Chargebacks are a $31 billion problem that creates endless headaches for merchants, issuers, and consumers. The key for merchants in this equation is finding the right approach to eliminate fraudulent transactions that lead to costly fees and strained industry relationships, as well as how to prevent chargebacks at their business.
Learning how to prevent chargebacks starts by understanding how chargebacks occur, why merchants are on the hook for these disputes, and what tools are available in the market to overcome this rapidly-growing problem. Armed with this knowledge, merchants can be better equipped to reduce chargeback disputes and the costs associated with this complex, industry-wide issue.
Why Chargebacks Happen
A chargeback occurs after a cardholder disputes a particular charge to their card issuer. This triggers the chargeback dispute process that often leads to the merchant footing the bill. After a consumer initiates the chargeback process, it causes the issuer to investigate the matter, which typically results in the merchant facing a chargeback fee. Merchants with a high number of chargebacks risk being red-flagged by their payment issuer partners, which can further strain relationships.
Chargebacks occur for a number of reasons. First, a cardholder may dispute a charge that is, in fact, fraudulent that they did not make. The second reason stems from chargeback fraud, which is when the consumer is intentionally trying to defraud their issuer by claiming they didn’t make a legitimate purchase. Chargebacks can also occur when there is a problem with a product, such as damaged or missing goods or a product that didn’t fit the description from the seller. This dispute can also trigger a consumer to report a charge to their card issuer/issuing bank.
The final reason a chargeback may occur is what’s called friendly fraud. This is where a consumer unknowingly reports a charge as fraudulent that was actually a legitimate purchase on that account. This can result from a consumer forgetting they made a charge or being unaware of another account user making a purchase they were unaware of. It can also occur from a customer simply not recognizing a charge that was made. Regardless of why a chargeback process is initiated, managing the dispute process can be complicated and costly for merchants.
Verifi’s research suggests that up to 76% of the time, consumers will bypass merchants all together and go directly to their card issuer to report a problem on their account. This trend has left merchants on the hook to pick up the pieces after the fact, providing them with little to no mitigation strategy to prevent from the chargeback dispute from occurring.
How To Prevent Chargebacks and Be Proactive
Not only do chargebacks increase the number of fees merchants face, but they can also damage their reputation with customers. Verifi’s data also indicates up to 63% of customers decreased business with a merchant associated with those chargebacks. Businesses also cover an estimated two-thirds of the costs of chargebacks.
In fact, for every $1 disputed in a chargeback process, merchants and issuers both incur an additional $1.50 in costs. This can complicate what type of relationship merchants can establish with card issuers. This is why merchants need to find proactive tools to learn how to prevent chargebacks from occurring — as well as reactive tools that allow them to recover profits lost to unfair disputes. There are a few core steps to take to achieve this goal and learn how to prevent chargebacks.
Rely on Chargeback Prevention and Protection Tools
The biggest problem for merchants is they’re left in the dark in the beginning stage of the chargeback process. This has been the inspiration for Verifi’s chargeback prevention platforms Cardholder Dispute Resolution Network™ (CDRN©) and Order Insight. These solutions were designed to provide merchants with more effective tools to fight chargebacks, such as Chargeback Representment. Combined, these solutions are designed to stop chargebacks before they happen, while also helping merchants retain more of their sales.
One of the most prominent features of the Order Insight tool is that it creates a more transparent process for resolving billing confusion and disputes in real-time. By providing more enhanced order details, the cardholder’s billing details provide more accurate merchant or product descriptions to avoid a charge from being accidentally disputed. For consumers who still contact their card issuer, the call center is equipped with more order details and the evidence necessary to protect a merchant from illegitimate disputes. This can resolve disputes quicker by either validating the sales or flagging it as legitimate fraud.
Choose a Payment Processor with Built-In Fraud Detection
A merchant’s ability to know how to prevent chargebacks is also dependent on the quality of the payment processor they rely on. Luckily, merchants don’t have to wade this challenge alone. Payment processing platform providers like Payline offer hardware and software that have fraud prevention features to catch suspicious activity as it occurs. This includes having connections with solution providers like Verifi to manage the dispute resolution process for them, instead of having to wade through this complex issue alone.
Key security features include AVS protection, tokenization and end-to-end encryption features that prevent your business’ and your cardholder’s data in the wrong hands. Payline works with Verifi to offer merchants tools such as Intelligence suite, which helps combat CNP fraud by flagging fraud as it occurs across a merchant’s processing systems. Having better CNP verification processes for purchases made online can help prevent fraudulent charges from occurring. Preventing those charges from happening can lessen the number of disputes merchants must manage.
Make Yourself Readily Available to Customers
One of the biggest reasons consumers go straight to issuers to dispute charges is that merchants don’t often make it easy to be contacted. Without the ability to properly respond to a customer inquiry in a timely manner, this leaves merchants in the dark. Since reporting a dispute to a card issuer can be quickly and in real-time, consumers tend to choose the easier route.
Merchants should have a variety of methods available for customers to connect with them. This includes email, phone, and chat. Customers should be able to contact merchants through a number of methods, and during whatever time/technology is most convenient for them. Disputes can often be resolved simply by opening up the lines of communication with a customer. This also applies to how you present your return policies to customers when they shop in-person and online.
For customers who might be missing an item, merchants should make it easy for customers to report the issue. The same rings true about reporting items that may have arrived damaged, or do not fit the product description the shopper anticipated by the merchant. Mistakes can be made on both the customer and merchant side of the purchase equation, but there are routes to minimize the number of complaints that turn into chargeback disputes.
Keep Solid Customer Records Respond to Chargeback Disputes Quickly
Time is of the essence of when responding to a chargeback notification. The easiest way to be able to respond quickly is to have a good system in place for tracking and recording all customer purchases. Having proper documentation can help defend your business from unfair disputes. This documentation should include the type of product/service provided and the terms associated with that purchase agreement. For illegitimate chargeback claims, this can help prevent a merchant being unnecessarily responsible for covering dispute fees.
When a chargeback notification is received, merchants should investigate the level of dispute and if it’s worth a response. For the disputes that warrant a response, they should be completed in a timely manner. While consumers can file a dispute within 120 days of a purchase, the turnaround time for merchants is much shorter. Most restrictions allow merchants to respond a claim within 30 days. That short time period allows merchants to reach out directly to a customer, or the card issuer, to manage the problem before it escalates.
Regardless of how, when, and why a chargeback occurs, merchants should be prepared with the right payment industry partnerships to help them navigate this challenge and be prepared to know how to prevent chargebacks. Chargebacks can be costly and complex, but they shouldn’t be managed alone.
Anna Kragie is a content contributor for Payline Data. She previously wrote for PYMNTS.com, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.