Protecting Your Business from Costly Chargebacks

What is a Chargeback?

A chargeback is a consumer protection tool that allows customers to dispute fraudulent charges or purchases that do not live up to their standards, to get their money back. Although chargebacks are meant to protect customers from unauthorized charges, it can lead to unexpected and damaging costs for businesses.

What is Chargeback Fraud and How does it Happen?

Chargebacks have become a prime target for fraud. When a consumer disputes a credit card charge, it can be incredibly difficult to tell whether the dispute is coming from a genuinely concerned cardholder, or a fraudster with malicious intent. There are two main types of chargeback fraud.

1. True Fraud: Occurs when the cardholder’s information has been stolen and used to make fraudulent or unauthorized purchases. About 30% of chargebacks are from purchases made with stolen credit card information.
2. Friendly Fraud: The initial purchase was made by the cardholder themselves either intentionally or unintentionally, however, the cardholder is disputing the charges for a variety of reasons including:

• The cardholder does not recognize the purchase or the does not recognize merchant’s descriptor on their billing statement
• The cardholder does not recognize the charge is a recurring payment
• The cardholder forgot about the purchase
• The cardholder claims the item does not match the description
• The cardholder uses it as a simple means to cancel a subscription or a preorder

Friendly fraud is one of the most prevalent fraud techniques that will likely not be going away any time soon. According to industry data, 40% of cardholders who commit friendly fraud will do it again within 60 days.

How Chargeback Fraud Affects Businesses

The chargeback process can be time consuming and card issuers can easily become inundated with chargeback requests. Many times, the chargeback requests are not fully investigated, and reimbursement is greenlit with little to no real evidence. This means that the monetary damages will be passed along to the merchant.
For many businesses, chargeback fraud can be very damaging to their revenue and can cause serious financial losses. Here are a few ways chargebacks can hurt small businesses:

1. Lost Revenue: With chargebacks, the customer is reimbursed for the cost of the product or service, which means the merchant has lost the inventory without being paid for it. For businesses operating on thinner margins, this loss can cut deeply into profits. It is predicted that by 2023, the average industry cost per $90 chargeback will be $191.
2. Fees: Merchants are often charged a penalty fee by the bank for processing an illegitimate transaction. The more frequently chargebacks occur, the higher fees businesses will pay the bank. These fees can range anywhere between $20-$100 per chargeback.
3. High Risk: The more often chargebacks occur, the higher probability the business is labeled as “high risk”. Small businesses that are classified as high risk often pay higher per-transaction processing fees. Ultimately, this label will limit which payment providers will work with these merchants.

How to Avoid Chargebacks

Even though merchants may be different in terms of their policies, disclosures, products, services, and sales methods, there are some general measures that businesses can take to prevent chargebacks from occurring. Here are four tips that will help mitigate costly chargebacks at your business:

1. Credit Card Verification Tools – Implementing tools for e-commerce such as address verification service (AVS), can confirm if the credit card billing address matches the one on file with the card issuer. If these do not match, the business can reject the transaction.
2. Use Clear Transaction Descriptions – If a customer does not recognize the business name on their credit card statement, they may assume this transaction was fraudulent. Make sure the business can be clearly identified on credit card statements.
3. Communicate with Customers – Send out order confirmations and notifications for any potential delays via email to confirm with the customer that they are aware the purchase is being processed. For recurring charges, make sure to send out a notification to customers that there will be an upcoming automatic payment.
4. Have a Clear Return or Cancellation Policy – Have a solid, clearly communicated policy for returns and cancellations that state when a refund is warranted. If a customer attempts to cancel a subscription or return an item or dispute the charge and it is not warranted, the business can refer to their return policy.

It is important that businesses take chargeback prevention methods seriously in order to retain revenue. Although chargebacks are inevitable, following the tips listed above can save your business from unnecessary losses. Don’t let chargebacks get the best of your business.