Chargeback Prevention

A Merchant's Guide to Chargeback Alerts

Chargeback Prevention Alerts_Blog Image


When it comes to chargebacks, the fewer there are the better.  Whether they're legitimate or not, too many chargebacks can result in a merchant losing their ability to process credit card payments.  Sometimes, a chargeback is initiated over an issue a merchant would have been happy to resolve, in the customer's favor, before getting the banks involved.

Chargeback prevention alerts are a way to circumvent the process, in a way that keeps customers satisfied, as well as in a manner that doesn’t reflect negatively on the merchant, in the eyes of banks and payment processing companies.

The Consequences of Chargebacks

Lost sales and revenues aren't the only negative effects of chargebacks. 

The biggest credit card networks—Visa, MasterCard & American Express—all keep track of a chargeback ratio for merchants.  If a merchant gets hit with too many chargebacks, their ratio will eventually cross a threshold that puts them into the "excessively risky" category. 

This may cause the merchant's acquiring bank to terminate their merchant account, and sometimes, to even list them in a Terminated Merchant File (TMF), which makes it challenging to get a merchant account from any other payment processor.

The exact threshold may vary from business to business.  For example, some mom-and-pop stores might be categorized as low-risk, while a high-volume online retailer might be viewed as high-risk, with their threshold adjusted accordingly.

Some acquiring banks won't even wait until the threshold is reached to start imposing restrictions.  These restrictions can include placing limits on the monthly processing volume, holding reserve funds (to protect themselves from loss), and possibly, even terminating the merchant account, flagging the merchant as "too risky."

Many consumers file chargeback requests before they've attempted to rectify the situation with the merchant first.  Though these consumers may not have malicious intentions, this "friendly fraud" can have devastating effects on merchants without some form of chargeback protection.

Businesses that lose their accounts due to bad chargeback ratios may have difficulty opening an account with a new acquiring bank, leaving no alternative but to go with a costly, "high-risk" payment processor, or shut down their business altogether.
 

What is a Chargeback Alert?

One of the best ways for a merchant to keep their chargeback ratio down is to sign up for a dispute resolution network that offers chargeback prevention alerts. 

This will effectively intercept chargebacks before the acquiring bank gets involved in the process, giving the merchant an opportunity to issue a refund and resolve the issue before their chargeback ratio is affected.

A prevention alert puts the chargeback process on hold and notifies the merchant about it before it reaches the point of counting against their chargeback ratio.

The merchant can then choose to proactively resolve the matter, by issuing a refund.  If the merchant believes the request is invalid, they can always opt to let the process play out and dispute the chargeback.

How Chargeback Alerts Work
 

What are the Benefits of Chargeback Prevention Alerts? 

The primary advantage of chargeback prevention alerts is that they allow merchants to resolve customer issues before they officially become a chargeback.  By doing so, the merchants are not penalized by either the card networks or their acquiring banks. 

Merchants have to pay fees for chargeback prevention alerts, but in the long term, paying those fees can be a lot more cost-effective than dealing with the expenses and lost revenue associated with having your account suspended or terminated.
 

Who are the Major Providers of Chargeback Prevention Alerts?

The two major dispute resolution networks offering chargeback prevention alerts are Verifi and Ethoca. 

Each company offers a somewhat different range of coverage when it comes to which banks are in their network.  To intercept a chargeback request successfully, the request must be initiated at an issuing bank in their network.  Verifi is expanding its network, but it currently has better coverage in the United States, while Ethoca has more coverage in Canada, Europe, and Asia.

Both companies charge fees when a chargeback prevention alert is issued, and both require a merchant to take action on an alert within 24 hours of receiving it.  If an alert is ignored, the chargeback proceeds as usual, but the fee is still charged by the prevention alert network provider.

Signing up with both networks (Verifi and Ethoca) can provide a merchant with the greatest amount of chargeback alert coverage and provide the ability to prevent more chargebacks.  However, there is significant overlap amongst the banks included in each network, since both alert providers are competing to have the major issuing banks in their network.  If a merchant receives an alert from both networks, they're obligated to pay fees to both companies, which can be costly, even though the merchant needs only one alert to prevent a dispute.
 

