How to Prevent Credit Card Chargebacks: The Ultimate Merchant’s Guide
A chargeback is when a merchant charges a credit card for a transaction, and the cardholder later disputes the charge. This might happen because the cardholder is truly a victim of fraud.
In other cases, merchants are the ones who fall victim. Sometimes consumers file for a chargeback with their credit card company even if the purchase was legit.
Chargebacks are unfortunately on the rise. According to a whitepaper from Juniper Research, they are increasing 20% each year—with the clothing, furniture, and high-end merchandise sectors at the most risk.
Below, we’ll dive into ways you can fight and reduce chargebacks to protect your company, and how to prevent chargebacks in the first place.
Why Preventing Chargebacks is Important
Chargebacks aren’t just a nuisance. They can seriously hurt your business operations and result in higher costs. Let’s take a closer look at these detrimental effects and prevention methods.
You lose funds from each sale
Chargebacks are detrimental for small companies for obvious financial reasons: You lose the funds from the payment. But there’s more to it than that. The 2016 LexisNexis True Cost of Fraud Study reports that for every dollar of nominal loss, businesses lose a total of $2.40 due to chargebacks, fees, and stock replacement.
“A chargeback is a triple loss money-wise,” says Krista Fabregas, eCommerce analyst at FitSmallBusiness.com. “The seller loses the profit on the sale, the dollars invested in the item, and the roughly $20 fee assessed by the processor.”
They can lead to higher payment processing fees
If it happens too frequently, you could face long-term challenges, Jacob Lunduski, financial industry analyst at Credit Card Insider says. “If a business accumulates too many chargebacks, they can lose the ability to accept credit cards from their consumers.”
Fabregas says that processing companies and financial institutions may also consider this a black mark on your account. “If the chargeback rate is deemed high, processors will consider the account high-risk,” she says. “This can lead to withheld deposits, account suspension, higher processing rates, and even closure without warning.”
Chargeback Merchant Rights: How to Protect Yourself
Chargeback fees can feel like they’re coming out of nowhere. Most retailers have a system in place to prevent chargebacks. But training your associates to prevent chargebacks isn’t enough––billing errors outside of your control can also result in significant fines.
Yes, “merchant error” still accounts for 10 to 15% of overall chargeback disputes. But fraudulent activity is still the leading cause of chargebacks. In fact, “Friendly fraud” alone comprises 60-76% of overall payment disputes.
At this point, you’re probably wondering if there are any credit card chargeback merchant rights that can protect your small business. The good news is that there are a few different ways to shield your small business from unnecessary chargebacks.
Let’s take a look.
What Is a Chargeback?
Chargebacks were created to protect customers from getting charged for expenses they didn’t make or approve. While this is a wonderful system for consumer protection, it doesn’t do much to protect you. Many business owners are under the impression that they have no alternative to paying when customer disputes arise.
Fortunately, in cases of cardholder error or chargeback fraud, you can protect your business. By knowing your merchant rights, you can work with card networks to combat fraud.
Visa and Mastercard operate with stringent guidelines and have provisions to protect small business owners from all types of fraud. Knowing how to interface with card issuers will protect your business from losses incurred during the chargeback process.
Common Causes Customers Dispute Charges
Chargebacks occur whenever card transactions are disputed. Disputes come from your customers’ card network or your customer––the cardholder––themselves. A few different factors can result in chargebacks when processing card payments with your merchant account.
Before we go into these, it’s important to note that every chargeback incurred by your business comes with a Chargeback Reason Code. Credit and debit card networks provide this 2 to 4-digit code that highlights the reason for the chargeback. This can be found on your credit card statement.
Now, back to chargeback causes. Each card issuer has its own set of merchant rights and standards. But there are overarching regulations that apply to all business transactions. For the purpose of this article, we’ll break these up into two types of chargebacks—fraudulent chargebacks and non-fraudulent chargebacks.
These happen in cases of merchant error chargebacks and comprise 10 to 15% of total chargebacks in the retail industry. Your customer’s (issuing) bank can reject a transaction for multiple legitimate reasons. These include:
- Late delivery (Customers can appeal transactions when they’re shipped items after the promised delivery date)
- Products not received within a reasonable timeframe
- Mis-swipes on card-present transactions
- Incorrectly entered information on card-not-present transactions
- Incorrectly processed transaction amount
- Double charges (The customer was charged twice for the same item or transaction)
- A poor quality product
Unfortunately, customer and retailer errors aren’t the only reason you’ll see chargebacks on original transactions. There is one common form of swindling that fraudsters use to separate your small business from its hard-earned revenue.
