Chargebacks are often considered the “cost of doing business”, especially for ecommerce merchants. The truth is, with the right chargeback management and prevention tools, this doesn’t have to be the case.

Unfortunately, chargeback fraud is a growing problem for those that sell products and services online. According to the LexisNexis True Cost of Fraud report, fraud losses increased by 6% in 2018—costing merchant $2.94 for every dollar lost to fraud. Those costs include the actual chargeback costs, lost merchandise, chargeback fees, lost revenue, and other fees incurred. Mcommerce took the hardest hit, costing merchants $3.29 per dollar—up 24% year-over-year.

What is a Chargeback?

There are many different chargeback codes, but essentially two main sources of chargeback fraud: criminal fraud and friendly fraud.

Criminal Fraud

Criminal fraud leads to chargebacks when a cardholder disputes a transaction because it was not authorized. This could happen when a card is lost or stolen and used to make fraudulent purchases. In other cases, counterfeit cards are created using stolen or hacked payment card data. Criminal activity results in a chargeback when the true cardholder sees unauthorized charges on his or her monthly statement and disputes the charges.

Friendly Fraud

Friendly fraud can be somewhat of a misnomer as it is sometimes perpetrated by bad actors who intend to cyber shoplift from a merchant. There are two types of friendly fraud: accidental and intentional. With the former, a spouse or child may borrow a payment card without the cardholder’s knowledge to make a purchase. When the true cardholder views their monthly statement, they see charges they did not authorize and dispute those charges.

Intentional “friendly fraud” occurs when a customer is calculated about how they dispute a charge. Rather than contacting the merchant with issues or complaints about a product or services, these people contact their issuing bank to file a chargeback. When a customer opts to use the issuer as a middleman rather than obtaining a refund or other resolution through the merchant, a sequence of chargeback events is set into motion. Not only is the merchant left unaware of issues with products or services, but they face fines, fees, and penalties associated with chargebacks.

Four Ways to Fight Chargebacks (And Win!)

Use Customer Service to Resolve Issues & Complaints

Customers often use chargebacks as a convenient way to get a refund. This may happen because they are purposely trying to defraud the merchant or because there is no clear path to getting in touch with the merchant. The latter is an issue that merchants can easily address. Merchants should clearly display customer/technical support contact information on both the website and on receipts/invoices. Refund and return policies should also be clearly stated and easily findable on the website.

Even when customers do pursue chargebacks through their issuing banks, merchants have a chance to rectify the situation before the dispute spirals out of control. Merchants typically have one week to 30 days to dispute a chargeback through the card brands’ channels. Merchants can reach out to customers during this window to ask more about the reason for the chargeback. In some cases, a customer may opt to contact their issuing bank and undo the chargeback.

The bottom line is that customers must feel as though they have avenues through which they can resolve their concerns, issues, and complaints.

Meet the Burden of Evidence

In cases where a customer is pursuing a chargeback, a merchant must then do its best to fight the chargeback. The first step is collecting evidence that contests the customer’s claim. Thanks to current technology, much of this evidence is digitally available through online payment gateways or point-of-sale (POS) systems. Some evidence that may need to be collected includes:

  • Signed receipts
  • Delivery confirmation slips
  • Customer service transcripts regarding a purchase
  • Verification that a customer lives or works at address where the goods were delivered

This underscores the importance of maintaining easily-accessible and thorough transaction records.

Prepare a Timely Response

Upon receiving notification about a chargeback, merchants must quickly prepare a response. Each card network has its own set of deadlines for each step of the chargeback process. There may be several levels of review and the chargeback may be reviewed by several parties. A merchant response requires urgency and accuracy.

Responses should be organized and fit the proper formatting per the card network’s specifications. They must also be sent through the channels indicated by each card network. A merchant may want to consult with a chargeback response template, which will provide an outline of all information and paperwork required. This template can be filled in with the necessary information by the merchant, per each chargeback case. Keeping a copy of these chargeback response templates on file is recommended as it can save time when chargebacks are filed and a merchant must submit the proper information.

Implement Tracking for Prevention

The best way to fight chargebacks is to prevent avoidable ones. While some of the chargeback process is out of the merchant’s hands, merchants do have the ability to implement the proper tools and procedures to avoid the same types of disputes from happening again.  Tracking chargeback reason codes is a good first step. If a merchant sees that fraud at the POS is a common chargeback reason, it may want to look into the fraud prevention tools implemented for card-present transactions.

Another option is to work with chargeback notification services. These services notify the merchant when a dispute has been filed, giving them a chance to resolve the dispute with the customer before the dispute gets further along in the process. This can help avoid fines, fees, and penalties from banks and card networks.

MerchACT offers full-scale payment processing support to our clients, including chargeback management and prevention. We can help advise on the best strategies and tools to protect your bottom line. Contact us today to speak with someone about optimizing your payments operation.

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