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5 Steps for Chargeback Protection


Chargebacks can have a major negative impact on merchants' revenue, with eCommerce chargebacks alone costing business owners an estimated $40 billion per year. Aside from their unnecessary costs, they're also time-consuming and can often be frustrating to resolve. The good news is that businesses can prepare themselves with a chargeback protection plan to reduce chargeback frequency and understand the steps to take when faced with a chargeback.

What is a chargeback?

A chargeback occurs when a customer disputes a merchant charge on their credit or debit card. The customer's card-issuing bank or financial institution then initiates recovery of the funds from the merchant.

Chargeback fees can cost merchants anywhere from $20 to $100, but with the associated administrative and additional fees, the total cost ends up being between two and two and a half times the price of the original sale. For example, if a chargeback occurred on a sale of $100, the total fees and expenses would be $200 to $250 - and that's not including the loss of the original sale revenue.

Why do chargebacks happen?

1. Credit card fraud

Often, chargebacks are valid because the customer has been a victim of credit card fraud - in this case, it can be difficult for merchants to dispute chargebacks successfully.

2. Merchant fraud

Merchant fraud occurs when a merchant fails to deliver faithfully and thoroughly on the original transaction. This could be a result of not fulfilling delivery of the purchased product, charging more than the original price at the point of sale, a product being fake or counterfeit as well as other reasons.

3. Friendly fraud

Friendly fraud is when a customer makes a purchase and the merchant follows through accordingly (including price, complete delivery and the product itself) but the customer still files a dispute. This type of fraud can be either accidental or intentional, and it's the main chargeback type that merchants should focus on fighting. While the term is coined "friendly fraud", many of the cases are often intentionally fraudulent and cause a number of problems for merchants.

If merchants don't fight friendly fraud disputes, not only do they have to return the sale revenue and incur chargeback costs, but they also lose the product sold. Friendly fraud costs merchants an estimated $11.8 billion per year, according to Visa.

Overall, it (quite literally) pays for merchants to minimize their potential instances of chargebacks, and to have an effective plan of action in place to fight back when they occur.

What's the difference between chargebacks and refunds?

Chargebacks and refunds share similarities, which may make it easy to confuse the two - however, they have major differences that are important for merchants to understand.

With a chargeback, a payment dispute is set in motion by the customer. They can usually dispute a charge online, on the phone or in person. This sets the stage for their bank or payment institution to process a chargeback against the merchant.

In comparison, a refund is initiated by the merchant after a customer makes a refund request directly with the merchant. The merchant activates the refund process, which sees the purchase amount returned to the bank account or credit card that the customer used to make the original payment.

Tips to Reduce Chargebacks

Merchants can implement a series of steps to reduce chargeback occurrence as well as the frustrations that they bring along:

1. Provide an outstanding customer experience

First and foremost, merchants should cultivate customer loyalty by providing an overall easy and enjoyable experience, including warm, personable and helpful customer service at all touchpoints.

Building relationships through a consistently exceptional level of service makes it more likely that a customer would seek to resolve any disputes directly with the merchant rather than forcing a chargeback through their bank.

2. Minimize merchant errors

Many chargebacks occur due to errors on the merchant's part - including but not limited to incorrect amounts charged to the customer's account, wrong products being shipped, and a shipping address being recorded incorrectly.

Merchants can minimize such errors by manually checking all customer and transaction data to establish a strong quality control procedure.

3. Establish a post-sale process

Fulfilling payment is not actually the closure of a sale, an assumption and mistake made all too often. Merchants can avoid chargebacks after the initial sale is complete by consistently communicating with customers during transit and after delivery to keep communication channels open in case they do have a complaint.

Delivery tracking can also remove a potential motive for customers to make a chargeback motion.

4. Make sure to strictly adhere to payment protocols

To follow all payment protocols, best practices include enforcing AVS (Address Verification Service) and CVV (Card Verification Value) confirmation. Merchants that handle credit card payments are obligated to be fully PCI compliant. Ensuring full and correct application of payment protocols can help merchants identify inconsistencies and potential fraud before a chargeback can take place.

Also, failure to demonstrate faithful adherence to applicable payment protocols, which may vary according to jurisdiction, may make fighting chargebacks later on much more difficult.

5. Make returns and refunds policy clearly visible to customers

Providing customers with clear, concise information on your returns and refunds policy can help merchants minimize chargeback occurrence.

Communication can lower the possibility of a customer who isn't clear on a merchant's returns and refunds policy from initiating a chargeback. These should be easily accessible and visible at different applicable touchpoints along the customer journey.

How to handle chargebacks once they arrive

While these steps can help merchants avoid chargebacks, having a prepared strategy in place to deal with them when they occur is important. Unfortunately, banks don't require a lot of proof from customers to process a chargeback, and fighting them isn't always easy - however, the below steps are definitely in a business's best interest to take.

1. Maintain good book-keeping

All credit card transactions should be thoroughly recorded the exact same way (or, in other words, have the same bookkeeping treatment). All relevant payment data for every transaction should be tracked. Consistent and timely record-keeping makes it much easier to execute an effective chargeback management strategy. Choosing the right transaction management system can make bookkeeping convenient and efficient.

2. Choose the right chargebacks to dispute and fight them

Merchants may choose to simply not dispute chargebacks at all. While it's not realistic to fight every single one, merchants should fight the chargebacks they have a good chance of recovering. Establishing a process of deciding which to fight and which to avoid pursuing can help merchants choose the right battles and recover what can be sizeable monetary amounts.

3. Gather important information to dispute the chargeback

During a chargeback dispute process, merchants are asked to provide evidence of various elements of the initial transaction. This includes proof of shipping, a positive AVS reply, correspondence with the customer, proof of delivery, and a transaction receipt, among others. A strong transaction management system can decrease the likelihood of data errors and provide a convenient means of accessing this information in order to produce the required evidence.

If you accept credit card payments, there is no way to completely eliminate chargebacks- however, implementing the above tips can produce a very effective chargeback protection strategy that decreases the frequency and includes the tools needed to fight those that do arise with a defined, streamlined process. 

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