Chargebacks are not new, but the rate at which consumers weaponize the concept is shocking to eCommerce merchants.
The chargeback mechanism was introduced many years ago to help build consumer trust in Card-Not-Present transactions.
And it worked. When a buyer falls prey to an unauthorized transaction, if there’s an order misrepresentation or delivery issue, the buyer can file a chargeback to seek remediation from their bank; if they couldn’t reach a clear consensus with the seller.
As eCommerce evolves, cardholders begin to see many loopholes around chargeback laws. So instead of using chargebacks to avoid fraud and transaction abuse, many cardholders now use chargebacks for gaming the system and getting freebies.
Go ahead and Google it. The numbers will make your brain hurt. One estimate says that chargebacks cost eCommerce businesses ~$200 billion annually.
Can a Merchant Prevent Chargebacks?
First, it’s crucial to re-emphasize that most chargebacks are illegitimate. It could be that the customer had buyer’s remorse and thought to get their money back by filing a chargeback. In other instances, the cardholder did not recognize the billing statement and assumed it was fraudulent. But there are scenarios where the buyer makes a transaction with the single purpose of filing a chargeback. These are classified as friendly fraud, and each successful case means you lose the sales revenue and goods shipped and incur other ancillary charges.
Also, if your chargeback rate goes above the predetermined card network threshold, that means more trouble. Your business will enter a chargeback monitoring program or the Member Alert to Control High-Risk Merchants list, meaning you will no longer get the standard payment processing account.
So, can a merchant prevent chargebacks?
The answer is yes. Even though friendly fraud accounts for over 75% of all transaction disputes, Chargeflow research has found that merchants can avoid ~40% of all chargebacks with informed mitigation strategies.
The logic is simple. If you realign your chargeback approach and close internal loopholes that often trigger disputes, you could make it difficult for even determined criminals to gain access to your store.
That said, the following passage highlights seven huge mistakes merchants make when fighting chargeback and how to avoid those revenue-draining blunders.
7 Rookie Mistakes Merchants Make When Fighting Chargebacks
- Not responding on time.
When a customer files a chargeback, you have a definite timeframe to respond, depending on the card network you’re working with. Visa merchants have 30 days to respond to a chargeback, while MasterCard gives 45 days. Over at PayPal, merchants have 10 days to submit their PayPal dispute evidence.
Failure to respond promptly means you’re guilty as charged. Hence, if you wish to fight the chargeback, do your best to stay updated with each payment platform’s chargeback time limits and send your documentation promptly.
- Poor paperwork
Aside from being prompt with your chargeback response, the quality of your documentation also matters. The chargeback remediation process is a daunting uphill battle with ever-changing rules. But you will be fighting amiss if you don’t do your due diligence to assemble tangible, compelling evidence to establish the transaction’s legitimacy.
Ideally, you should keep track of all purchase receipts, shipping and delivery confirmations records, and all relevant customer correspondence. Such an organized system might mean spending some extra subscription bucks, but it’ll surely pay off when a customer files a dispute.
- Not communicating with the customer.
Assuming all chargebacks that come your way are the fault of the cardholder might create blind spots in your mediation approach. Merchants without consistent, reliable strategies also open back doors for disputes, as we noted earlier.
Therefore, before sending in your chargeback response, you should contact the customer to hear their side of the story. And if you’re about to find a middle ground with them, and they agree to withdraw the case, it’s advisable to still respond to the chargeback and include the agreement with your customer.
- Not having well-crafted Refund, Return, and Exchange Policies.
Not having a well-drafted order return, refund, and exchange policy is one of the reasons merchants incur buyers’ wrath. And even when you have such a policy and don’t display it where the buyer can quickly locate it, you will still be shooting yourself in the foot. When challenging a chargeback, an obscure policy isn’t the best recourse.
If you make your policy clear, accessible, and flexible to underscore what constitutes a sales-final and returnable items, you might save yourself the burden of chargeback representment.
- Not understanding the chargeback reason code.
The chargeback reason code, an alphanumeric code given by the card issuer involved in a chargeback, helps you understand what you’re fighting. It helps you know how to adapt your strategies to the battle at hand.
The problem with these codes is they don’t always show the cardholder’s intent. For example, suppose you are dealing with an online shoplifter whose sole purpose for the transaction is to file a chargeback. No reason code their bank provided will tell you their actual intent. Also, the trail of documents between the various parties involved in the chargeback might cause significant discrepancies between what the cardholder specified and what the merchant received.
Either way, it’s advisable to tailor your documentation to that reason code. And ensure you’re familiar with the changing reason codes across networks and the documentation required for each code.
- Writing off chargebacks as a cost of doing business.
I don’t know if you’ve seen this, but research shows that ~43% of merchants say they have no chance of winning a dispute, and 34% lack the confidence of ever winning a dispute. Yet, 51% of merchants have seen an uptick in their chargeback volume.
Industry records show that global chargeback costs could reach $117.47 billion by 2023, with the average industry cost per chargeback expected to reach $191.
Merchants write off chargebacks as a cost of doing business for the lack of strategic chargeback remediation strategies to combat disputes and recover losses. Get educated on industry best practices to limit dispute exposure. And when scammers force their hand, you should know how to put the fear of god into those scoundrels.
- Not automating chargebacks.
Responding to chargebacks in the given time frame and providing a thoroughly detailed response to help win the case is a challenge for most merchants. Plus, the chargeback mediation process is highly time-consuming, so you often put other urgent tasks on the back burner.
Most merchants find that their chance of winning hovers around 12%, no matter how hard they fight. Yet, Chargeflow’s fully automated chargeback solution is helping merchants recover disputes without lifting a finger, with up to a 75% win rate. And the success-based pricing model means merchants only pay when they win cases.
Chargeback fraud is a growing challenge for the entire eCommerce ecosystem
The global pandemic and its antecedents have created a worsening fraud situation. According to the Association of Certified Fraud Examiners (ACFE) and Grant Thornton, 51 percent of their research respondents uncovered increased fraud since the beginning of the pandemic; 71 percent expect fraud levels to increase over the next year. What’s more? A similar report surveying over 300 merchants found that 65% of respondents saw an increase in chargeback fraud in 2022.
Educating yourself on these issues makes sense. And having the necessary frameworks to ensure you don’t spend your working hours fighting to recover lost revenue is how you scale.