How Much Are Chargebacks Really Costing You—and How to Combat Them

Chargebacks can be a serious disturbance for any business. In the US alone, 25 million transactions are disputed each year, and that number is only expected to grow—especially with the rise in online shopping due to the coronavirus pandemic. Even the best-intentioned businesses are vulnerable to chargebacks. Consider the following:

  • 81% of customers file chargebacks with their banks out of convenience rather than speaking with the merchant directly, a phenomenon known as “friendly fraud.”
  • The rate of consumers initiating unjustified chargebacks is growing at a rate of 41% per year in a phenomenon known as “cyber shoplifting.”
  • A customer who successfully files a chargeback is 9x more likely to file another.

Unfortunately, the chargeback process is still confusing to many merchants, and it can be difficult to determine the best way to approach disputed transactions. Below, we outline the most vital information ecommerce merchants should know regarding what chargebacks are, how to handle them, and strategies for avoiding disputed transactions in the first place.

Chargebacks Explained

A chargeback occurs when a customer files a dispute with their card-issuing bank about a specific charge on their account. The merchant’s payment processor then debits the contested amount from their account and forwards them the dispute for review. From here, merchants have a set amount of time to respond to the dispute with compelling evidence that the charge is valid. The response is then reviewed by the issuing bank, which can either uphold (customer wins) or decline (merchant wins) the chargeback.

There are over 150 different types (“reason codes”) of chargebacks across the four major credit card providers; however, not all of them are applicable—and many are incredibly rare—for businesses in the ecommerce industry. The most common types of chargebacks among ecommerce businesses are Fraudulent, Credit not processed, Consumer dispute, and Technical/processing error.

  1. Fraudulent: The customer believes that someone else used their card to charge the transaction in question.
  2. Credit Not Processed: The customer returned the product(s) they ordered and never received the agreed-upon refund or credit.
  3. Consumer Dispute: The customer never received the product(s) they ordered or claims they were not as described, defective, or damaged.
  4. Technical/Processing Error: There was a technical issue during checkout; for example, the customer was charged twice for a single purchase.

Handling Filed Chargebacks

The main benefit of responding to chargebacks is the potential to recoup lost funds. This can be especially attractive to businesses because they are charged a fee for each disputed transaction regardless of the outcome. Responding to chargebacks can be beneficial in disputes regarding big-ticket items, since losing that revenue can impact your bottom line. However, responding to chargebacks is widely considered to be more trouble than it’s worth.

For one thing, chargebacks can take a massive amount of time and effort to handle. Full resolutions can take anywhere from one to six months, depending on how persistent the customer is. Additionally, as a rule, chargebacks are skewed in favor of consumers—after all, the process was initially created to protect consumers from dishonest merchants.

Business owners who decide they do wish to respond to chargebacks don’t have to start from scratch. Software such as Signifyd and Verifi can help manage chargebacks in-house, while managed services offered by companies such as Accertify and are good resources for outsourcing the work to experts familiar with the process.

Avoiding Future Chargebacks

The best way businesses can avoid losing time and money to chargebacks is to do everything they can to prevent them in the first place. This is especially important because businesses that receive a lot of chargebacks may have their account cancelled and flagged as fraudulent. The best ways to prevent chargebacks are to be both proactive and vigilant.

Be Proactive With Presentation & Service

The more merchants convey what customers can expect from the product and the process of receiving it, the less likely they will be dissatisfied with what they receive—or the amount of time it takes. Here are some ways businesses can be proactive in preventing chargebacks:

  • Depict products honestly and in great detail. Make sure each product is described exactly as it will arrive. Upload clear images and write descriptions that include important information like dimensions, compatibilities/incompatibilities, weight, color, and more. The more accurate the presentation of your product online, the less likely customers will feel like what they received was not as described.
  • Make sure the return/refund policy is easy to find before the order. If customers are aware of rules and processes before placing an order, they’ll be more comfortable purchasing in the first place. Then, if they wish to return the product for any reason, they’ll know they have a clear path toward getting reimbursed and will (likely) try that method before involving a bank.
  • Provide exceptional customer service. Make sure contact information is easy to find. If a customer can talk to a live person and explain their issue, they may be willing to reach a compromise before they resort to a chargeback. If the customer is asking for an exception to clearly-stated refund policies, pay attention to their demeanor—sometimes it’s worth issuing a refund anyway to avoid the headache of a chargeback later.
  • Don’t charge until the items have shipped, and send follow-up emails for every step of the order. Keeping customers informed of the status of their order is an easy way to instill confidence that their product is on the way and has not been forgotten. Customers are less likely to dispute a transaction for non-receipt of goods if they can see exactly where their order is and aren’t charged too soon for it.
  • Keep track of returns and issue refunds promptly. One major concern for customers is returning a product to an online store, but never receiving their money back—thus losing out on both the product and their money. Alleviate this fear by keeping customers informed throughout the return process, and make these transactions a priority on your end to ensure customers get their money back as soon as possible.
  • List adjusted price and shipping times clearly for international orders. While international orders are a great way to grow a business, they are riskier. If a customer’s local currency is not displayed, they may get confused about the amount they are paying and file a chargeback when the amount on their bill does not match. Clearly list the business location, local currency, and export/shipping restrictions to avoid this.

Vigilantly Monitor Orders for Unusual Activity

Being vigilant can be much trickier than being proactive. Successfully vigilant businesses monitor their orders for activities that are often associated with chargebacks. Many payment processors have become quite clever at detecting fraud, but businesses can incorporate an extra layer of protection by making sure each purchase seems legitimate before fulfilling an order. Here are a few transactions that may indicate fraudulent activity:

  • Shoppers placing large orders without preference for size, color, make, or model of goods/services
  • Unusually high transaction amounts
  • Existing shoppers who suddenly order a substantial volume of goods/services
  • Single customers that provide more than one card to cover an order or set of orders
  • Shoppers that order more than once in a given day
  • Multiple transaction attempts with a failure at the first attempt

These can be legitimate transactions, but they can also be fraudulent. Being on the lookout for this behavior, as well as having additional safeguards in place like address verification (AVS), asking for CVC codes, and adding velocity controls can help prevent chargebacks.

In addition to odd purchase behavior, monitor your billing system for any issues or glitches. The faster you can identify an accidental double-charge, issue a refund, and inform the customer, the less likely they will be to try to fix the issue through their bank.

In Conclusion

Every business will have to deal with chargebacks in one way or another. Being proactive and vigilant will allow businesses to focus on growth instead of wasting time on disputes with customers. If you have not done so already, talk to your payment processor about fraud tools that are already built into their system to help prevent chargebacks.