As a merchant, you probably don't have many good things to say about chargebacks. But from a consumer's perspective, they provide an important safeguard against online fraud and unscrupulous sellers. Customers know they can resort to asking their banks for a chargeback if there's no other way to resolve a problem. In a roundabout way, this does benefit merchants, because it makes consumers more confident that they can make purchases online with minimal risk.
Because chargebacks make consumer protection a priority, it falls on merchants to bear the burden of proof when it comes to fighting invalid or fraudulent chargebacks. In theory, the right evidence and the proper argument will succeed in getting illegitimate chargebacks dismissed, but things don't always work out the way they should. Therefore, the best method of chargeback defense is to prevent them from happening in the first place.
Chargeback Defense - Start by knowing your risk
Chargebacks can threaten a company's survival. Aside from the fact that chargebacks end up costing you much more than the original transaction amount, banks and payment processors keep track of how many chargebacks hit any individual merchant account, and if the number exceeds a certain threshold that they set, they can impose transaction limits on that account or even shut it down entirely.
Acquiring banks classify businesses as low, medium, or high risk.
Finding out whether your business is high risk, low risk, or somewhere in between is important, because the best practices for preventing chargebacks vary based on your risk level.
Some industries (internet subscription services, for example) are considered inherently high risk. Your individual circumstances also factor in:
- Your marketing practices
- Your reputation
- Your customer service team
- Your billing practices
- The typical length of time between when goods are purchased and when they're delivered
Knowing your risk level can help you determine the best strategy for chargeback prevention.
Chargeback Defense - Find your "root causes"
Every gardener knows that the only way to kill a weed is to get it by the roots. The same goes for chargebacks—attacking the root causes of chargebacks is the best way to keep them from sprouting up.
The first step in preventative chargeback defense is identifying those root causes.
Understanding chargeback reason codes is of key importance here.
These codes tell you why the customer asked for a chargeback, and can lead you toward an understanding of which aspects of your business need to be strengthened.
If most of your chargebacks are due to authentication problems, you might need to update your transaction procedures and revise your checkout page. If they're due to customer dissatisfaction with your products, a more flexible return policy might help.
Chargeback Defense - Calculate the true cost
Above, we mentioned the fact that chargebacks cost you more than just the original transaction amount. How much, exactly? Consider all of the associated costs of chargebacks:
- Transaction fees from your payment processor for the original charge
- Overhead costs to market, sell, and ship the product
- Chargeback fees from your bank
When you add it all up, you can't just write off chargebacks as the cost of doing business.
All told, the "true" cost of a chargeback can be more than double the transaction amount. This is why chargeback defense is so important.
Chargeback Defense - Learn prevention strategies
You can't effectively fight chargebacks by sitting there and waiting for them to come to you. At that point, damage has already been done, even if you fight them through the chargeback representment process.
Here are the basic steps every business needs to take for chargeback prevention:
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Set realistic expectations. If you're making promises your products or services can't keep, you're going to end up with disappointed customers who don't trust you. That's a recipe for chargebacks.
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Maintain efficient operations. Customers will only be so patient with you through mistakes and delays. If they lose faith in your ability to handle their business with care and competence, they're going to resort to chargebacks.
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Provide excellent customer service. Consumers are supposed to seek resolution of their issues through the merchant before going to their bank to request a chargeback. The easier you can make it for them to reach you and receive expedient attention to their problems, the more often they'll do so.
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Deliver prompt fulfillment. A customer should never be stuck waiting, wondering if you've forgotten about their order. Ship promptly and provide transparent communication about any issues or delays holding up a customer's order.
Chargeback prevention tools can also make a big difference.
Chargeback Prevention Alerts provide immediate, 24/7 notification and response to chargebacks, and can in some cases provide you with the opportunity to issue refunds and resolve the problem before the banks get involved.
You can also use 3-D Secure technology and other fraud prevention tools to reduce problems with authentication errors and card theft.
What all of these steps have in common is that they're proactive—they're about tackling the potential issues that can result in chargebacks and taking action to reduce that likelihood.
When to Get the Experts Involved
When you don't have the time or resources to handle chargeback prevention in-house, you can always outsource it to a chargeback management company. It's important to weight the costs and benefits of taking this step, but for merchants nearing the edge of their chargeback threshold, it can be a lifesaver.
Chargeback experts know the reason codes, prevention methods, representment strategies, and all other aspects of the chargeback process inside and out. They also have dedicated staff ready to respond to chargebacks well before any deadlines pass.
Proactive prevention measures are your first line of defense against chargebacks. Choose the ones that will be most effective for your business, and you can look forward to seeing less lost revenue every month due to preventable chargebacks.
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