How to Prevent Chargebacks
Chargebacks are posing a serious and rising threat to the success of online retail businesses. These disputes disrupt their payment systems, reducing revenues and hurting their efforts toward creating sustainable customer relationships. Although online retailers may contest these chargebacks and get them reversed occasionally, the best "medicine" is to prevent them.
In this article, we will give a detailed review of the strategies you can use to prevent chargebacks and minimise payment disputes. So read on to learn all it takes to ensure that chargebacks no longer significantly reduce your revenue or threaten the long-term growth of your e-commerce business.
What are Chargebacks in Online Transactions?
Chargebacks for online payments happen when a customer contacts their traditional bank or neobank to reject an amount that was deducted from their account in respect of a transaction with a merchant. If the bank accepts the rejection, a chargeback will be lodged, and the money will be taken from the account of the business and sent back to the account of the customer.
The original purpose of a chargeback was to help a cardholder get their money back in a situation when their stolen credit or debit card has been used by a fraudster or a dishonest merchant tries to cheat them through questionable charges. However, due to a range of factors, even honest merchants now deal with chargebacks frequently. For example, there is an increased risk of fraud in card-not-present transactions, which has made it difficult for many merchants to manage chargebacks and appeal against them.
How Does a Chargeback Work?
A chargeback occurs when a customer wants a refund of their card payment and goes straight to claim it from the financial institution that issued their debit or credit card, instead of requesting the payment reversal from the merchant that received the money.
While customers can use chargeback to avoid falling victim to fraudulent or unauthorised transactions, the process is quite a challenge for many merchants. Customers can request a chargeback even when there was no fraudulent transaction, such as when they did not like the product they bought or an item was misrepresented on the e-commerce platform of the merchant.
Online retailers can appeal against a chargeback with their issuing banks. However, the process can take a long time, possibly months, to complete. While a cardholder is usually given 45–180 days to dispute a charge, and the bank may have two to six weeks to process it, the merchant is typically given around seven to ten days to respond, which is such a short deadline. Besides, appealing a chargeback may cost more money than the cost of the initial product or service.
Why Should You Prevent Chargebacks?
Chargebacks cost money, and that is enough reason to prevent them. There are chargeback fees or other administrative fees that the merchant may be required to pay to resolve a chargeback. Besides, if you choose to dispute a chargeback but end up not winning the case, you will lose the money for the item or subscription service, pay some fees for the investigation, and the customer might stop being loyal to your brand.
Furthermore, the reputation of your business can be negatively affected by chargebacks and credit disputes. Financial institutions, EMIs, fintech companies, and payment processing service providers monitor your chargeback rate, which measures your percentage of chargebacks per total number of transactions. They use this metric to determine your eligibility for loans, payment processing support, and other financial assistance. Therefore, you need to do your best to prevent chargebacks from ruining your business.
10 Ways to You Can Prevent Chargebacks
The following are various ways you can prevent chargebacks as a manager or owner of an online retail business:
1. Create a return policy that is easy to understand
Having a return policy tells your customers that you are ready to accept any products they may want to return after having bought them from you. It also specifies how much time they have to make the return, which could span from a week to a month. You need to ensure that this policy is clear about the quality of the product being returned and other important factors that can make the policy easy for your employees and customers to understand. Post it online and in your store, warehouse, and collection/fulfilment centres.
2. Ensure that your shipping and billing process is transparent
Your shipping and billing processes can be responsible for a significant share of the chargebacks you have been receiving. It is possible that many of your customers are not receiving their items, so they keep requesting refunds, or they do not understand the payment descriptors on your POS or payment features. Therefore, it is helpful to create a clear and transparent process for shipment and billing.
It is not so difficult to provide a transparent shipment and billing process for your customers. You can start by adopting technologically enhanced processes, such as providing a mobile app or web-based page where they can see the delivery dates for their purchased items and keep track of them as they are being moved from one shipment point to another until they get to the collection points.
Then, in terms of billing, you can try to purchase an item from your online store and test various payment methods to get an idea of what could be the problems your customers are having with using the platform. This is called “mystery shopping'' on your own website. When you are able to detect any problems, take the necessary step to fix them. If applicable, you might need to add more information about using the platform.
3. Provide good customer service, easy contact channels, and well-trained staff
Customers are more inclined to use chargebacks as a form of protest if they cannot receive a response from a merchant's customer service. Therefore, it is preferable to make sure that your website, printed receipts, delivery dockets, and other materials make it simple to discover the contact information for your customer care staff.
In addition, to prevent any chargebacks in the future, make sure that your customer support team is well-trained to handle concerns swiftly and completely. Credit card disputes can be avoided with the help of your staff. To assist your business in preventing chargebacks, you should provide training to every employee who deals with client transactions or customer care.
4. Delay billing
Although this might not sound easy to do, it is possible to try it and see how it works. You can delay billing until the item purchased has been shipped to the collection point. This can prevent disputes linked to the non-receipt of merchandise.
5. Get customer participation proof
To appeal chargebacks that were caused by a customer claiming not to have received the item shipped, you can request that your customers always provide proof that they participated in the transaction and have received what they bought. In this regard, an option is to develop an internal system that captures the account order history of your customers and shows all transactions, as well as records and signed receipts of items collected at the point of delivery.
6. Quickly cancel recurring transactions
When a customer requests cancellation of any recurring transaction, try to do it quickly. This will help you avoid any chargebacks originating from an unwanted charge due to a delayed recurring transaction cancellation.
