirements. It could even lead to account suspension or outright closure.
Even with all of this at stake, many merchants believe efforts to prevent chargebacks are futile. They’re wrong, of course; with the right strategy, chargeback prevention is very achievable.
A chargeback alert is an advance warning from an issuer, facilitated by a third-party provider. The alert informs the merchant when a chargeback is pending, but has not yet been filed. This gives the merchant time (between 24 and 72 hours) to refund the disputed transaction and avoid the chargeback.
Merchants that use alerts are typically billed on a “per-chargeback” basis. If the refund is issued within the allotted time, however, the issuer won’t officially file a chargeback. That means there are no chargeback fees, and the case does not impact the merchant’s chargeback ratio, saving a lot of time and money.
Chargeback alert services are highly secure. That said, only providers certified by the payments industry, and in good standing with banks and processors, are allowed to access the monitoring technology.
Learn more about chargeback alerts
There are two main providers of chargeback alerts, each with their own network of associated financial institutions:
Ethoca alerts work much the same way as CDRN alerts. There are two main differences between Verifi and Ethoca, though. The main one concerns which issuers are in their networks. Verifi offers wider coverage within the US, while Ethoca’s network is broader in Canada, Europe and Asia.
Ethoca and Verifi each have their own networks, but they are not always exclusive. In some instances, a bank may be associated with both providers. This could potentially lead to the merchant being billed twice for the same alert.
The other significant difference between the two providers is their time allowances. With Ethoca, merchants have up to 24 hours after the alert to resolve the issue. Verifi expands that window to 72 hours, in some cases.
Similar to alerts, network inquiry programs use data to stop potential chargebacks before they happen. For merchants, the big difference is that these programs may prevent a dispute entirely, without the need to refund the purchase at all.
Providing transaction details like shipping confirmation, cancellation number, or product name can often help merchants and acquirers diffuse non-malicious but still invalid disputes. For example, it may offer the cardholder enough information to remember a purchase, and therefore retract the dispute. Here again, there are two main players (Ethoca and Verifi):
Tools like Consumer Clarity and Order Insight are great assets. However, there are additional add-on services that may take these platforms one step further.
Verifi, for instance, also offers Rapid Dispute Resolution, (RDR) a fully automated chargeback resolution upgrade to Order Insight, as well as the recently-introduced Compelling Evidence 3.0 guidelines to help prevent chargebacks:
Now that you have stop-gap solutions in place, it’s time to turn your attention to more long-term chargeback prevention solutions. This starts by establishing that there are three fundamental reasons why customers file chargebacks:
Some threats are obviously internal, while others come from criminals or even your own customers. Risk factors can also be inherent in your business model. Sometimes you may experience immediate results from your prevention tactics, while some remedies will only produce notable results in the long term.
In any case, diagnosing the true sources behind your chargebacks is the only sure way to know you’re using the most effective solution. Then, once you pinpoint the source of your disputes, there are a number of prevention tools you can put in place to help safeguard your revenue from invalid claims.
Learn more about chargeback risk factors
Did you know that 20-40% of all chargebacks may result from minor errors or missteps on your part? The key is to ensure that dealing with your customer service department is significantly easier than calling the bank. Make it easy to contact you. Display phone numbers, email addresses, even social media accounts prominently on all pages of your site, as well as receipts, packaging, and more.
Also, today’s customers expect swift, helpful responses to inquiries. Phones should be answered by live representatives, preferably in three rings or less. Emails and social media contacts should be acknowledged within an hour. And, if shoppers can place orders 24/7, then you should consider making round-the-clock customer service equally accessible.
Happy customers will return to do business with you again. Dissatisfied shoppers are likely to file disputes and chargebacks. They could also leave negative reviews and share their complaints publicly on social media, hurting your reputation.
Learn more about customer service best practices
Your billing descriptor is like a “numerical fingerprint.” Banks need your billing descriptor to identify your business, as do your customers.
For every completed online transaction, a notification appears on your customer’s billing statement. This billing descriptor is what the customer sees in connection to the sale. It identifies your business and the total price of the goods or services purchased. If the cardholder doesn’t recognize the information, however, they could mistake the transaction for fraud and file a chargeback.
Clear, simple, to-the-point descriptors work best. Use the “doing business as,” or “DBA,” name your customers will recognize, even if it’s not the legal name. Finally, do regular testing to ensure customers are getting the message.
Learn more about billing descriptors
Possibly the biggest chargeback prevention challenge comes from first-party misuse, also known as “friendly fraud.” These disputes can be initiated unintentionally; a customer may not recognize your billing descriptor, and assume a charge was unauthorized. There are other cases, however, where cardholders are deliberately gaming the system to get something for free.
What makes friendly fraud so difficult to prevent in general is the fact that it occurs post-transaction. The “fraud” doesn’t occur until the moment the buyer initiates a dispute. This makes it hard to anticipate or prevent the threat using conventional tools. That’s not to say it’s impossible to prevent friendly fraud chargebacks, though.
Learn more about friendly fraud
Over the long haul, the best option for most online retailers is to consistently challenge illegitimate claims through representment. When merchants regularly contest bogus disputes, it can help build their reputation, strengthen relationships, and discourage future friendly fraud.
Learn more about chargeback representment
eCommerce technology is constantly evolving, and new chargeback threats appear daily. An effective chargeback management strategy must be flexible enough to identify new trends and techniques, counteract new technology, and adapt on the fly to a constantly shifting landscape.
Chargebacks911 offers the most comprehensive chargeback management services and products available on the market today. No other provider can deliver our level of transparent, end-to-end chargeback management, going beyond prevention to revenue recovery and future growth.
Whatever you need to prevent chargebacks, we can help. Contact us today for a free demo.
Absolutely. Depending on the circumstances, a high percentage of chargebacks can be prevented with the right tools and strategies.
Merchants can avoid chargebacks by deploying tools like chargeback alerts, and also by offering outstanding customer service and resolving any internal missteps that may be triggering claims.
Providing outstanding customer service and resolving internal missteps can eliminate many chargebacks, as can consistent customer verification. Prevention is always the best form of chargeback management (when possible).
Yes. Under certain circumstances, issuers or the card network might recognize a claim as being fraudulent and deny the chargeback. In other cases, the bank might allow the claim on a provisional basis, but reverse that decision when additional evidence is supplied by the merchant or their acquirer.
Merchants can challenge chargebacks through the representment process. The chances of winning a reversal, however, are statistically low. Partnering with the right chargeback professionals, however, can exponentially increase win rates. Generally, this is a more cost-effective solution.
Yes, in many ways. Financially, the merchant will typically lose the order and any associated costs such as shipping. They will also have to refund the customer, and pay per-chargeback fees. Additionally, the seller’s chargeback ratio will increase, potentially threatening processing capabilities and long-term business sustainability. Finally, excessive chargebacks can undermine the business’s reputation and negatively impact relationships with both banks and customers.
Cardholders tend to win chargebacks more often than merchants. Banks have a pragmatic interest in keeping their customers happy. The assumption is that any chargeback filed is legitimate until proven otherwise. Merchants must defend the validity of a transaction in order to win a reversal. Many merchants lack the experience and expertise to mount a compelling defense, and many more simply don’t bother fighting at all.
