Sometimes it seems overwhelming to deal with chargebacks on your own. As a card-not-present merchant, you have to deal with this growing threat. Whatever the reason for the chargeback, it drains your revenue, ties up your resources, and threatens your business' survival.
Still, most merchants regard chargebacks as an inevitable part of running a business. Merchants believe that there will always be disputes with their customers. With that kind of attitude, it seems that managing chargebacks is hard...or not even worth the effort.
An attempt to prevent fraudulent payments is known as a chargeback.
The cardholder may request a refund if they notice a payment they did not authorize. How this occurs is more complex.
Cardholders may report a fraudulent purchase or an error by the merchant. The cardholder could also be the victim of friendly fraud, in which case they don't remember making the payment, don't realize the payment was made by someone they know, or request a refund to protest a store policy.
What Creates a Chargeback
A chargeback can be the result of several factors, ranging from real fraud to unethical customer intentions. There are three general reasons for chargebacks:
1. Real fraud
Fraudsters made purchases using legitimate cardholders' information. Chargeback requests are filed on the debit/credit card statements when the real cardholder sees this charge on their statement.
2. Errors or negligence by the merchant
The merchant either didn't ship an order, shipped an item that was broken or different from what was described, or made a billing error by overcharging the customer without resolving the issue. The authorized cardholder files a chargeback on a transaction when they fail to receive the item they paid for.
3. Friendly fraud
Cardholder fraud occurs when the cardholder is also the fraudster at the same time, according to industry terminology.
In today's complex payment ecosystem, chargebacks are a serious problem. Chargebacks are just as complicated for businesses, and they are also costly to handle.
- Lost resources and time: Dispute resolution can be used to challenge a chargeback. We are disputing between your company, the cardholder, and the bank that issued the card. There may be a substantial impact on your labor and human resources.
- Product and profit loss: You may lose both the product and profits of the sale if the chargeback goes through due to payment fraud.
- Administrative costs: The chargeback fee is now the responsibility of the business. A network fee will be charged as well.
- Increased card processing fees: Card networks consider your business high-risk if you have a high chargeback rate (usually over 1% of all transactions). A monitoring program will also be implemented, which will increase your operational costs.
It is almost always better to avoid chargebacks altogether than to fight them. Taking the time to configure your merchant account, payment gateway, and sales process, as well as training your team will help you avoid chargebacks. By doing this correctly, you can drastically reduce the number of chargebacks you receive.
As this process isn't intuitive, you're likely to make as many mistakes as advances without expert guidance. Here are some extremely useful tips from our experts that will help you maximize the number of chargebacks your business will avoid.
1. Determine the source
Take a closer look. In the end, all chargebacks are the result of one of three reasons: merchant error, criminal fraud, or friendly fraud.
Before you can effectively fight chargebacks, you must identify which of these three things is to blame. This isn't as easy as it sounds.
The card issuer attaches a reason code to a chargeback filed by a cardholder. Based on this code, the bank can explain why the transaction was reversed. The reason code system has been rendered unreliable due to a variety of factors, including eCommerce growth and online fraud. However, it may not reflect the true reason why a claim was filed, since it shows the given reason.
2. Calibrate your front-end fraud filter
Front-end transaction scoring and filtering are key to preventing fraud/unauthorized chargebacks. The problem here is that it is quite easy to overreach with the filters, which leads to false positives.
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Despite being coded as fraud or unauthorized, the majority of chargebacks merchants receive will be won in the Response process since they are chargeback fraud or friendly fraud. We win just over half of the chargebacks coded as Fraud/Unauthorized, which are 56 percent.
3. Provide efficient customer service and transparent policies
One of the best ways to avoid chargebacks is to encourage your customers to contact you directly when they have a problem related to an order. When you communicate with the customer before a chargeback occurs, you have the opportunity to resolve the situation and process a refund or issue a credit, thus preventing a chargeback.
In addition, the merchant's policy must be transparent and easy to understand. Payment descriptions, such as billing information, should be identifiable to them, so there are no misunderstandings.
4. Don't accept reversible payments
A reversal of funds is not possible with some payment methods, as the name implies. For high-risk use cases, cryptocurrency and online bank transfers are suitable options. You might benefit your business if you enable only non-reversible payment methods to users who have a history of several chargebacks and who are therefore likely to be fraudsters.
The member protection programs offered by some payment methods can help prevent chargebacks, even if they're not irreversible. Alipay is an example of this. In the case of unauthorized transactions, the company compensates buyers. Merchants only suffer revenue loss.
