Dealing with chargebacks is an inevitable part of running an online business and accepting credit card payments, but there are steps that can be taken to ease the burden. To do it effectively, merchants should understand the essence of the issue. They must be aware of what chargebacks are, why they occur, and how to proceed with them.
But first and foremost, business owners need to understand what measures they can take to prevent chargebacks. We’ll dive into those specifics in this blog.
A Quick Reminder: What Is a Chargeback?
In layman’s terms, a chargeback is a bank-initiated refund for a purchase made with a credit card. The main difference between a chargeback and a refund is that a refund doesn’t get the bank involved in returning the money.
As a general rule, a chargeback should only occur when a cardholder disputes a charge after noticing an unrecognizable transaction.
The original idea behind chargebacks was to provide protection to honest customers experiencing actual fraud. But unfortunately, not every chargeback is justified and legitimate. As a result of the dynamic growth of online businesses, merchants now see more fraud attempts related to chargebacks.
Since consumers have become more and more understanding about how chargebacks work, some dishonest customers have learned to abuse the system and use chargebacks even when they’re not justified. Such incidents are called friendly fraud and happen when a customer falsely disputes legitimate transactions.
Unfortunately, friendly fraud is far from a small-scale problem. According to Chargebacks911, friendly fraud is the top source of fraud attacks affecting merchants.
What Are the Effective Ways to Reduce Chargebacks?
Now that you understand what a chargeback is and how it could impact your business, let’s talk about prevention. Completely eliminating chargebacks is impossible, but there are several ways to reduce them noticeably. Here’s a breakdown of some of these methods.
1. Make Sure Your Website Is Secure
Fraudsters search for every loophole and bug they can exploit in outdated software. So, updating your website regularly and avoiding clerical or technical errors should be the very first step you take in avoiding chargebacks.
Encrypt the data on your site, consider using the Address Verification Service (AVS), and collect CVV/CVC with each transaction.
2. Provide Relevant Product Descriptions
An incomplete product description (or one that doesn’t match the product received) results in a higher chance that the customer will file a chargeback. The more details you provide, the better.
It’s also important to remove items from your website when they’re no longer available for purchase. This will help to prevent confusion.
The same goes for billing descriptors. Chargebacks can sometimes occur simply because of misunderstanding. So, make sure your transaction descriptors match your business name to prevent chargebacks from customers who don’t recognize your transactions on their account.
Adding contact information to your transaction descriptors — an email address or phone number — will also work in your favor. With this information easily available, customers will be more likely to contact you first rather than the bank.
3. Work With a Reliable Payment Provider
Ensure that the payment processor you work with provides card authorization and capture, sophisticated and highly effective anti-fraud tools with machine learning, AI-based solutions, and an efficient chargeback disputing mechanism.
4. Create Clear Refund and Return Policies
Make your refund and return policies simple and easy to understand and make them visible to website users.
When a customer isn’t satisfied with an ordered product, offer a refund. Provide detailed information on how to return the item and how to request that refund. Such an approach will help you prevent chargebacks and avoid negative reviews.
Return management is less expensive in the long run and comes with less hassle than dealing with chargebacks.
5. Use 3D Secure
3D Secure protocol is an extra security layer that shifts the liability from the merchant to the issuing bank. If the customer confirms the transaction with the code, the issuer takes responsibility and covers the potential costs related to chargebacks. The benefits for merchants are indisputable — enhanced security and fraud prevention, fewer disputed transactions, liability shift, and PCI compliance — not to mention increased customer satisfaction.
6. Be Clear About Shipping Details
Being precise is essential when it comes to shipping costs and deadlines. In the case of delays, inform the customer immediately and offer an alternative solution if possible.
Provide shipment tracking information to keep customers updated about where their package is and when it will be delivered.
People tend to be impatient and waiting too long for ordered items may lead to a transaction dispute, so consider offering expedited shipping as an option.
7. Monitor Product Quality
Ensure that all your products and services are of the highest possible quality.
This will result in customers who are pleased when they receive the products they’ve ordered and will prevent chargebacks related to customer satisfaction.
8. Provide Accessible Customer Service
Make it easy for customers to find your contact information and reach you directly if something needs to be fixed with their order.
If possible, make your customer service available 24/7. If that’s not an option, clearly state your business’ support hours on your website and inform your customers about an approximate time frame for addressing their inquiries.
Always deal with customers’ issues promptly and be as responsive as possible. When your customers know the status of their inquiries, they are less likely to file a chargeback.
Open and direct communication with customers can be one of the best ways to reduce chargebacks.
9. Monitor Orders
It’s essential that you keep a close eye on your orders. Keeping details of past fraudulent activities and monitoring incoming orders for similar behaviors can help you quickly recognize potential dodgy patterns and prevent your business from money loss.
Also, keeping detailed records of all transactions may come in handy when gathering evidence and valid proof to dispute future chargebacks.
Watch Your Chargeback Ratio
It’s important to be aware of your business’ chargeback ratio. If your ratio is higher than 0.9% and you’re unable to lower it within the recovery time given by a credit card issuing company, your business may be classified as a high-risk merchant, which will incur higher processing fees. In the worst case scenario, too many chargebacks can lead to your merchant account being frozen or terminated.
Taking the steps we outlined above can help you to reduce the number of chargebacks and reduce your chargeback ratio. For more detailed information regarding chargebacks — the representment process in particular — check our comprehensive guide for merchants or watch the video below.
Focus on Growth, Not Chargebacks
Coping with chargebacks is one of the most challenging and costly parts of running an online business. Merchants should take appropriate measures before chargebacks pile up and become a real threat to their businesses.
It’s crucial to work with a payment provider that will have your back at every step and equip you with robust tools to protect your transactions and reduce the number of chargebacks.
With Shift4, you can focus on your business and let our machine learning-based solutions limit fraud attempts to save you time and money!