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Chargebacks are an effective way to protect customers from losing their money to scammers. If an unauthorized transaction occurs, or the customer feels they have been scammed, they can easily raise a dispute and get their money back. While this may favor customers, chargebacks are a real headache for eCommerce business owners. More frequent chargebacks drain revenue, ruin customer experience, and might even stop you from processing payments altogether. However, fortunately, merchants can effectively deal with chargebacks.
While merchants can fight the chargebacks, it’s better to prevent them altogether. But how can you do that? Well, read along to find out. This blog discusses everything from chargebacks, how they work, their types, and how merchants (you) can tackle or prevent them, ensuring better revenue and customer experience.
What are Payment Chargebacks?
Payment chargebacks happen when a customer disputes a transaction because of fraud, malicious intent, or confusion. However, chargebacks occur only when a transaction is made via debit or credit card.
How Do Chargebacks Work?
Let’s say a customer gets notified of a charge against their debit or credit card but claims that they didn’t initiate the transaction. In this case, the customer can file a chargeback request with their bank, citing a fraudulent transaction. The bank then investigates the issue, and if the customer’s claim is found to be legit, the money is credited back to the customer.
Sometimes, a customer purchases a product that comes out to be damaged or a completely different item. In that case, too, customers can file a chargeback with their bank if the merchant refuses to resolve the issue. The bank will thoroughly investigate the problem with the merchant and the issuing bank and offer a valid resolution.
Types of Chargebacks
Here are the three types of payment chargebacks:
1. Criminal Fraud
Criminal fraud or true fraud chargebacks are the reason chargebacks were invented in the first place. As the name tells, criminal fraud chargebacks occur when a scammer charges a customer’s credit or debit card without authorization.
2. Friendly Fraud
Friendly fraud chargebacks happen when customers report a perfectly legit charge as fraudulent. Several times customers do this with malicious intent, i.e., keeping a delivered product/service and getting the money back or out of confusion or impatience.
3. Merchant Error
Merchant error chargebacks happen when there’s an issue from the merchant’s end. For instance, if a merchant ships the wrong item, a damaged item, or charges the customer twice, a customer can raise a merchant error chargeback. While these chargebacks favor the customers, the merchants can learn about the flaws in their system and work to improve the same.
How to Identify the Root Causes of Chargebacks?
While each chargeback has a unique reason, they essentially fall into one of the below-mentioned categories. If you know which category the chargeback falls into, you can quickly determine what’s the reason behind that chargeback:
When the cardholder claims that they didn’t initiate or authorize the transaction, most probably, a scammer is behind that.
2. Customer Disputes
Another category of reasons behind chargebacks is consumer or customer disputes. They happen when the customer raises a dispute citing reasons such as:
- The delivered product wasn’t as described
- The product was delivered late.
- The payment wasn’t processed.
Chargebacks arising because the cardholder failed to authorize the payment or the authorization was declined come under the category of ‘authorization.’
4. Processing Errors
Sometimes customers raise chargebacks because of incorrect payment information such as account number or currency.
How can Merchants Reduce the Risk of Chargebacks?
Here’s how merchants can prevent or reduce the risk of payment chargebacks:
1. Comply with Proper Payment Protocol
Different card networks have unique payment protocols that you must follow for card-not-present transactions. For instance, some networks might want you to use AVS verification, while others might require you to use CVV verification, capture the customer’s IP and proof of delivery, etc. Therefore, make sure to follow all the necessary payment protocols. This way, you’d be able to chuck off potentially fraudulent transactions before letting them complete, thus reducing the chances of chargebacks.
Pro Tip: Ignoring payment protocols might portray your business in a bad light. So much so the card network might rule you out entirely in case there’s a dispute.
2. Utilize Anti-Fraud Tools
The majority of true fraud cases will lead to a chargeback. So, the best way to prevent chargebacks is to boost your fraud prevention system using anti-fraud tools. For instance, you can use device fingerprinting, 2FA, velocity checking, or ML tools to identify fraud.
In case you don’t have access to anti-fraud tools, you can simply notice some red flags, such as:
- Too many failed order attempts from a single IP.
- Orders from foreign countries where credit/debit card frauds are common.
- A substantial order that you wouldn’t usually receive.
When you notice the above or any other red flags, you can know there’s something fishy and act accordingly.
3. Offer Enhanced Customer Service
Mostly, online subscription services are prone to friendly chargebacks. It’s usually because customers find it too hard to cancel their subscription or completely forget and then get charged for months without actually using the service. This further leads them to file chargebacks with the banks. However, you can deal with this by offering better customer support. Your website should have clear contact information for the customer support team, and the support team should be easy to approach.
Also, it should be fairly easy to cancel the subscription. This way, your customers will be able to cancel subscriptions on their own or contact customer support if required, and there won’t be as many friendly chargebacks.
Pro Tip: Refunds cost you way less than chargebacks. So, if the customer’s concern is genuine, it’s better to refund the money instantly.
4. Use Dispute Management Tools
Using dispute management tools is yet another effective way of dealing with chargebacks. For instance, specific tools alert you (merchants) when the customer requests a chargeback, temporarily pausing the chargeback. This allows you to deal with that customer and issue a refund before the dispute escalates. Tools such as Order Insight also offer insights to issuing banks about transactions that further help banks identify any false disputes.
How to Combat Different Types of Chargebacks
1. Criminal Fraud
To tackle this, you can integrate tools that ensure secure transactions or help spot fraudulent or suspicious transactions. You can look for suspicious patterns and put a hold on the transactions mid-way before letting them complete. Dispute management tools might also help.
2. Merchant Frauds
Merchant fraud chargebacks occur when there’s an error from the merchant’s end. The best way to tackle these chargebacks is to ensure a seamless process right from when the customer visits your website, adds products to the card, chooses a subscription, pays in full, and delivers the product/service. When you have a seamless process, the chances of making any errors will be negligible, reducing the possibility of merchant chargebacks.
3. Friendly Frauds
Friendly frauds are hard to predict, which is why they’re hard to combat. However, if you take the right steps, you can efficiently deal with them. For starters, you can opt for signed delivery confirmation. This way, the customer won’t be able to claim that the product never arrived falsely. Or you can go for open box delivery wherein the delivery partner and the customer check the product for damages.
As stated earlier, you can boost customer service and have a customer-friendly cancellation and return policy. This will help you keep friendly frauds at bay.
How Long Does It Take to Solve a Chargeback?
There isn’t a set duration within which a chargeback request will be solved as it depends on factors such as the reason code, chargeback type, the card network, etc. However, it takes around 1-3 months for a chargeback request to get solved.
As eCommerce technology evolves, new chargeback threats keep showing up. However, if you stay updated, use the latest tools, and determine the root cause of chargebacks, you can minimize the impact of chargebacks on your business. So, what are you waiting for? Follow the tips mentioned in this article and minimize the risk of chargebacks.
Karthik Narayanan is the Co-founder, CPO & CTO at inai, a global payment stack simplifying native payments with a single integration. He is a serial entrepreneur with over a decade of experience in product and engineering. Over the last 5 years, he has worked with 200+ businesses ranging from SMEs to Bigtechs.