There are few things that erode a business’ bottom line like chargebacks.
When a customer feels like they were wrongly or unfairly charged for a purchase, they can go through the process of filing a chargeback. This process runs through the issuing bank and indicates that the customer feels they were unfairly charged for a product or service.
Unfortunately, this process puts a lot of burden on merchants to prove the legitimacy of the charges. It can be a painful experience and often leads to both lost revenue and lost merchandise.
One study from 2016 found that eCommerce businesses lost an estimated $6.7 billion in revenue due to chargebacks.
Above and beyond the direct monetary cost, there are also the costs of preventing and challenging these disputes, which can become a strain on the entire business and suck up valuable time and resources -- just to recoup revenue that you’re already owed!
Best case scenario, if you win a chargeback, you’re often charged a fee, which averages about $25 per incident, no matter the amount of the original purchase.
But the reality is even worse. If your company loses too many chargeback disputes, you can be flagged as a high-risk merchant, which can lead to increased fees or outright blacklisting by specific payment processors.
That blow can obliterate your entire business.
So how do you fight back and protect your company?
The key to reducing chargebacks -- or hopefully avoiding them altogether -- is often easier than it seems. But it starts by unpacking the chargeback process and what drives people to take action.
Why Do Chargebacks Happen?
Chargebacks are a often a symptom of another problem. One of the keys to avoiding chargebacks is to understand the consumer’s behavior and mindset that leads them to making the decision to file a dispute.
According to one study, about 70% of chargebacks occur for one of these 5 reasons:
- The product or service was not what they wanted or expected
- Delivery didn’t arrive within a necessary window
- Delivery never arrived at all
- Company will not accept a return or exchange
- Customer didn’t recognize the charge and mistakenly thought it was fraud
Each of these on their own is generally not reason enough for a customer to file a chargeback. Most reasonable customers will first attempt to resolve a dispute through a normal channel. They may contact your support team, file a complaint, or leave a negative review online.
If your company doesn’t respond to the initial complaint or resolve the issue for the customer, then it’s entirely possible that the customer may choose to escalate the complaint by filing a dispute with their bank or card issuer.
5 Ways to Guard Against Chargebacks
Most of these steps include improving customer communications and setting clear expectations.
Here are some practical ways to combat charge disputes.
1. Send prompt and clear order communications
One of the most frustrating things as a consumer is placing an order and having no understanding of what’s happening. Did it go through? Is it on the way? Will I receive my item before the big event?
Communicating clearly with customers about their order -- from confirmation to shipping and delivery -- can go a long way in helping ease anxiety and reducing chargebacks that may occur out of sheer confusion.
We recommend using an app like Tracktor to enable your customers to track their orders from purchase to delivery right on your site. Tracktor even has a free plan, making it accessible for brand new stores.
2. Respond to customer service inquiries promptly
Your best line of defense against chargebacks, in most cases, is to resolve the dispute before it escalates.
If it’s clear that a customer is upset, disappointed, or otherwise unsatisfied with their purchase, you should see that as an immediate red flag that the entire transaction could be at risk. In almost every case, it will be financially advantageous for your company to offer a refund, exchange, or other solution to meet their expectations.
3. Use a clear payment descriptor
One of the most common reasons why transactions are disputed is because the billing descriptor used by a merchant doesn’t look familiar. Customers who check their statements may not recognize the name of the company and assume it was an erroneous charge -- or worse, fraud.
Save everyone some headache by making sure that your company’s billing descriptor is clear and obvious.
4. Set clear return policies
Hiding your return policies in the fine-print is a sure-fire way to get hit with a dispute when a customer’s unhappy.
No matter what your return policy is, you should make it known upfront. It’s better to scare off a few customers with restrictive rules rather than to have orders that result in chargebacks if the customer’s unhappy and realizes they can’t get a refund or exchange like they expected.
5. Update your product descriptions
Your product’s description and specific attributes can play a major role in different customer’s buying decision.
Make sure that your descriptions are always accurate and updated to protect against uninformed purchases that come back to bite your business.
Fighting Fraud to Reduce Chargebacks
Unfortunately, not all consumers are as well-meaning as we’d like to think.
It’s estimated that as many as 7 in 10 chargebacks could be “friendly fraud”. This term refers to illegitimate disputes that are filed by the real cardholder.
These can be an especially challenging problem that’s akin to any kind of shoplifting or theft. The unfortunate reality is that, while you can take some steps to combat this kind of chargeback, there are limitations to what you can do to stop or prevent it altogether.
It’s up to the merchant to prove that they fulfilled their end of the transaction.
Here are some tips for combating friendly fraud:
1. Always follow credit card processing protocols
Make sure that you’re collecting and processing full payment details for every transaction. Do not attempt to re-authorize a failed payment.
2. Consider using an Address Verification System (AVS)
Avoid credit card fraud or friendly fraud by using an AVS before shipping orders. If you can catch a suspicious transaction early, it can save you a ton of trouble, time, and money later on down the road.
3. Keep thorough records and customer histories
When push comes to shove, you may need to defend yourself against a dispute.
The best thing you can have in this scenario is proof of the transaction, the charges, shipment and delivery, and any other details that will bear out your side of the story.
It’s best practice to keep these records for several years. Depending on the card issuer or payment processor, charges may be eligible for dispute for up to 3 years after the purchase.
At the end of the day, no company wants to deal with the consequences of a chargeback and being prepared is the best way to protect yourself and your business.
Tyler Hakes is a writer for Radvocate, a platform that’s simplifying the arbitration process. He writes about business growth, consumer rights, and legal tech.