How to prevent chargebacksLiza Amaro
As a merchant, you never want to have a dispute with your customers—especially over a payment. Unfortunately, chargebacks do happen, and they’re a hassle to deal with. However, there are some things you can do to help prevent chargebacks from happening in the first place.
What is a chargeback?
A chargeback is a payment dispute that occurs when a cardholder asks their card-issuing bank to reverse a transaction. Introduced in the 1970s, chargebacks exist to protect consumers from fraudulent transactions, but chargebacks can occur for a variety of other reasons as well (more on that in just a bit).
What happens when a chargeback occurs?
When a consumer files a chargeback with their card-issuing bank, those disputed funds associated with the transaction are collected from your merchant account until the dispute is resolved. However, arriving at the resolution can be a complicated and time-consuming process, often taking several weeks or even months to resolve.
In addition to the complicated paperwork and time-consuming efforts involved in a chargeback, merchants are also assessed chargeback fees each time one occurs. These chargeback fees are determined by your payment processor and generally range between $20 to $100 each—which may even total more than the disputed transaction itself. Plus, some payment processors charge additional fees associated with researching and disputing the chargeback on your behalf. It’s important to know whether your payment processor bills you a flat chargeback fee or tacks on additional fees as well.
Two primary types of chargebacks
- Legitimate fraud: The intended purpose of chargebacks is to protect the consumer from unauthorized transactions committed by fraudsters, such as when a credit card number is lost or stolen, when a data breach occurs, or other criminal activity.
- Friendly fraud: The most common cause of chargebacks, this type refers to a legitimate transaction that the cardholder made but either does not recognize or is unhappy with the product or service provided. Between 2018 and 2021, the average merchant saw an increase of 23% in friendly fraud. Why? Many experts point to the dramatic rise in ecommerce shopping. For example, if a customer ordered a product from your website but the shipment was lost, then the customer may file a chargeback to dispute the transaction instead of contacting you to remedy the situation.
Best practices to prevent chargebacks
- Include an accurate merchant billing descriptor for credit card statements: One of the most common reasons for friendly fraud is related to the merchant’s billing descriptor, which is the line item for a purchase that appears on the consumer’s statement. If the customer doesn’t recognize your business name, then they’ll dispute it. For example, if the name of your online business is Surplus.com but the name of your parent company, SPS Enterprises, shows up as the billing descriptor, then it’s logical for your customer to chargeback the transaction as unrecognized. It’s important to make sure your billing descriptor matches the business name your customer knows.
- Track all shipments: With package theft at an all-time high, make sure you have tracking numbers for every order that ships out to customers. In addition, consider requiring a signature upon delivery for higher value shipments, and always use a reliable company for your shipments.
- Ensure product descriptions are accurate: Sometimes customers initiate a chargeback because they’re unhappy with the product or service the merchant provided. To avoid this type of chargeback, make sure the items you sell match the descriptions and images provided on your website. Also make sure your website clearly provides direction on how customers can contact you with questions or issues following a sale. And, when a customer contacts you, respond to any communication professionally and promptly, whether by phone, email, online chat, or another method.
- Have clear documentation around recurring subscriptions: We all enjoy the convenience of a recurring subscription, whether it’s for a streaming service, a magazine, or an online membership, but a customer can initiate a chargeback if they forget about an automatic renewal and want to cancel. To protect your business, ensure that customers clearly understand the parameters of the recurring transaction upfront. For example, when the customer is initiating the subscription, clearly document the terms of the recurring transaction, including the billing frequency, billing amount, cancellation policy, and automatic renewal date. Before the customer clicks the final button to begin the subscription, include a checkbox where they acknowledge that they have read and agree to the recurring transaction terms. In addition, send your customers an email alert 30 days before the auto-renewal is scheduled to occur.
- Work with a reputable merchant services provider: In addition to providing the tools you need to accept and process card-based payments, your merchant services provider (MSP) is also responsible for working with you through the chargeback process. Carefully compare MSPs to understand what fees they assess for chargebacks, the tools available to help you prevent fraud, and how/if they work with you through the dispute process. For example, ConnexPay developed a chargeback management system that is provided to our clients free of charge to efficiently receive, manage, and respond to disputes. We also work hand-in-hand with you on chargeback responses, and we collaborate with you on ways to help keep your chargeback ratio below 1%.
In addition to providing merchant services, ConnexPay can also issue card payments. In fact, ConnexPay is the first and only company to bring together the two sides of the payment process—merchant acceptance and virtual payment issuing—into a single platform with one contract and one reconciliation. If you’re an e-commerce intermediary or an online marketplace, now is the time to explore how our single platform enables your business to safely accept payments from customers, experience faster reconciliation, and reduce fraud with virtual card issuance, all in real time.