Friendly Fraud chargebacks
You’re probably asking, “How can fraud be ‘friendly?” Friendly fraud doesn’t mean that you high-five the person who defrauds your business. It means that a customer bought something from your eCommerce store just to keep the product and request a refund.
In most cases, the customer does this with the intention of fraudulently requesting a refund. It’s called “friendly” because everything but the customers’ intention is above board.
But this isn’t a minor issue. Friendly fraud has already increased by 21% between 2018 and 2021. What’s worse, policy abuse of this sort costs retailers $89 billion a year. Fraud rates are only increasing with time as more retailers gravitate to eCommerce-heavy operations.
But you know what they say—the best defense is a good offense. So, protect your organization from fraudsters by studying chargeback merchant rights and disputing shady chargeback requests.
Essential Chargeback Merchant Rights
A clearly stated refund policy and return policy can help protect your business from friendly fraud. You can use the reason codes on the back of your statement to identify the formal reason for each chargeback. Keep in mind, however, that the codes differ depending on the card issuer.
The Fair Credit Billing Act was passed in 1947 to protect customers from unfair charges. But, as you’ve seen, sometimes it’s the company that needs protection from fraud.
Both card networks and banks have implemented standards to protect your chargeback merchant rights. Card issuers have implemented a 15-day grace period for chargebacks on returned items.
Merchant protection is the idea behind this time limit. This was implemented so customers can’t issue a chargeback request before you have a chance to issue their refund. You also can’t incur chargebacks on cash-back transactions.
The appeal process for chargebacks can get a little convoluted on the company side. First and foremost, you’ll want to look up the chargeback reason codes on your bank statement. This will allow you to weed out any chargebacks resulting from any kind of fraud.
To dispute a chargeback, you’ll need to create a case for representment. You’ll need to represent compelling evidence for the chargeback to be declined. By keeping meticulous records, you’ll be ready to submit any information that the card processors request. This includes customer information, sales records, existing communications, your return policy, and the product description from your store or website.
Working with Your Payment Service Provider
Fraud prevention is an active responsibility for modern business owners. Monitoring and contesting chargebacks on your own can be exhausting. So, it’s important to partner with a payment service provider that has a knowledgeable and easily accessible customer service team on call.
Payment Depot’s award-winning CX team has an A+ rating from the Better Business Bureau. In fact, we have the highest-rated merchant services in the retail industry. See why for yourself by contacting one of our award-winning representatives today!
Tips on How to Fight Chargebacks and Deal with Disputes
In the unfortunate circumstance that you do find yourself facing an invalid chargeback, there are a few steps you can take to increase your odds of winning.
“Don’t just automatically assume that all chargebacks are valid,” says David Bakke, personal finance expert at Money Crashers. “If you’re fairly certain that you can state your case and get the chargeback attempt denied, go ahead and do so.”
Let’s look at ways to increase your odds of winning the case—and keeping funds in your pocket.
1. Contact the customer directly
“Most of the time, customers bypass the company when doing chargebacks and go straight to the card issuers,” says Chris Marchand, VP of business development at Verifi. He’s not wrong. In fact, one eConsumer Services survey found that more than 80% of shoppers have contacted their bank before trying to deal directly with the seller in cases of chargebacks.
That’s why he and many experts agree that sellers should get in contact with the customer directly to understand the issue and see if there’s a way to solve it. Fabregas recommends doing this BEFORE reaching out to the bank.
“Contact the customer to see if there’s simply confusion on the charge, or another issue, like a defect, that you can resolve outside of the dispute,” she says. “A retailer can call a customer to see if another family member made the purchase using their card. This happens often in families with teens, and usually, the expense is legitimate.”
If this is the case, Fabregas says it’s still important to respond to the dispute. “Don’t rely on the customer to call their card company and approve the charge,” she says. “Clearly describe your conversation with your customer in your response documentation.”
Once you’ve updated the dispute, you’ll still want to maintain those open communication lines with customers. “Keep them informed of the status,” says Marchand. “Nothing frustrates a customer more than a lack of communication about their dispute and/or forcing them to contact you over and over again to find out what the status is.”
Remember, communications with your customer can—and should—continue to be friendly. “Use the chargeback engagement process as an opportunity to improve customer service and brand relations,” Marchand recommends. “If you don’t view them as the enemy or automatically presume fraud, you’ll be able to work out the chargeback by helping the customer find a solution that will appease them and stop the dispute.”