5. Make sure it's documented
It is of utmost importance that you require customers to sign contracts to protect your business. Contracts should clearly outline the services you will provide. There should be no exceptions.
You should allow your customers the following choices when it comes to signing:
- Faxing or emailing the signed contract back to you
- Electronic signature (fingerprint)
- Whenever you make a return, you should have some kind of proof:
- Screenshots of the product page when it is purchased
- Description of the return policy agreed upon by the customer
- Original proof of delivery (not damaged)
- Purchase confirmation (plus proof that the right product was shipped)
Lastly, make sure your online ordering system is set up so that your customers can read your return, exchange, and other relevant policies before they even submit their order.
6. Enhance the user interface
It is common for customers to become frustrated when they cannot find answers to their questions on your website. The good news is that you can remedy the problem with a few simple tweaks.
- Provide as much information as possible about the product.
- Make sure shipping information is clear (pay extra attention if your shipping times are lengthy).
- Display real images of your products and even record videos.
- Provide customers with updates after each milestone is reached.
7. Allow customers to contact you easily
Nowadays, there are a variety of ways to communicate. It doesn't matter if you prefer live chat, phone calls, or email. You should make sure that your contact information is easily accessible on the web, and that you respond to customers promptly.
During peak periods such as Black Friday or Cyber Monday, you may need to hire additional staff to handle the seasonal spikes in customer demand.
8. Make sure to log all transaction data
It makes sense to log as much information as possible, even if you don't have real-time monitoring capabilities. Disputes over chargebacks require evidence, and transaction information is that evidence.
In some cases, you can simply label everything in a well-organized spreadsheet and export the data to the best chargeback management software.
Finally, some chargeback software even provides pre-configured templates for disputing chargebacks, which you simply fill in based on your own data analysis.
9. Educate Your Staff
Every department within a company can contribute to reducing chargebacks, from marketing to sales to customer service. Knowing the challenges and understanding how to prevent them is all it takes.
Incentivize customers to act before they initiate a chargeback by being proactive and encouraging them to raise concerns with your company.
In addition to training your employees to identify false patterns, flag bad user profiles, and use automated tools to detect high-risk transactions, you should also train them to recognize suspicious patterns.
10. Implement this logic in stores as well
It is important to bear in mind that brick-and-mortar vendors accepting payment through POS terminals are just as susceptible to chargeback fraud as online retailers. To prevent chargeback fraud in-store, follow these tips:
- When making swipe transactions, get a signature. It may trip up fraudsters and protect you during a chargeback dispute.
- Train your staff on best practices. Do not swipe cards more than once, record the transaction data, etc.
- You should not manually enter credit card numbers. Human error is a leading cause of chargebacks.
- Never throw away receipts. You may need them later on if you receive a chargeback request.
11. Activate Secure Payment Protocols
Chargebacks pose challenges to payment processors, but the good news is that they are aware of them. There is a downside to implementing security measures at checkout since these can add friction.
While payment security (and fraud prevention) can be difficult, there are good practices that can be followed.
- Using encryption: To demonstrate your business's trustworthiness and commitment to data security, you should acquire SSL certificates.
- AVS: It verifies that the checkout address matches the cardholder's address. While it's not foolproof, it may discourage less sophisticated attempts at fraud.
- 3DS2: 3-D Secure and its second version, 3DS2, allow more information to be collected before and during checkout, which is the most popular form of payment security. Information including the IP address, the transaction history, and the amount of the transaction is collected. In addition to the issuing and acquiring banks, the payment processor also receives the data. It takes a few seconds for the data to be analyzed.
- CVV: For faster payments, some online retailers remove the Card Verification Value. In the long run, however, it could be a valuable tool for chargebacks.
- Using tokens: The process of replacing transaction data with randomly generated characters. Protecting cardholder information makes it more difficult to steal and use the card for fraudulent transactions.
- SCA: PSD2's Strong Customer Authentication component forces businesses to increase their authentication efforts. The majority of it is protected by methods like multi-factor authentication, one-time passwords, and biometrics.
Online merchants will always need to deal with chargebacks from time to time, there is no denying that.
It is best to hire a team of experts if you want to maximize your chances of reversing chargebacks. If you want to focus on growing your business, hire a chargeback management company to take care of chargeback disputes.
In chargeback prevention, being proactive is essential. Chargebacks will be less frequent if you take proactive steps to prevent them, which will minimize the chance of becoming viewed as a high-risk merchant by the market and the payment industry.