A chargeback is a credit card reversal that can occur in various circumstances. For instance, it can happen when the merchant fails to verify the cardholder’s identity. It can also happen if the cardholder’s account is breached and the transaction is fraudulent. The most common cause of chargebacks is fraud, but not all fraud is created equal.
Chargebacks are scary because they can be costly and time-consuming for merchants. According to recent data, U.S. merchants have to bear $3.75 for every dollar lost in fraudulent transactions. Merchants usually can’t fight them, so they often have to pay hefty fees while losing out on future sales.
By following these steps and tips, you’ll be able to minimize your risk of experiencing chargebacks:
Chargebacks are a common phenomenon in the world of eCommerce. As stated by Statista, almost 75% of eCommerce merchants saw increased fraudulent attempts in 2021, of which chargebacks covered a significant amount. In fact, they’re so common that many merchants simply accept them as part of doing business online.
But what are chargebacks? And how can you minimize the risk that your business will get hit with one?
They occur when a customer raises a chargeback dispute for a transaction with their bank or credit card company. The customer claims that they did not authorize the purchase in question or that it was made without proper authorization.
The merchant loses this dispute because they don’t have enough evidence to prove otherwise. They also lose both the money and goodwill associated with an unfulfilled sale. Hence, most merchants fear a chargeback, which can impact a sale and cause a potential lifetime client. However, merchants can also raise a chargeback dispute to fight it.
According to Ethoca, although winning chargebacks is hard, you can still improve your chances of winning. For instance, you can collect all customer transaction details upfront and compelling evidence related to the disputed transaction.
Chargeback rates reflect how often customers use their right to dispute charges against you. Generally speaking, higher chargeback rates mean higher risk for your business.
To calculate your current rate, divide the total number of disputes by the total number of sales made over some period. Then, compare this number against industry averages; if yours is above average, consider taking steps towards reducing those numbers before disaster strikes.
Identifying Chargeback Triggers
To minimize your risk of chargebacks, you need to know what causes them. The most common triggers for a merchant account chargeback are:
- Unrecognized transactions: Customers might not remember making a purchase or could mistake the transaction for fraud, leading them to initiate a chargeback.
- Fraudulent transactions: If a customer’s payment information is compromised and used for unauthorized transactions, they may initiate a chargeback to reclaim their funds.
- Product/service not received: Chargebacks can be triggered if the customer didn’t receive the product or service they paid for. This might be due to shipping issues, technical glitches, or miscommunication.
- Product/service not as described: If the delivered product or service doesn’t match the description provided by the merchant, customers may request a chargeback.
- Billing issues: Incorrect or unclear billing descriptors on customers’ credit card statements can lead to confusion and chargebacks.
- Subscription cancellations: If customers are still charged after canceling a subscription and cannot resolve the issue with the merchant, they might resort to chargebacks.
- Technical glitches: Payment processing errors, double charges, or other technical issues can result in customers initiating chargebacks.
- Quality issues: Products that are damaged, defective, or lower quality than expected might lead customers to dispute the charge.
- Unauthorized transactions: If a family member or someone else used the customer’s card without permission, the cardholder might initiate a chargeback.
- Misleading advertising: If the merchant’s advertising misrepresents the product or service, customers may dispute the charge due to false expectations.
- Failure to cancel recurring payments: If customers intended to cancel a recurring payment, but it wasn’t stopped, they might initiate a chargeback.
- Dissatisfaction with customer service: Poor customer service experiences, unresponsive support, or failure to address concerns could trigger chargebacks.
Knowing and understanding these triggers can help you stop chargebacks from occurring in the first place. However, it can be highly challenging. Hence, it is advised to use technology to your benefit. For instance, with the help of technology, you can share real-time intelligence with a wide network of merchants. This intelligence can help analyze ongoing transactions and flag any potential fraud.
Transparent Billing and Invoicing
Transparent billing and invoicing are essential for all merchants. By ensuring that your customers understand the charges they are being charged, you can help minimize chargebacks and increase sales.
There are many benefits to creating a transparent invoice:
- Customers will better understand the amount they owe, which may lead them to make additional purchases or recommend your company to others.
- You’ll be able to avoid potential disputes with customers who disagree with their purchase total. Additionally, you can address any concerns related to unauthorized charges on their account statement.
Robust Dispute Resolution
The second step is to ensure that your team is equipped to handle chargebacks. This means providing training on how to resolve disputes and responding promptly. Consider outsourcing dispute resolution services if you are overwhelmed with the number of chargebacks.
For example, suppose a customer calls in their dispute over a late delivery, and there’s proof that it was late. In that case, you should be able to quickly resolve this issue by refunding their money or offering another product at no cost.
However, suppose they claim they never ordered anything from you, and there’s no record of their purchase. Then it’s more difficult for you as a merchant because there isn’t much evidence except what the customer says happened during checkout.
Therefore, ensuring employees are well-trained is crucial. This ensures everyone knows the necessary steps to handle these situations, effectively minimizing overall risk levels.
Secure Payment Processing
Another excellent way of reducing transaction fraud and chargebacks is secure payment processing. A merchant can minimize chargebacks using secure payment gateways and PCI-compliant payment systems.
Such systems are in high demand across different business sectors. Data from Global Newswire shows that the payment gateway market size is supposed to surpass $161 billion by 2032. And as technology evolves, the security of payment gateways will rise, too. This will help prevent fraudulent transactions and protect the merchant from fraudulent activity on their site.
Merchants must also use fraud prevention software to monitor suspicious activity on their websites. This could include unusually high orders placed in a short period or large amounts spent on one transaction.
The use of EMV chip technology can also help reduce fraud. This technology incorporates an embedded microprocessor chip. The chip generates dynamic data whenever an electronic card is utilized.
This dynamic data is used alongside traditional magnetic stripe technology at point-of-sale terminals worldwide. This combined approach makes counterfeiting increasingly challenging. In fact, it’s more complex than ever before to counterfeit cards due to this enhanced security feature.
Monitoring and Analytics
The easiest way to keep track of your payment processing is by using analytics. Analytics will allow you to monitor payments, customer behavior, chargebacks, and fraud. It is best to host your monitoring and analytics software on the cloud.
Cloud deployment offers numerous benefits, such as 24/7 access from anywhere, cost-effectiveness, better scalability, etc. Hence, the cloud deployment is expected to expand at a higher CAGR.
You can use information about payments to better understand what payments are being made on your site and how often they’re being made. This will also help you know when it’s time for a new product launch so that it has the maximum impact possible.
Employee Training and Awareness
You can reduce chargebacks by training your employees to spot fraudulent transactions, respond to chargebacks, and handle customer disputes.
For example, suppose an employee receives a call from a customer who says they did not authorize a payment in their name. The customer then requests for the payment to be reversed.
In that case, the merchant must prove that it was authorized. This can be done by either showing proof of consent or providing evidence that the customer had been notified about the impending transaction beforehand.
Employees should also understand the best practices of chargebacks to identify potential trigger points for chargebacks before they become an issue.
For example, if multiple orders from one customer are being processed at once without any problems, then there’s no need for concern. However, if only one order has been placed, but several payments were made at different times, this could indicate fraudulence.
As we’ve seen, chargebacks can be a costly and frustrating experience for B2B merchants. But they don’t have to be. By taking some simple steps, you can minimize your risk of experiencing chargebacks in the first place. These proactive measures can significantly help protect your business and maintain smoother transactions. All you need to do is identify chargeback triggers and use technology.