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What Are Chargebacks and How Can They Kill Your Business?

Thursday, July 28, 2016 by

What Are Chargebacks

Your new business is up and running, your website is generating sales, and life is great, right? Maybe, but stay alert for a hidden threat many new merchants don’t know about until it’s too late – chargebacks. Like shark fins in clear waters, chargebacks are e-commerce hazards that can strike without warning. Protect your business by understanding what chargebacks are, how to prevent them, and what to do when you encounter them.

What Are Chargebacks?

A chargeback occurs when a cardholder calls their card issuer to dispute a charge on their account. If one of your customers files a dispute, you’ll get a notice from your acquiring bank that a chargeback is pending. You can either accept it or appeal it – we’ve got more information on that below. If you accept it or if the acquirer or card issuer denies your appeal you’ve got a chargeback. That’s not good.

Why Do Customers File Chargebacks?

Visa lists four main reasons for chargebacks in its 94-page Chargeback Management Guidelines document. (It’s not great beach reading, but read it anyway.) The top two reasons come from customers: disputes and fraud attempts. Authorization and processing problems can also cause chargebacks, so we’ll talk about good recordkeeping in a minute.

Customer dispute chargebacks

There are many reasons a legitimate customer may file a chargeback request. If their order never arrived, if it was the wrong item, if it was radically different from the product description, or if they were overcharged, they may request a chargeback if your customer service team doesn’t fix the problem.

Friendly fraud chargebacks

Criminals posing as customers order goods, pay with a credit card, and then falsely claim they never received their order. This “friendly fraud” is a real problem for online merchants and it’s getting worse. According to retail news outlet WWD, chargeback fraud is rising 20% per year, and more than half of people who successfully file a fake chargeback will do it again within three months. In other words, once there’s blood in the water, the sharks move in.

Over 50% of people who successfully file fake #chargebacks will do it again within 3 months. Click To Tweet

How Do Chargebacks Hurt Your Business?

Chargebacks cause harm in the short run and over the long term. With each completed chargeback, you lose the revenue from the transaction, any merchandise you shipped or services you provided, and you’ll almost always owe a chargeback fee to your acquirer.

If your chargeback ratio (chargebacks to total transactions) reaches a certain point, you’ll either pay higher processing rates or lose your merchant account entirely, often with much less notice than you’d like. If that happens, you’ll have to find a processor who’s willing to work with “high risk” merchants – at high-risk rates — to keep your business from sinking.

How Can Your Business Avoid Chargebacks?

You can reduce your chargeback risk by following five simple steps to keep your legitimate customers happy and discourage fraudsters from taking a bite out of your business.

1. Provide clear information to customers

Your product descriptions and images should be accurate so shoppers aren’t disappointed when the goods arrive. Your shipping and return policies should be visible on every site page so shoppers know what to expect before they buy. Make sure the billing descriptor that appears on customers’ credit card statements is recognizable; use your shop name or another term you’ve told customers to expect to see.

2. Track your shipments

Package tracking helps everyone. Customers won’t assume their package is lost if they can track its progress, and fraudsters are out of luck claiming the package never arrived if you have proof it did. (There are plenty of WordPress plugins out there to help you manage shipping – check out our post here.)

3. Provide great customer service

Customer service contact information should appear on every page of your site and on the receipt in every package you ship. Round-the-clock help and a customer-friendly attitude can reduce the risk that customers will go straight to their card issuer to solve their problems.

4. Screen your transactions for fraud

Your processor, a 3rd-party fraud-prevention service, and/or your own in-house team can watch for red flags like shipping and billing addresses that don’t match, high-value purchases by a new customer, many small purchases from the same IP address in a short period of time, and purchases from locations that are known to have high rates of fraud.

5. Keep detailed transaction records

The more information you record for each transaction, the better. Some things are required, like the date, amount, cardholder name, and other basics. Go above and beyond to include what card issuers call “compelling evidence” – delivery signatures, customer service emails that prove receipt of the item, customer IP addresses and phone numbers, and more. Each issuer has its own rules, which you need to study. (See below.)

What Should You Do If You Get A Chargeback Notice?

Submit supporting information quickly

Get your evidence to your acquirer within the time limit they set. If you’re late, you lose out, even if the chargeback would otherwise be unsuccessful. This is where good recordkeeping and organization literally pay off.

Evaluate the chargeback

Whether the chargeback is approved or denied, study it to see if there are things you can improve to avoid similar chargeback requests going forward.

Want to learn more about chargeback prevention?

Get the details on each card issuer’s chargeback process and fraud-prevention tips:

Your acquiring bank can be a resource for chargeback prevention, too. Talk to your banker about ways to shore up your fraud controls and head off future attacks.

One Comment
  • Jo Ann Henriques
    29 July 2016 at 11:55 am

    Chargebacks can be a pain and difficult to handle. If you do not have the time or the expertise to recover your chargebacks, contact Chargeback Gurus. We have 13+ years of experience winning chargebacks and reducing chargebacks for our e-commerce merchants.

    Dont let chargebacks ruin your business.

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