How to Reduce Chargebacks
Dealing with chargebacks is part and parcel of running an online business and accepting credit card payments. How to do it effectively? First of all, you need to understand the essence of the issue.
What are chargebacks? When may they appear? And finally, what are the ways to reduce chargebacks?
So what is a chargeback?
In layman’s terms, it’s a bank-initiated refund for a purchase made with a credit card. However, the main difference with a classic refund is that a refund doesn’t get the bank involved in returning the money.
As a general rule, it should occur when a cardholder disputes the charge after noticing an unrecognizable transaction.
The dark side of chargebacks
The original idea behind chargebacks was customer protection. Needless to say – honest customers’ protection.
Yet, not every chargeback is justified and legitimate. Following the dynamic growth of online businesses, merchants observe more fraud attempts related to chargebacks.
Since customers became more and more comfortable with chargebacks, it happens that they abuse the system and use chargebacks even when they’re not justified.
Such incidents are called friendly frauds, and they happen when a customer falsely disputes transactions.
Unfortunately, friendly frauds are far from being small-scale – as according to Chargebacks911, 86% of all chargebacks are probable cases of friendly fraud.
Due to such alarming statistics, specific ways to reduce chargebacks had to be developed.
Reasons behind chargebacks
There are many reasons for disputing the charge. Sure thing, the most common one is when a cardholder doesn’t recognize a transaction on their bank statement.
Other typical ones are customer dissatisfaction, technical errors (e.g., accidental duplicate billing), or simply – fraud.
Once a customer files a chargeback, it goes under bank investigation. The issuing bank assigns a reason code to the dispute to facilitate the process.
The reason code makes it easier for the merchant to find out why a customer wants their money back.
Please note that every credit card association, such as Visa, Mastercard, or Discover, has its own chargeback reason codes.
The chargeback process
Once a cardholder notices an unknown charge on their account, they contact the issuing bank and request a chargeback. Even though a customer initiates the chargeback, it can’t be processed without the bank that issued the customer’s credit or debit card.
Then, the bank starts the dispute procedure with the acquiring bank. It’s the acquirer who informs a merchant about the chargeback request.
Within the allotted time, usually ten days, a merchant needs to provide evidence and proper documentation regarding the transaction.
This stage is the most crucial one from the merchant’s perspective. The more detailed information you collect to address any doubts, the higher your chances are to find ways to reduce chargebacks.
What kind of information might come in handy? It could be a valid and legible copy of the transaction receipt, a confirmation of delivery, proof that you already resolved the complaint, etc. The evidence depends on the reason for the chargeback.
Assuming you work with one of ACCF's approved processing providers, you’ll find all the necessary details regarding evidence on your merchant dashboard.
After collecting all the information from the merchant, the acquiring bank sends the documentation to the issuer.
And finally, the issuer informs a cardholder about the verdict.
If your case is rejected, but the evidence convinces the acquirer the transaction was legitimate, it submits the transaction to the issuer again. Then, the issuing bank may either agree or disagree with the acquirer.
Final arbitration
If the issuer rejects your evidence again, you can send it to the card association for final arbitration.
When the card association rejects the evidence, a merchant loses a chargeback, and the cardholder gets their money back. If not, a certain amount goes to your account, and the cardholder needs to pay the appropriate amount.
Note that the funds are returned to the customer if the merchant fails to respond to the dispute or fails to provide relevant documentation proving its rights when objecting to it.
When a merchant needs to pay back the funds due to a lost dispute, the amount comes with an extra fee charged by a merchant service provider—usually $25 per case. It’s the cost of the investigation and chargeback resolving process.
Plus, you need to be aware that if your product was delivered, you have to accept the loss of the item or service.
What are the ways to reduce chargebacks?
It goes without saying the process works in the customer’s favor. Although it’s impossible to eliminate chargebacks, there are several ways to reduce them.
1. Make your website secure
Fraudsters search for every loophole and bug in outdated software, so update your website regularly and avoid clerical or technical errors.
Encrypt the data on your site, consider using the Address Verification Service (AVS) that verifies the cardholder’s address, and collect the CVV/CVC.
2. Provide relevant product descriptions
When the description is incomplete or doesn’t match the product received, there are higher chances that the customer will file a chargeback.
The more details you provide, the better. Also, remove items that are no longer available.
The same goes for billing descriptors, as chargebacks can be a matter of misunderstanding. Make the descriptor match your business name to not confuse customers. If customers don’t recognize your business name, they will most likely dispute a charge.
You can also place some contact information on the descriptor—an email address or phone number. Customers will be more likely to contact you first rather than the bank.
3. Work with a reliable payment provider
Ensure the payment processor you work with provides anti-fraud tools with machine learning, AI-based solutions, and an efficient chargeback disputing mechanism.
According to Chargebacks911 and CNP’s report, companies that use third-party chargeback management solutions can reduce chargebacks by 19%.
4. Create clear refund and return policies
Make your refund policy visible for website users and make it simple and easy to understand. Offer a refund when a customer isn’t satisfied with an ordered product.
Provide detailed information on how to return the item and request a refund. It can help you prevent chargebacks and avoid negative reviews.
Furthermore, set clear return policies. Return management can be less expensive and comes with less hassle than dealing with chargebacks.
5. Be clear on shipping details
Being precise is essential when it comes to shipping costs and deadlines. In case of any delays, inform the customer immediately and provide an alternative solution if possible.
It’s good to provide shipment tracking information to keep customers updated about where their package is at the moment.
Sometimes, fast shipping can help. People are impatient, and waiting too long for ordered items may lead to a transaction dispute.
6. Provide high quality
Make all your products and services of the highest possible quality. Avoid damaged products, lost packages, and delays.
7. Provide accessible customer service
Make it easy to find your contact information so that customers can reach you directly if something is wrong with their order.
If possible, run customer service 7 days a week, 24 hours a day. If it’s not an option in your case, clearly state the support hours on your website.
Don’t forget to inform your customers about an approximate time frame for addressing their inquiries.
Deal with customers’ issues promptly and be responsive. When your customers know the status of their inquiries, they are less likely to file a chargeback.
Note that open communication with customers can be one of the best ways to reduce chargebacks.
8. Monitor orders
Monitoring your orders is crucial.
Keeping details of past fraudulent activities can help you quickly recognize potential dodgy patterns and prevent your business from money loss.
Not to mention that keeping detailed records of all transactions may come in handy when gathering evidence and valid proof when a chargeback occurs.
Watch your chargeback ratio closely
Keep your eyes on the ball and monitor your chargeback ratio.
If it’s higher than 0.9% and you can’t lower it within a recovery time given by a credit card issuing company, your business is in trouble.
You may be classified as a high-risk merchant, which entails the necessity to pay higher processing fees.
What’s more, too many chargebacks can even lead to freezing or terminating your merchant account.
Your merchant service provider will monitor the chargeback rate on your account. If this exceeds certain thresholds, the provider will take appropriate action.
Final thoughts
Dealing with chargebacks is one of the most challenging and costly parts of running an online business. When chargebacks start to pile up, they can severely harm your business.
Therefore, it’s your responsibility as a merchant to find the right ways to reduce chargebacks and limit them to the lowest possible level.
