Oh, chargebacks. They can feel like a strangling noose around the bottom line and profit margins of business merchants. It’s been a challenging year, and small businesses face different difficulties, from having to shut due to Covid-19 to the struggles of securing Government loans to stay afloat. Another cash suck is presently on the rise in the form of credit card fraud.

A prevalent and stressful issue is chargeback fraud, also known as “friendly fraud.” Any business that sells online has to take control of chargebacks. Why? You made the sale, accounted for the revenue already, only to be forced to give back the money and even pay a fee on top of it all. Not only do too many chargebacks damage your reputation with credit card processing companies, but they can also affect your business bottom line. But let’s start with the basics. What exactly is a chargeback?

What are chargebacks?

A chargeback is a term used when a customer disputes a charge on their credit card. When a dispute is made, you (the merchant) reverse the transaction while the customer gets their money back. In many ways, chargebacks favor cardholders’ safety, as the risk of forced fund reversal pushes merchants to provide exceptional services. 

How a credit card chargeback hurts your business

A customer might request chargeback even when there has been no fraudulent activity. They may do so simply because they weren’t satisfied  or believe your product or service was wrongly represented. Some can even request chargebacks if they didn’t recognize the charge on their statement.

As a business owner, you need to take chargebacks seriously. Why? When you’re hit with a chargeback, you don’t only lose the dollar that was disputed, you also lose money on chargeback fees, as well as the money, and time you spend packaging, delivering and selling such product or service. 

If you get a little too much, and your chargeback ratio (total chargebacks divided by total sales) reaches a certain level, you’ll either lose your merchant account or get charged higher processing fees. Losing your merchant account means you’ll have to find another processor that accepts ‘high risk’ merchants.

Why do chargebacks occur?

From fraudulent transactions to defective goods, chargebacks can occur due to many different reasons. To take a step in reducing or preventing chargebacks, you need to understand why customers may want to initiate one against transactions with your business.

Major card networks like American Express, Discover, Visa, etc., create reason codes, an alphanumeric string of text to explain why a specific chargeback occurred, and what documentation a business needs to provide to challenge the dispute.

Chargeback fraud

As stated earlier, chargeback fraud or friendly fraud is on the rise. But there’s nothing ‘friendly’ about fraud — fraud is a fraud, plain and simple. Of course, customers make mistakes and can file for chargebacks accidentally, but that’s the exception and not the rule. 

The term friendly fraud came to be as a way of categorizing customers who file for chargebacks either due to confusion or to commit theft. Because the system is designed to favor cardholders, the chargeback process can make it challenging for businesses to defend themselves. Some customers claim:

  • The product doesn’t match the description
  • They never received the order
  • They canceled the order, but it was still delivered.
  • A family member made the order without their consent.

Poor customer service

Sometimes, plain lousy customer service is enough to cause a dispute. Customers who’ve had their messages and emails ignored, encountered an unpleasant representative, or had to wait on hold for a long time can initiate payment disputes.

Fulfillment issues

Fulfillments that include packing, shipping, and delivery can come with product damages, late deliveries, or even non-delivery, which can cause chargebacks.

Actual fraud

When a fraudster purchases from you with a stolen legitimate cardholder’s information, and the item gets shipped to them, the legitimate cardholder identifies the purchase as illegitimate and files for a chargeback.

Your battle strategy against friendly fraud depends on you putting needed fraud protection measures in place. You also need to have efficient and easy access to every transaction data required to debunk the unscrupulous customers’ fraud tactics.

healthy and profitable business

How to prevent credit card chargebacks

Since you are not going to get back your merchandise or service rendered. Because of various processing fees imposed by financial institutions, some chargeback claims can cost you more than the value of the transaction itself. Therefore, you need to take protecting yourself seriously! Just as brick-and-mortar businesses put solutions in place to prevent theft, you need to do the same for your online business. Here are some steps to take:

1. Have an easy-to-understand refund policy

If you want to avoid chargebacks, you need to display your refund policy on your website, register, and print the details on every receipt. Clearly state the time window for returns, exclusions, restocking fees, and be as specific as possible.

2. Create clear billing descriptors

As simple as that may sound, having a clear merchant descriptor (a simple line that identifies your business name on the cardholder’s statement), date, and the transaction amount will eliminate unnecessary disputes. Asides from that, you need to meticulously keep records to help you fight back when chargeback issues arise.

3. Maintain well-defined shipping expectations

A lot of customers expect lightning-fast shipping these days, majorly due to the Amazon effect. This is why you must make your anticipated shipping times clear. Provide a copy of your shipping policy after every purchase and put it on your website as well.

4. Address customer issues promptly

Never leave customer emails or calls unattended. Nothing is more frustrating than trying to make a complaint and not receiving any response. Create automated email and phone systems to let the customer know when to expect a callback.

5. Implement a multi-layered fraud prevention strategy

Technology comes in to save the day when it comes to actual fraud, e.g., in case of stolen identities, card details, etc. In this case, both the customer and business are victims, but then your business is left footing the bill. The best option is to arrest the situation early and catch the transactions before they ever go through. Some solutions to turn to are:

Address verification service (AVS)

This reduces risk by checking the billing address listed in the particular transaction against the issuing bank’s address. If that doesn’t match, the transaction is flagged as possible fraud. Always request customers provide their shipping and billing addresses, then wait for the AVS check before the transaction goes through

BIN database 

As a merchant, keeping your chargeback ratio as low as possible is excellent for your reputation. Customers feel safer in their transactions due to the extra level of security provided by BIN checks. What a BIN database does is that it uses the first six digits of the 16 digit card number to verify the legitimacy of every card, be it credit, debit, charge, or gift card. An extensive bank BIN lookup can help you check the authenticity of questionable orders, such as orders to regions entirely different from which the card was issued. The transaction can then be reviewed, and necessary procedures are taken to prevent you and your customer from falling victims to fraud.

IP intelligence

You can block suspicious transactions from fraudulent IP addresses through an in-depth analysis of addresses to monitor risks associated with such locations.

Credit card verification code 

Your payment gateway should require buyers to input their CVV number at checkout. Since merchants or the payment processor cannot store customers’ CVV, they have physical possession of the card being used for the purchase.

Verified by Visa and Mastercard secure code 

Both tools require the customer to input a password before completing their checkout process. Although exclusive to e-commerce businesses, using this tool can help protect your business from chargeback frauds.

Prepare your business to manage chargebacks 

Although dealing with chargeback claims and fraud can be daunting and time-consuming, businesses that don’t take the time to manage disputes and keep their chargeback rates low can experience painful losses to their cash flow and bottom line. You must respond quickly to retrieval requests and chargebacks. Protect yourself today!

AvatarAndrej Kovacevic

Andrej is an entrepreneur, a digital marketer, and an avid internet technologist. Throughout his career, Andrej has combined his passion for cutting-edge technology with a keen eye for emerging industry trends. He is also a contributor to a wide range of technology-focused publications, as well as his own Tech Loot blog.