What Causes Chargebacks and How to Avoid Them?
If you sell products or services and accept card payments (credit or debit cards), you have or will shortly experience chargebacks.
Chargebacks are the primary tool banks use to resolve credit card payment disputes. They have their root in the Fair Credit Billing Act of 1974. Chargebacks are designed to protect consumers from merchant errors, merchant and criminal fraud. When a consumer did not authorize a charge, or is unhappy with a product or service, they can challenge the charge with their bank aka chargeback. If the bank feels the consumer’s claim is valid, they will initiate a chargeback in order to reverse the payment.
Chargebacks Hurt a Business’s Profitability and Can Damage it’s Reputation
While too many chargebacks can hurt the profitability of the business through loss of revenue and inventory. Merchants also lose the value of overhead costs like shipping, fulfillment, and interchange costs.
Frequent chargebacks could also compromise your business’s reputation and result in penalties from credit card companies.
The chargeback process is antiquated and governed by rules that are often unevenly enforced. Both merchants and consumers can feel frustrated by the system. In recent years, merchants especially have felt the sting of chargebacks as criminal activity has accelerated and increased the number of chargebacks. Recent data showed that chargebacks resulting from criminal activity cost merchants an estimated $20 billion in 2021 – an 18% increase over 2020. Further, widespread supply chain disruption throughout 2020 and an continuing into 2022, has also made a significant contribution to credit card chargebacks, with strained parcel networks resulting in bottlenecks during the shipping process.
According to the Chargeback Field Report, nearly 70% of merchants reported an increase in credit card chargeback rates as a result of COVID-19. Around 47% estimate their company’s current chargeback ratio is between 0.6%-1%, while 33% estimate that it exceeds 1% — a rate that can result in penalties from credit card companies.
What is a Bank Chargeback?
In addition to customer disputes, there is also something called a bank chargeback. A bank chargeback type of dispute filed against the merchant by the issuing bank. The bank files the chargeback based on an error or anomaly in the transaction. As their name implies, bank chargebacks are resolved between the issuer and acquirer.
Causes for Chargebacks
Chargebacks can occur for a variety of reasons ranging from the wrong shipment of goods to system errors or even fraudulent transactions. Understanding the causes for chargebacks, you will be in a better position to take corrective action. Here are some of the most common reasons for chargebacks:
Issues with the Delivery of Goods and Services
If the products the customer ordered are not shipped, shipped wrong or defective products are shipped, the customer is likely to dispute the transaction. It is, therefore, vital that you retain shipping receipt copies and shipment tracking data. Maintaining accurate shipping and tracking data for each transaction for review in the event of a dispute can prove invaluable.
Unauthorized Phone or Email Transactions
If you accept payments via phone or email, customers can deny that they made the transaction. When taking orders over the phone, you must ask for the physical address of their customer and the CVV of their credit card.
Invalid Credit Card Number
Your payment system must reject any invalid or expired credit cards automatically. If the system fails to locate a valid credit card account number, it could result in a chargeback.
Duplicate Processing
System errors or other technical issues can cause the credit card to be charged twice for the same transaction. Similarly, in the case of web-based transactions, a duplicate charge may occur if the customer presses the “pay” button twice.
Fraud
While most chargebacks are legitimate, sometimes a customer may make a purchase solely to use a chargeback to make some money. For example, upon receipt of a product, a chargeback initiated. Once the initiator sees how easy it is to get a refund, they place more orders and file more chargebacks to game the system.
Human Error
When a credit card is manually keyed or processed by an employee, the chance for error increases. A best practice is to keep manual processing to a minimum.
Responsibility of the Merchants
Merchants have a vital role to play in mitigating the incidence of chargebacks, both legal and illegal.
When merchants:
- provide prompt and efficient customer service,
- have clear policies for refunds,
- make it easy for customer to contact them,
- deliver correct goods, and
- pay attention to transaction details,
the number of chargebacks they see will diminish.
Secondly, the merchants can use electronic tools to identify fraud, which will help detect transactions that might end up in a chargeback. Finally, it is the merchant’s responsibility to fight an illegitimate chargeback. When a merchant is diligent about disputing claims, the banks may tend to permit fewer chargebacks initiated against them.
Responsibility of the Cardholder
Cardholders should recognize that it is a privilege and not a right to own a credit card, and specific responsibilities accompany this privilege. One of these responsibilities is to know what a chargeback is and when it should be legitimately and ethically used.
Cardholders should treat chargebacks as the solution of the last resort and not the first option when a refund is needed. Frivolous or fraudulent use of chargebacks is unacceptable because the merchant faces the financial brunt of it. Creating awareness and educating customers as well as merchants about chargebacks can gradually lead to a decline in needless or illegitimate chargeback claims.
