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What are Chargebacks and Can You Prevent Them?

Date Updated: March 13, 2023

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Chargebacks are a form of consumer protection that let people challenge fraudulent transactions that were made to their credit or debit card. When consumers decide to file a payment dispute, the credit card company will look into the claim; if the request is legitimate, the money will be returned back to the customer’s credit card account.

Chargebacks happen for a number of reasons, such as credit card fraud, merchant error, undeliverable items, and damaged or faulty goods. Sometimes, a chargeback occurs when customers dispute charges to simply get their money back because they are unsatisfied with a purchase. Occasionally a poor shipping process can result in a chargeback request when purchases do not arrive by their delivery dates – or at all.

Chargebacks can be expensive for merchants since they can result in lost sales, fees, and reputational harm. Banks or processors may decide to impose fines on a business that receives too many. A strong chargeback prevention strategy is crucial for merchants to implement for effective fraud prevention and customer service solutions.

How to Prevent Chargebacks?

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When a customer decides to dispute a charge appearing on their debit or credit card statement, the card issuer starts a chargeback procedure to undo the transaction. The merchant may lose the sale’s payment as a result, in addition to paying additional fees and penalties. The true cost and consequences of chargebacks, however, go far beyond these short-term cash expenses.

Chargebacks can have a variety of causes, including but not limited to non-delivery, fraud, incorrect billing address information, and inefficient shipping process. It is essential to have an effective chargeback management strategy if one wants to be in a position to eliminate them entirely.

Chargebacks Can Damage a Business Reputation

company reputation concept to illustrate how chargebacks can affect your brand

One of the most notable effects that chargebacks have is the damage they can do to a merchant’s reputation. Chargebacks are an obvious indication that there is an issue with the products or services that the merchant provides, and they can cause customers to lose trust in the merchant. In addition, a high chargeback rate, bad ratings, and comments posted on review websites as well as social media platforms can further damage the reputation of the business.

The image and perception of a brand can be severely harmed when a company has an overabundance of chargebacks. Consumers can get the impression that the company is not professional or that the actual product or services are of poor quality, both of which could result in a drop in sales. This can be especially detrimental for smaller companies since a poor reputation can lead to a reduction in the number of clients and income generated by the business. 

Potential for Lost Revenue

bar graph in downward trend to illustrate lost revenue due to excessive chargebacks

As previously noted, chargebacks can cost a merchant a lot of money. When a customer decides to file chargebacks, the initial transaction is reversed and removed from their credit card bill, and the merchant’s account is also charged additional costs and penalties. This can add up to a sizeable sum of money and may make it challenging for businesses to get merchant accounts or payment processing services, which could have a negative effect on their revenue.

High Chargeback Ratios Mean Fines

photo of wooden stamp with the word fine in red ink on paper

It is crucial to prevent chargebacks so you can avoid high chargeback ratios, the percentage of chargebacks received for the total number of transactions processed. A high ratio can result in fines and penalties from card networks and payment processors in addition to lost income. Losing the sale due to a dispute is detrimental enough to businesses, but having to pay extra fees for every chargeback claim makes it important to respond quickly to any chargeback prevention alerts.

realistic yellow triangle warning notification alert to illustrate the dangers of too many chargebacks

Merchants must abide by the strict chargeback criteria set forth by the credit card network and payment processing companies; otherwise, they run the risk of being charged increased chargeback rates. For example, merchants who receive too many chargebacks or who don’t reply quickly to a credit card dispute or chargeback alerts from the credit card company are subject to fines under Visa’s chargeback monitoring program.

 High Ratios Can Lead to Account Termination

Payment processing businesses and acquiring banks may see merchants whose transaction data reveals a high chargeback rate as a possible high-risk business. This is because a high chargeback ratio indicates that the merchant is not trustworthy or able to meet consumer expectations. As a consequence of this, these organizations could decide to close the accounts of merchants who have a high chargeback percentage in order to lessen the possibility of incurring monetary losses.

An excessive number of chargebacks may result in a drop in revenue, they could have to find a new payment processing provider, and increased fees or penalties, all of which may be incurred as a direct or indirect consequence.

Payment processors and merchant account providers have the option to terminate a business’s merchant account if the business has a high chargeback percentage. This is due to the fact that a high chargeback ratio may give the impression that the service provider is in danger of losing both their reputation and their capacity to generate revenue. E-commerce platforms such as Amazon and eBay have the ability to suspend or terminate a seller’s merchant account if a high number of chargebacks are submitted against the products the seller is selling.