Why Let a Chargeback Management Company Handle Alerts for You?

  1. Working with a chargeback management company who is an authorized reseller of Verifi and Ethoca prevention alert programs means that you have the coverage of both Verifi and Ethoca, and never have to worry about the overlapping alerts.  Merchants therefore do not have to pay for duplicate alerts.

  1. When you hire a chargeback management company, you have a dedicated team that responds to chargeback prevention alerts within the required time frame.  This way you never have to worry about failing to respond in time—whereas, when a merchant signs up for alerts directly with the networks, the burden of resolving the alerts falls on the merchant.

  1. Some chargeback management companies offer an intuitive dashboard, where you can manage the alerts from different networks in one portal, versus logging in to multiple systems to track your prevention alerts.

  1. A chargeback management company may even offer a 100% chargeback prevention guarantee when a prevention alert is handled.  This means if an alert, after issuing a refund, still turns into a chargeback, the management company will refund 100% of your alert fee.

  1. Lastly, a chargeback management company may charge the same fee that is charged by the alerts networks, plus you get all of the additional benefits listed above.

How Soon Can the Alert Networks Intercept and Prevent a Chargeback? 

New Merchant:  45 – 60 days
(Haven’t processed any transactions before)

Existing Merchant:  20 – 30 days
(Never enrolled in a prevention alert network before)

Existing Merchant:  No delay
(Previously enrolled in prevention alerts, but switching providers)

What Percentage of Chargebacks Can Be Prevented by the Chargeback Prevention Alert Networks?

The percentage of chargebacks that can be intercepted by the prevention alert networks depends on these factors: 

  1. Transaction Count (The more transactions, the better the coverage)

  2. Customer Bank Location (US customer base has better coverage than overseas)

  3. Years in Business (Established businesses can have better coverage than new merchants)

Here are some estimates based on our own internal data analysis: 

Service/Product

Verifi

Ethoca

Physical Goods

21%

17%

Digital Goods

41%

30%

Digital Service

17%

33%

Subscription Industry

19%

14%

 

What is the Cost of a Prevention Alert? 

The cost can vary based on your prevention alert count.  The cost ranges from $35 - $40 per alert received.


What Do I Need to Get Started with the Prevention Alert Network?

To get your merchant accounts enrolled in the prevention alert network, you need to provide the following information: 

  1. Merchant/Business Name

  2. Business Registered Address

  3. Merchant Account Descriptor (Name as it appears on customer credit card statement)

  4. Merchant Account Number (The ID provided by your payment processor)

  5. Access to your Sales System (To issue refunds and resolve the alerts)
     

Are Prevention Alerts the Only Way to Prevent Chargebacks?

Some consider the Prevention Alerts to be a band-aid solution since it doesn’t really address the root cause(s) of your chargebacks.

Participating in the prevention alerts can be expensive.  Here is the true cost of preventing a chargeback through prevention alerts:

Transaction Amount

$100.00

Cost of Goods

$25.00

Fulfillment Costs

$8.00

Marketing Cost

$25.00

Processing Fee

$3.50

Operations Fee

$10.00

Prevention Alert Fee

$40.00

Total Cost

$211.50

(Over 2x the cost of the Transaction Amount)

 

Given such an expense per potential transaction, it makes the most sense to focus on proactive steps, to prevent chargebacks in the first place.


5 Simple Steps to Reduce Chargebacks Organically
 

  1. Set true expectations, in regards to your product(s) and the service you offer customers

  2. Provide exceptional customer service, with prompt response to phone calls or emails

  3. Provide terms of service and refund terms to your customers, prior to all sales

  4. Provide easy methods for your customers to reach your customer service or to cancel their product/subscription service(s)

  5. Identify the true cause of chargebacks, and fix any internal issues that trigger chargebacks


Is your business experiencing chargebacks?  Whether you’re a low, medium or high-risk for chargebacks, you must understand where they are coming from, what they’re really costing you, and what you can do to stop them.  Download the free Chargeback Prevention Guide for simple tips on how to prevent them.

Chargeback Prevention Tips for Low, Medium & High Risk Businesses