Reducing Chargebacks Can Lead to Fewer Headaches…and More Revenue
Too many merchants treat chargebacks as an unavoidable cost of doing business.
The truth: chargebacks are largely preventable. With the appropriate precautions, it's possible to reduce chargebacks by as much as 40%. Not only that, but most chargebacks that do get filed can be successfully disputed with the right strategy.
Are Chargebacks Costing You More Than You Think?
Merchants first need to understand that an effective chargeback management strategy must include two equally important components: decreasing and disputing. It’s imperative that merchants take steps to decrease future chargebacks, and dispute illegitimate chargebacks that slip through the protective barrier. While both are necessary, it doesn't take a genius to figure out that the better your prevention strategy, the less time and energy you'll spend disputing transactions.
Turning a blind eye to chargebacks is the surest way to see them escalate. Merchants who aren't dedicated to reducing chargebacks will take a hit on both the business's bottom line and its long-term growth.
On average, a merchant loses $2.40 per every dollar of fraud. That means a $100 chargeback costs the merchant at least $240. What makes up those costs? Take a look at this example:
The Cost of Chargebacks
- To start with, a variety of fees accompany each chargeback, ranging from $20 to $100. These fees are meant to cover the costs of the chargeback process. They also have a punitive effect, serving as an incentive for merchants to fight chargebacks.
- The costs of processing the transaction, including the interchange fee, are wasted. If the merchandise was shipped, the chargeback amount will also include the shipping and handling.
- The merchant also loses the cost of the goods Merchandise associated with a chargeback is rarely returned to the, so the merchant forfeits the money spent on the item and any potential for future profitability.
- Chargebacks allow banks to forcibly remove funds from the merchant’s account. Unless the merchant’s representment case is successful, that revenue is lost forever. How much is being lost? The average merchant suffers 206 fraud-related chargebacks per month, costing a median of $146 each.
- Merchants can choose to dispute the chargeback, but that is an expensive, time-consuming, labor-intensive process, wasting even more of the merchant’s resources.
- Finally, excessive chargebacks also increase the odds of a terminated merchant account, leading to placement on the MATCH list (also called the Terminated Merchant File). Being MATCHed forces the merchant to use high-risk payment processing, with extra fees, a revenue-siphoning account reserve, and very expensive periodic reviews.
The Most Important Step to Reduce Chargebacks
The very first step in reducing chargebacks is determining the actual chargeback reasons, or triggers. Despite the numerous reason codes used by card networks to categorize a chargeback, there are really only three true sources:
Criminal Fraud: Also known as credit card fraud, this is where criminals gain access to credit card information and make unauthorized transactions. More than half of all chargebacks are blamed on credit card fraud, but less than 10% of chargebacks are actually due to criminal activity.
Merchant Error: Faulty business practices, unchecked policies, processing errors—there are several merchant missteps that can cause chargebacks. To uncover potential chargeback triggers, merchants need a thorough, unbiased inspection of business policies and practices, such as the 106-point Chargebacks911® Merchant Compliance Review.
Friendly Fraud: Also known as chargeback fraud, this practice is sometimes due to lack of understanding on the part of the consumer. Many times, however, it is a form of “cyber shoplifting.” Savvy shoppers detect and exploit loopholes in the chargeback process to game the system and secure an undeserved, no-hassle refund.
Where Do Your Chargebacks Come From?
Most merchants rely on chargeback reason codes to determine the transaction dispute’s cause. With the rise of friendly fraud, however, reason codes aren’t as informative as merchants assume, and the true situation is vastly different from what the reason code implies. For instance:
- A cardholder makes a purchase, then suffers from “buyer’s remorse,” regretting the purchase but not really wanting to confront the merchant.
- The consumer claims the transaction is unauthorized and files a chargeback.
- The bank issues a chargeback with a fraud-related reason code, and the merchant accepts this reasoning.
- The merchant takes the reason code at face value, and feels the need to beef up fraud prevention tactics, making the checkout process more difficult for other users.
- The chargeback itself was trouble enough, but now things get worse. Not only are the extra fraud detection efforts unwarranted, the added friction causes the merchant to lose legitimate business.
- Worst of all, because the transaction was authorized and friendly fraud was the real culprit, the merchant is doing nothing to resolve the true issue …meaning the problem will keep occurring.
For the merchant, there is lost revenue, lost merchandise, and annoyed customers. All the result of receiving—and believing—an inaccurate reason code.
All efforts to reduce chargebacks will be unsuccessful unless merchants can determine the true cause of chargebacks. That’s why Chargebacks911 created Intelligent Source Detection™, a proprietary process that allows us to analyze a transaction dispute and determine the real reason behind the reason code.
Once merchants have detected the true cause of transaction disputes, they can begin implementing prevention practices to stop the revenue loss. At this point, they are fighting the problem itself, not just the symptoms.
Best DIY Methods to Reduce Chargebacks
There are ways merchants can help reduce chargebacks on their own. These efforts are nominally effective in at least addressing the “low hanging fruit”—the easy-to-prevent transaction disputes that are rectifiable without professional assistance.
35 Simple Steps to Preventing More Chargebacks
Download our FREE guide that outlines 35 step-by-step effective chargeback prevention techniques. Learn insider secrets that will reduce your risk of chargebacks, increase your profits and ensure your business's longevity.
Some of the best DIY tips to reduce chargebacks include:
- Always use fraud detection tools like AVS, card security codes, and 3D secure.
- Improve customer service:
- Prominently display essential contact information.
- Replace IVR phone systems with 24/7 human support teams.
- Reply to emails promptly, and regularly check social media accounts.
- Know and stick to business best practices outline by card networks and acquirers.
- Reduce friction associated with recurring payments:
- Clearly share the terms of service.
- Offer a "no strings attached" cancellation policy.
- Fulfill cancellation requests quickly and completely.
- Make sure customers understand rates and changes.
- Ensure customers know when products will be shipped—and when they should be delivered.
- Use delivery confirmation for large purchases.
- Write accurate and detailed product descriptions.
- Watch for potential indicators of fraud.
- Use easy-to-recognize billing descriptors.
Of course, there are multiple other chargeback prevention tactics that a professional team can implement. If you’d like help adopting a more detailed chargeback prevention strategy—one that does more than just address the “low hanging fruit”—contact us for a free demo.
Reducing Chargebacks is Only Half the Battle
While prevention is a necessary step in an overall risk management strategy, it’s only part of the effort. Representment—disputing chargeback scams and other illegitimate claims—is just as important. We’ll cover that more fully in another post.
Chargebacks911 offers the most comprehensive risk mitigation and management solution in the industry—the only one that effectively addresses both prevention and representment. We can show you how to get a handle on reducing chargebacks, then help you recover revenue lost to transaction disputes. We’re also the only solution to guarantee ROI, meaning our services are risk-free. To learn more, contact us today.