2. Act quickly
Time is of the essence when it comes to chargeback disputes, and you’ll want to act in a timely manner to have the best chances of winning.
Pay careful attention to deadlines and timelines. Mark them in your calendar and set alerts to remind yourself. “If you miss the deadline, you have no recourse,” says Fabregas. She also points out that sellers who fail to respond could receive an additional bad mark on their account.
Ellen Cunningham, marketing manager at CardFellow, recommends completing everything AHEAD of the deadline to even further increase your odds—and to limit the risk of a bottleneck somewhere along the process. “There are usually a few companies involved in passing along documents to fight a chargeback,” she says. “The sooner you provide the information, the better your chances of having everything submitted on time.”
One key: “Don’t rush so much that you forget something,” Bakke says. This brings us to our next tip…
3. Be thorough in your documentation
Jeff Neal, owner of The Critter Depot, has had to deal with chargeback disputes in his business. “We normally win because we’re able to provide the documentation that banks need to confirm the customer actually received the product,” he says. They’ll use screenshots of email correspondence and tracking information, along with any other relevant documentation available.
But merchants conducting in-person transactions don’t always have digital correspondence or tracking documentation to provide. In these cases, you’ll likely have to submit your documented return policy and signed charge slips.
Before you send everything off, give it a final quality assurance review to make sure you’ve been thorough. “Check and double-check the chargeback notification letter to ensure you’ve provided everything the bank requested,” says Cunningham, “If you don’t know what a particular document is, ask your processor.”
And if you have additional documentation that further helps your case, feel free to send it along. In fact, Cunningham recommends sending more information than you think you need to. “I sometimes hear from businesses that thought simply sending over a signed receipt was enough proof, only to lose the chargeback,” she says. “Send signed receipts, email correspondence, delivery tracking, anything you have to prove the legitimacy of the transaction.”
How to Prevent Chargebacks
While there’s not much you can do to prevent a chargeback after the fact, you can take steps to prevent future instances. Here are some chargeback prevention tips to keep customer claims from happening in the first place.
1. Update your merchant account
Sometimes, a credit card chargeback happens because a shopper doesn’t recognize the name of the business on their statement. You might have a parent company name or a former business name that doesn’t resemble your brand now. Fabregas says this is something that many merchants forget.
“A surprising number of businesses don’t check this with their processor,” she says. “Having your exact website or store name appear on statements prevents most recall-related disputes. Plus, adding the phone number gives customers an easy way to inquire about the charge before initiating a dispute.”
Going a step further, you’ll want to be descriptive in additional billing guidelines and descriptors. This can also help customers better recall what they purchased and the transaction data. And although there are character limitations, you’ll want to pack in as much specific information as you can to convince a cardholder that they’ve actually made a purchase.
“Fraud mitigation platforms can address the matter by sharing shopping cart-level data, such as merchant’s name and contact information, date of event, name of device used in the order process, and item or service descriptions (size, color, style) between cardholders, businesses, and issuers,” says Marchand. “By provisioning this data directly into the issuing bank’s call center, online or mobile applications, a questionable charge can be resolved directly with the customer.”
2. Adopt the right technology
Technology has completely changed the way we do business. And this continues to be true when it comes to payment processing. There are many tools available that can help you avoid chargebacks—the main one being a credit card payment processor from an accredited company.
At a minimum, Cunningham recommends working with your processor to use the best compatible anti-fraud technology. “Some tools, like Visa Secure and Mastercard SecureCode, reduce your liability in the case of chargebacks,” she says. “If you implement those tools, it’s much less likely that you’ll even get a chargeback in the first place.” But remember that this also has the potential to work AGAINST you, making it difficult to successfully appeal a chargeback.
And there are additional investments you can make to protect your company. For example, Saltwater Grille has completely changed its point-of-sale terminal, using TableSafe technology. Rather than diners giving servers their cards to process at the terminal, the mobile POS is brought to the diners to pay tableside.
3. Use an Address Verification Service (AVS)
An AVS helps prevent fraudulent transactions, ultimately lowering your chargeback rate. Here’s how it works: during the checkout process, the AVS system will compare the address entered by the customer with the information associated with the card on file. From there, the system will generate a code indicating whether there is a complete match, partial match, or if the address cannot be verified. The comapny can then use the code to determine whether or not to approve the transaction.