How to Prevent Chargebacks?
The ideal way to protect your small or mid-sized business against chargebacks is to focus on preventing them rather than getting entangled in dispute resolution. Here are some proven ways to prevent chargebacks:
Deliver Outstanding Customer Service
Customer confusion is one of the primary reasons for chargebacks. The customer may misunderstand what they signed up for, or the payment process may frustrate them. With excellent customer service, it is possible to prevent this situation and boost customer loyalty. Take the following steps:
- Make your online customer support system more accessible. Each page on your e-commerce website should provide clear links or buttons that lead the user to a live chat, contact form, or address.
- Encourage customers to reach out to you via email or online contact form at the time of order confirmation and ask for feedback upon delivery of the product or service.
- Show generosity and flexibility with cancellations, as it may be better to miss out on a small percentage of the sales revenue if it helps to prevent chargebacks.
Use a Direct and Unambiguous Payment Descriptor
A payment descriptor prints beside each line of the credit card statement. It is possible to customize the text, which shows up when different payment processes are used to make payments to you. Leaving a payment descriptor blank or keeping it ambiguous or hazy means that the customer may forget where this entry came from and may initiate a chargeback.
To make the descriptor as clear as possible, you can put your website address or company name in it. A clear payment descriptor will serve as a reminder to the customer if they have any questions or wish to contact your customer care.
Contact Information
When a customer wants a refund, they are ready to talk to someone about it. By making your contact information easy to find online, your customers receive the quick response they want, while you often can avoid the fee and time spent working through the chargeback.
Enhance User Interface and User Experience in Your Online Store
When a customer is unable to navigate your website or find the answers they are looking for, they will quickly get frustrated. Create a logical and intuitive UI for your e-commerce store and checkout process, so that customer confusion is minimal. An intuitive check-out and payment process will cut down your rate of chargebacks.
Here are a few tips to enhance user experience:
- Make sure that the product features, dimensions, usage, packaging, and pricing details are clear. Multiple high-quality images with magnification roll-overs also help. Don’t keep your customers guessing in the hope of making more sales.
- Provide clear and detailed shipping information. If you expect longer shipping times, let the customer know before they place an order, so that they can make a well-considered choice.
- Send confirmations via email or text messages after every step in the process – order confirmation, shipping, tracking data, etc. The goals are to help your customer not forget about their order and to keep them updated so that they can contact you if any issue manifests itself.
- Ask for feedback after your customer has received their order and a review if they are satisfied.
Stay Alert about any Red Flags.
If you have a system to monitor customer purchases, you can prevent fraudsters from using stolen credit cards. An astute payment processor will likely take care of this issue for you. Nevertheless, you can watch out for telltale signs such as an unusually large order, or an order from an unlikely destination such as North Africa or Russia (especially if the same customer was previously placing orders from the U.S.).
Maintain Customer Data Record
When a situation arises where you want to appeal a chargeback, you might require customer activity logs. Your web developer could help you with this. Create a system to record as much user data as possible, including IP address used, order history, address used, and activity logs (which web pages were accessed and when). When you are disputing a chargeback, more data at your disposal is always better than less.
Take Anti-Fraud Steps from Your Side
Credit card companies and experienced payment processing firms work hard to put systems in place to detect fraud. From your side, you can contribute to this effort with steps like:
- Ask for signatures for every delivery
- Use a professional service for address verification
- Require the credit card’s CVV number
- Use the in-built anti-fraud tools in the content management system (CMS) for your online store
Additional Resources
From VISA
Best Practices: Improve the Customer Return Process
Visa Merchant Dispute Resolution Best Practices
Visa Security Alert: Purchase Return Fraud
From Mastercard
Choose IntelliPay – A Leader in End-to-End Payment Solutions
Chargebacks are a painful but necessary reality for any business which accepts credit and debit cards. Understanding how chargebacks happen and educating and sensitizing customers about their use can help reduce the rate of chargebacks.
Working with an experienced end-to-payment solutions provider such as IntelliPay can solve many of your payment and transaction challenges. IntelliPay is transforming the payments processing industry with its intelligent cloud-based payment platform and cutting-edge alternative fee-based payment models which shift processing costs to the cardholder.
If you’re a merchant and you want the most comprehensive payment processing solution for transactions in person, over the phone, online, mobile, or through the IntelliPay automated recurring payment module, schedule a no-obligation consultation with IntelliPay representative today – 855-872-6632 or sales@intellipay.com.