Chargebacks can be a sign of underlying issues

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Last but not least, chargebacks can be an indication that there are deeper problems with a business. For instance, if a business has a high percentage of chargebacks due to chargeback fraud, this may be an indication that its security procedures are not up to par. Avoiding fraud is a large part of preventing chargebacks, whether it be friendly fraud, a merchant error, or a compromised credit card, it is important to stay up to date with your credit card fraud security measures.

In a similar vein, if a business is seeing a high number of chargebacks as a result of unsatisfied customers, this may be an indicator that their goods or services are not living up to the standards that their customers have set for them. Merchants can enhance their overall business operations and the satisfaction of their customers by focusing on the underlying reasons for chargebacks and reducing the number of chargebacks that occur in their establishments.

a flow chart handwritten in a notebook to illustrate that some chargebacks can be midigated by evalutating process

A chargeback prevention strategy is essential for merchants who want to protect their reputation, revenue, and business operations. By implementing effective chargeback prevention and management strategies, merchants can avoid chargebacks, protect consumers, avoid fines and penalties, and maintain their merchant accounts. In addition, by addressing the root causes of chargebacks, merchants can improve their products and services, increase customer satisfaction, and ultimately, grow their business.

Top 10 Steps for Your Chargeback Prevention Strategy

Businesses should ensure that they have transparent policies and procedures in place for dealing with customer complaints and chargebacks. A return and refund policy, for instance, ought to be straightforward and simple to grasp. The return window, the method by which refunds will be handled, and any limitations or limits that apply to returns should all be outlined in the return policy. In addition to these crucial rules and procedures, the following are also important:

1. Transparent billing information

Ensure that your customers have access to their billing information, including detailed receipts and statements. Clearly outline any recurring billing or subscription services and provide customers with the ability to easily manage or cancel these services.

2. Accurate and detailed product descriptions

Accurate and detailed product descriptions can help prevent misunderstandings and disputes. Set realistic expectations and ensure that your product descriptions are complete, and accurate, and include all relevant information, such as size, color, and material.

3. Timely order fulfillment and shipping

Timely order fulfillment and shipping can help prevent customer disputes related to delivery confirmation and non-delivery. Offering shipping insurance can provide many customers with a resolution as well as prevent chargebacks. Clearly state your expected processing and shipping times and keep your customers informed of any delays to ensure realistic expectations.

4. Chargeback Dispute Policy

Have a clear internal policy for handling disputes, including the process for responding to chargeback alerts and any required documentation. Ensure that your customer service team is trained on the chargeback process and equipped to provide the necessary information to avoid chargebacks.

5. Clear Billing Descriptors

Merchants should ensure that their business name is clear and recognizable on cardholder receipts and statements. This can help prevent confusion and disputes over unrecognized charges and help avoid friendly fraud chargebacks.

6. Excel at Customer Service

A lot can be done to avoid chargebacks with good customer service. Merchants should respond to questions and complaints from customers, and their customer service teams should work to solve any problems quickly and to the customer’s satisfaction.

Make sure your customers can easily reach you if they need help and that you quickly answer any questions or complaints. If you have good customer service, you might be able to solve problems before they lead to chargebacks.

7. Use the Tools Available

Fraud detection tools can help merchants find and stop transaction processing that isn’t legitimate before a customer disputes them. Some of these tools are address verification services, card verification codes, and tracking the IP location.

8. Track Your Ratios

Merchants should keep an eye on their chargeback ratios and take action if they are too high. This can include things like making customer service better, cutting down on fraud, and fixing any problems that might be causing fights.

9. Transparent Return Policy

Make sure your refund policy is clear and easy to understand, in addition to having clear policies and procedures. Consider a no-questions-asked refund policy for a certain amount of time after purchase to help reduce chargebacks.

10. Shipment Confirmations

It is important to keep your customers informed during the shipment process. Most expect a tracking number, but sending an email when the package is shipped, en route, and delivered can alleviate friction due to unexpected delivery windows. It is recommended to always require an adult signature as confirmation the package was delivered to a person, not a porch. Often it comes down to proving the customer received the package when disputing a chargeback.

How AllayPay Can Help You Prevent Chargebacks

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By implementing these additional best practices, merchants can further reduce the risk of chargebacks and improve the overall customer experience. It’s important to stay up-to-date on the latest fraud prevention methods and chargeback reduction strategies to ensure your business is protected from financial losses.  While chargebacks can still occur, taking proactive steps to prevent them can help reduce their frequency and severity.

AllayPay offers a range of tools and services to help merchants manage and avoid chargebacks.  We’ve teamed up with Midigator to provide fully automated chargeback response tools saving your company time and money.  Contact us today for more information.