4. Verify cardholder identity
According to data from ClearSale, stolen cards are the No. 1 reason chargebacks occur, accounting for 30% of instances. Verify cardholder identity for every sale with a photo ID–and don’t forget to make sure the customer signatures match.
As an extra step, send an immediate email receipt so that shoppers are alerted instantly about purchases made on their cards. The receipt should be itemized and contain details like items purchased, date, and vendor location to help jog their memory.
5. Analyze your chargeback incidents
When chargebacks happen, it’s important to conduct a post-mortem to help understand what went wrong and why. This can also give you further insights into how to best prevent chargebacks in your business.
“If we look at a generic customer journey map, preventing chargebacks happens through most of the customer’s experience,” says Chris Guillot, founder of Merchant Method. An analysis can help you identify which stages have friction and contribute to your chargeback challenges.
This post-mortem is also an opportunity to see if there are specific issues with your products or services that you might need to address. “See if there are things you can adjust in your business model or level of customer service so a chargeback of that particular nature won’t happen again,” says Bakke.
6. Get your employees in on it
Your staff is the first line of defense against fraud. Include loss prevention in your employee onboarding so that they start the job with a fresh review.
“Consistently and frequently train employees on operational compliance, specifically as it pertains to POS, returns and exchanges, and managing customer service issues,” says Guillot. If your employees are trained to handle issues head-on, you can prevent chargebacks altogether. And an effective chargeback management strategy can make a world of difference to your total lost revenue.
Credit Card Chargebacks by the Numbers
And if you need even more convincing as to why preventing and handling chargebacks should be a priority, consider the following:
- Consumers do it because it’s easy. The onus is on you, the merchant, to prove the transaction is valid. 81% of consumers admit that they filed a chargeback simply because it was convenient.
- Most consumers go straight to the bank. 58% do not reach out to the company when filing a chargeback. Only 14% of cardholders contact merchants prior to filing a dispute.
- The top merchant challenges that businesses face when dealing with fraud are: Customer identity verification (60%) Delay in payment confirmation (43%) Confirmation of delivery (44%) Address verification (45%) New payment methods (43%) Limited ability claim products (25%) Fraud assessment (11%) International payments (13%) Lack of specialized fraud detection (15%) Manual order reviews (14%).
- In 2019, companies lost 4.4% of their revenue due to chargebacks.
Go Beyond Preventing Chargebacks
While they’re a nuisance to deal with, a little bit of due diligence can go a long way when fighting illegitimate chargebacks. The best way to deal with them? Lessen your chances of falling victim to chargebacks in the first place.
Learn how to prevent 5 common types of retail fraud >
Having a chargeback prevention strategy can certainly go a long way in reducing unnecessary expenses. That said, there are other ways to lower your costs, particularly when it comes to card processing.
Just ask Payment Depot’s customers, who’ve managed to lower their card processing fees by 40%. Instead of taking a cut out of your transactions, Payment Depot simply charges a monthly membership fee in exchange for access to wholesale payment processing rates. This enables you to keep more of your profits.
Contact Payment Depot to learn more. We’ll evaluate your current payment processing fees and recommend solutions to help you save more.
Knowing your rights can help prevent arbitration in cases of fraudulent chargebacks. You have the right to representment and arbitration in cases of suspicious chargebacks. Before we close, let’s take a look at a few final questions about chargebacks and merchant rights.
Should Merchants Fight Chargebacks?
Yes! Fighting illegitimate chargebacks can help protect your business from fraud, and help you maintain ROI.
What Time Limits Are Applicable to Chargebacks?
Customers can file chargebacks within 60 to 120 days of their original purchase. From there, you have 30 to 45 days to respond. These time windows may vary depending on your customer’s card network, your acquiring bank, and the chargeback reason code.
How Do Chargebacks Differ From Refunds?
Chargebacks occur when customers do not request—or are denied—a refund for a particular expense from a vendor. While refunds are between you and your customer, chargebacks are between your customer and their card issuer. To protect merchants, most companies require customers to contact you for a refund before issuing a chargeback request.
What Is a Chargeback Fee?
A chargeback fee is a fee charged by your bank (the acquirer) to penalize you for processing a customer’s chargeback. This $25 to $50 fee aims to compensate your bank for the time involved in processing a chargeback.
What Is a Chargeback Ratio?
Banks monitor your company’s chargeback ratio to prevent you from processing an unnecessary number of chargebacks. Your ratio is the number of chargebacks you received during the month divided by your total transactions for that month. If your ratio is above 0.9, you may receive a notification from your bank about fees and additional consequences.