Remind customers of any cancellation limitations that may apply when they have made an upfront payment for a subscription or membership that has a predetermined length. As applicable, offer to accept a different method of payment from them for the remaining period of their membership or subscription.
Remember that by having clear terms and conditions and an easy-to-find payment cancellation page, the majority of chargebacks involving recurring payments can be avoided. Even better, for the first recurrence or if a considerable time has passed since the last payment, notify the consumer of a scheduled payment. The likelihood of a customer filing and winning a chargeback increases significantly if they did not receive notice or were not aware that they would be making a recurrent payment.
7. Ensure that your website has detailed descriptions of your products
Customers who are likely to ask for a chargeback because they were not fully informed about the products that they bought will not have a chance to do so if your website clearly presents accurate descriptions of your products. The goal here is to avoid any failure on your side that might give a dubious customer a chance to request a chargeback.
8. All card-not-present payments should include zip code, CVV, and other verification services
When handling card-not-present transactions, ensure to use zip codes, CVV codes, or any other address verification services (AVS). This is necessary to enable you to provide highly secure transactions. Besides, it is important that you know how to accept payments safely as an online merchant. It will help boost your chargeback prevention and business growth efforts.
9. Card-present transactions should include a customer signature
How do you ensure that a charge was intentional and legit when dealing with a dubious customer who is likely to file a chargeback? One of the ways to achieve that is to obtain a customer signature for all card-present transactions between you and your customers.
10. Collect and analyse data about your chargebacks
Data collection, analysis, and action are essential for business success in many spheres, including chargeback prevention. Here, your POS system is crucial, and it needs to work with your payment options. Therefore, to learn more about your transaction data, evaluate your POS reporting capabilities. Use your reports to spot patterns that could point to staff or customer fraud. In this aspect, you can use POS software like Square, which offers cutting-edge capabilities like monitoring and fraud protection measures.
How Much Do Chargebacks Cost Merchants?
Chargebacks cost merchants a lot, both financially and operationally. Merchants can lose annual revenue, pay a lot in administrative and chargeback fees, and have challenges managing their costs of goods and shipping. It is the merchant’s acquiring bank that charges the chargeback fee to cover the cost of processing chargebacks. The fee can range from $20 to $100 for each chargeback transaction.
The total cost of chargebacks to a merchant varies according to the average transaction value and the average number of chargebacks they receive each month. Assuming that in a month a merchant in the United States gets an average of 500 chargebacks and sells items worth an average of $100, experts at Chargebacks911 estimate that it will cost the merchant a total of $1.3 million in chargebacks yearly.
Below is a breakdown of how the cost in the example we gave above was estimated:
- Annual revenue lost: $600,000.
- Plus, chargeback fees: $162,000.
- Plus, administrative fees: $240,000.
- Plus, the cost of goods and shipping: $300,000
The total annual chargeback cost: $1,302,000.
Chargebacks can result in significant immediate financial consequences. For example, banks and other financial institutions measure the significant risks merchants pose using their chargeback volumes. When they find that an online retailer has a high volume of chargebacks, they withhold funds and create tougher requirements for financial services and payment processing support. A very high rate of chargebacks could possibly result in the suspension or closure of the merchant’s account.
There are many ways you can prevent chargebacks as an online merchant. They include the following:
- Create a clear and readily available payment dispute and refund policy and make it known to your employees and customers.
- Ensure that your customer support is helpful, especially in promptly responding to subscription cancellation requests.
- Use the most advanced security measures for secure payment processing and fraud prevention.
- Continuously analyse chargeback-related data, especially from your POS system, and keep track of customer behaviour to guide your product pricing and inventory management.
Yes, you can fight a chargeback by filing a rebuttal in writing to the issuing bank. However, you must ensure that you have enough evidence to support your claims, otherwise, you might not win the case.
The best way to handle chargebacks is to prevent them. You need to look for effective chargeback-prevention strategies, like the ones we have provided in this article, and use them to save your e-commerce business from the damaging effects of chargebacks.
To prevent chargebacks as a PayPal user, you can do the following:
- Provide reliable contact information so that your customers will be able to easily reach you in case there are any issues.
- Be quick to respond to any reasonable buyer who makes an inquiry concerning their purchase.
- Ensure you provide a clear and understandable return and refund policy.
- Encourage your customers to open a dispute in the “Resolution Center” on PayPal instead of filing a chargeback with their financial institution.
Chargebacks are simple to start and frequently successful, although not all situations can be covered by them. The initial course of action should typically be to attempt to settle the issue with the merchant directly, as chargebacks are intended to be a last resort.
Yes, merchants usually respond to chargebacks. However, the response could be positive or negative. A positive response would mean that the merchant has accepted the chargeback and the necessary refund will be made, while a negative one would mean that the merchant is contesting the chargeback. The outcome of the contest would depend on the supporting evidence provided by the customer or the merchant.
The average chargeback to transaction ratio for all industries is 0.60%. This means that there will be chargebacks on 6 out of every 1000 purchases. Chargeback rates in the retail and travel sectors are around 0.50%. Chargeback ratios for retailers who sell tangible things are typically at or below 0.5%.
The worst decision you can make with regard to chargebacks is to do nothing about them. Every chargeback negatively affects the profitability and growth of your business. When you calculate your annual chargeback costs, you will see the huge amount of money your business has spent on them. Yet, they are liabilities, not assets or investments. Therefore, it is beneficial to create a plan to prevent chargebacks and payment disputes. Make use of the various strategies we have provided in this article, and you will see your business doing better in terms of chargeback management and customer service.