How to Tell When You Have Too Many Chargebacks & What to Do About it
Having too many chargebacks is a costly problem. Each one filed means lost revenue, increased overhead, and dissatisfied customers. And while an increase in disputes means immediate short-term losses, there could also be other long-term consequences that jeopardize your business.
In this post, we’ll discuss ways to decrease your chargeback filings, and provide strategies to see long-term dispute reduction.
So, first things first: what exactly is a chargeback?
A chargeback (also called a dispute) is a kind of forced transaction reversal initiated by the cardholder’s bank. If your buyer reports a transaction as fraud or abuse, the bank will typically file a chargeback on that individual’s behalf. The bank then removes the money connected to that transaction from your acquirer, and returns it to the buyer’s account.
While no one wants to be on the receiving end of a dispute, chargebacks do serve a legitimate purpose as a consumer protection mechanism. In the 1970s, credit cards were a new idea, and many consumers remained skeptical. When lawmakers introduced the chargeback process, however, it provided a degree of confidence: buyers could recover their money if they became victims of fraud or merchant abuse. The process also serves as a deterrent against bad actors who might try to abuse cardholders.
A typical chargeback case proceeds in this manner:
If you lose a chargeback dispute, or decline to engage in the representment process, you’ll be required to cover the cost of the original transaction. This means you lose the sales revenue and the cost of any goods or services already provided. Your acquirer will also likely charge an administration fee.
Chargebacks add up over time, with more disputes leading to higher overhead in the long term. Depending on the severity, too many chargebacks could threaten your future sustainability.
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What’s the Acceptable Number of Chargebacks?
Of course, the ideal number of chargeback cases is zero. It’s not always that simple, though; mistakes can happen, and some chargebacks are totally outside of your control.
Your chargeback ratio (or chargeback rate) is the magic number used to determine whether you have too many chargebacks. This ratio gauges your monthly chargebacks as a portion of overall transactions.
This is an incredibly important calculation; if your chargeback ratio exceeds—or even approaches—chargeback thresholds established by the card networks, your acquirer may terminate your account. In that situation, you’d lose the ability to process card payments, effectively making it impossible to do business.
Further complicating matters is the fact that you don’t have one single chargeback ratio. Instead, you have a different ratio for each card brand you accept...and how that ratio is calculated varies, based on the brand. Visa, for instance, weighs the number of chargebacks filed against you in the most recent month against your total transactions during the same period. Mastercard, however, weighs your current month’s chargeback against the previous month’s sales.
As confusing as all this may be, your chargeback ratio is a critical indicator for determining whether you’re experiencing too many chargebacks (and are therefore in danger of external intervention). That said, many merchants don’t even bother tracking their ratio; some may not know how important it is, while others simply don’t believe there’s anything they can do about it.
3 Fundamental Chargeback Sources
Chargeback prevention is not a hopeless cause. To be successful, though, you need to start by determining the source of your chargeback problem. We can trace all chargebacks to one of three fundamental sources:
Simple oversights and missteps in your policies and procedures can cause big problems over time. For instance, the billing descriptor that appears on buyers’ statements may not be optimized for eCommerce. As a result, your customer can’t recognize the transaction, suspects fraud, and files a chargeback.
The relative anonymity of the digital marketplace—combined with the fact that we regularly conduct payments without a card present—makes criminal fraud a persistent problem. As if that weren’t enough, contemporary payment fraud is multifaceted: identity theft, account takeover, affiliate fraud…there are countless methods a bad actor may employ to separate you from your money.
Sometimes a cardholder files a chargeback without a valid reason to do so. It could be the result of buyer’s remorse, or a simple misunderstanding, or maybe just convenience. These are all examples of friendly fraud, and although they’re not justified chargebacks, they still cost you your revenue just like a valid dispute.
This chargeback process worked well for a long time. However, the arrival of eCommerce introduced a new variable into the equation for which the market was unprepared. The result: more and more cases of unjustified chargebacks, i.e., friendly fraud.
Customers will file $50 billion in friendly fraud chargebacks annually by the end of 2020. Shocking as that may be, the real chargeback cost is much higher when you account for false positives, margin compression, and other losses. We already see too many chargebacks filed without legitimate reason…and the problem’s only getting worse.
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How to Prevent Chargebacks
This presents the question: how do we get rid of all these chargebacks?!
Unfortunately, there’s no “one-size-fits-all” solution that will work in every individual case. Instead, you need to identify chargebacks by their sources, and deploy the right solution or solutions based on the circumstance.
With criminal fraud, for instance, the best approach is a multilayered strategy to identify and block fraud attacks. Using multiple tools provides redundancy, giving you a wider, more dynamic view of potential red flags.
A well-rounded criminal fraud strategy should make use of:
- Address Verification Service (AVS)
- CVV Verification
- Proxy Piercing
- Device Fingerprinting
- Velocity Checks
- Biometrics (when available)
Combining these tools with dynamic fraud scoring creates a better framework for deciding whether to accept—or decline—a transaction. These efforts can, in turn, be augmented by optimizing your processes and policies. For example, a comprehensive merchant compliance review can help identify:
- Ineffective return rules and procedures.
- Oversights in order fulfillment.
- Customer service shortcomings.
- Faults in merchandise or product presentation.
Long-Term Friendly Fraud Reduction
What about friendly fraud, though? While clear policy statements and communication can help prevent some friendly fraud, in most cases there will be no sign of fraudulent activity until after the transaction.
For example, a customer might make a purchase, then later realize she spent more than she can comfortably afford. Rather than request a return, the buyer might file a chargeback, claiming the merchandise was either defective, or never arrived at all. It’s dishonest…but not uncommon. Too many chargebacks like this bear the telltale signs of friendly fraud.
In these situations, the best you can do is engage the fraudster through tactical representment. That said, chargeback representment is a complicated process: you need to collect compelling evidence, assemble a case, and submit that information to your acquirer. Even then, the odds are against you.
Your best bet to address the friendly fraud threat is to seek outside help. Chargebacks911® offers the tools and strategies you need to identify chargebacks by their source and deploy the appropriate strategy. We offer the industry’s best win rate guarantees, all backed by a 100% ROI guarantee.
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