Chargeback Management: A Merchant's Guide
Every retailer, from the smallest independent merchants to the largest global enterprises, has to deal with chargebacks. Payment disputes can occur for any number of reasons, and when cardholders convince their banks that they have a valid claim, merchants are stuck watching hard-earned revenue vanish from their accounts.
Some chargebacks are legitimate, and some are fraudulent, but either way, merchants can hardly afford to stand by and do nothing about it. The best way for merchants to protect themselves is to implement a comprehensive strategy for managing all the fraud and disputes that come their way. What do merchants need to know about chargeback management?
- What is Chargeback Management?
- Why Do Merchants Need Chargeback Management?
- What are the Primary Causes of Chargebacks?
- What are the Elements of a Comprehensive Chargeback Management Strategy?
- How Can Merchants Prevent Legitimate Chargebacks?
- How Can Merchants Fight Fraudulent or Erroneous Chargebacks?
- Is it Better to Hire a Chargeback Management Company or Handle Chargebacks In-House?
Despite the recent rise in alternative payment methods, cards are by far the most widely used method for making e-commerce purchases, accounting for 47% of all transactions.
Every single credit card transaction is vulnerable to the chargeback process, which is mandated by law as an inextricable part of the credit card payments system. The details of this process were left to card networks to decide.
Chargebacks were created in order to give consumers recourse when they get defrauded by credit card thieves and unscrupulous merchants, thereby giving them the ability to use their credit cards in any situation without having to worry about being hit with unauthorized charges.
The law that created chargebacks dates back to 1974, but from a consumer perspective, they’ve never been more necessary. Credit card fraud is rampant, surging after the massive shift to e-commerce that took place during the COVID-19 pandemic. About 127 million people in the U.S. have experienced credit card fraud, and more than a third of all cardholders have been victimized by card fraud more than once.
Unfortunately, true fraud is not the only cause of chargebacks. While chargebacks are also used to remedy fraud and errors committed by merchants themselves, many chargebacks are themselves fraudulent, originating out of false and deceptive claims made by cardholders.
The costs and consequences of chargebacks are significant, and can do serious damage to a merchant’s revenue and reputation. In the worst-case scenarios, you can even lose your merchant account due to excessive chargebacks. For any merchant who accepts credit card payments, strategic chargeback management is a must.
What is Chargeback Management?
Chargeback management describes all of the ways in which merchants can deal with fraud and disputes that result in payment reversals. Effective chargeback management requires a strategic approach that anticipates preventable chargebacks and fights invalid and fraudulent chargebacks whenever they occur.
Why Do Merchants Need Chargeback Management?
Dealing with chargebacks on an ad hoc basis is not a great way to manage them. Chargebacks often happen for predictable reasons, and can be prevented or recovered with the right tools and tactics.
Some merchants decide that chargebacks are too much trouble to manage, and write them off as an unavoidable cost of doing business. This is not only an expensive decision to make, it’s also extremely risky. Chargebacks come with dangers beyond just the obvious loss of revenue.
But just to be clear, revenue loss is one of the most serious consequences of unmanaged chargebacks. Every time you get hit with a chargeback, you not only lose the disputed revenue, you also have to pay a chargeback fee that typically runs between $20 and $100.
When you add it all up, the typical chargeback costs more than twice the amount of the original transaction. Few merchants can afford to endure needless expenses like that for long.
The other big problem with chargebacks is that your chargeback ratio is always being monitored. In order to protect consumer confidence in the credit card payments system, card networks require merchants to maintain a chargeback ratio of less than 1% of all monthly transactions. When merchants exceed that threshold, there are penalties.
In the early stages of their “excessive chargebacks” status, merchants may be required to participate in remediation programs that come with additional obligations and fees. When you maintain an excessive chargeback rate for too long, you can end up getting your merchant account terminated. When that happens, you may find that the only payment processors willing to take your business are “high risk merchant” specialists that charge exorbitant rates.
Chargeback management can also preserve a merchant’s good reputation. If customers are filing a lot of chargebacks against you, it might mean that you are not succeeding at providing quality products or excellent customer service, or that you are failing to protect consumers—and yourself—from predatory fraudsters.
What are the Primary Causes of Chargebacks?
The causes of chargebacks can be sorted into one of three categories: true fraud, merchant error, and friendly fraud.
- True Fraud refers to chargebacks that result from criminal, third-party fraud. In other words, somebody has stolen the cardholder’s payment credentials and used them to make unauthorized transactions.
- Merchant Error chargebacks occur when merchants fail to deliver on their obligations to their customers. For example, when you forget to ship out an order, withhold a refund, or misrepresent your merchandise.
- Friendly Fraud is also known as first-party misuse, and refers to fraudulent or erroneous chargebacks that are not actually legitimate. Friendly fraud can occur when cardholders mistake unrecognized charges on their billing statements for true fraud, but some people intentionally file false dispute claims as a form of cyber-shoplifting.
An effective chargeback management strategy must provide workable options for dealing with all three categories of chargebacks.
What are the Elements of a Comprehensive Chargeback Management Strategy?
Just as there are three types of chargebacks, there are also three key elements in a comprehensive chargeback management strategy. You need a chargeback policy, you need to engage in chargeback analysis, and you need the right tools for dealing with chargebacks.
Your chargeback policy outlines the steps you will take in response to various dispute scenarios. It helps you decide when to fight chargebacks, and when to accept them. It tells you how to handle customers who engage in friendly fraud. Without a smart chargeback policy, you can waste time taking inappropriate and ineffectual actions in response to chargebacks.
The next element, chargeback analysis, is the cornerstone of effective chargeback prevention efforts. By analyzing chargebacks, you can uncover their true root causes. Only then can you determine what actions you should take in order to prevent such chargebacks from recurring in the future.
Finally, you need reliable software tools and other technological resources. These can include anti-fraud filters, multi-factor authentication protocols, chargeback alert services, and anything else that automates the process of preventing and deflecting chargebacks.
How Can Merchants Prevent Legitimate Chargebacks?
True fraud and merchant error chargebacks often result from legitimate disputes based on factual claims. When you receive a chargeback, investigate the claims, and find that they have a valid basis, you don’t have any choice but to accept it.
Fighting legitimate chargebacks is not a good use of your time—you have no realistic expectation of winning your revenue back. The best thing you can do is figure out what allowed the chargeback to occur in the first place, and make operational changes to prevent future recurrences of similar disputes.
In the case of merchant error, you should be able to see where you went wrong and avoid making the same mistake twice. True fraud is another story. Credit card fraudsters use increasingly sophisticated methods to get past detection algorithms, but authenticators like 3-D Secure and AI-based anti-fraud software may be able to stop them.
How Can Merchants Fight Fraudulent or Erroneous Chargebacks?
When you receive a chargeback and realize that the dispute claims are bogus, you can fight back through the chargeback representment process.
To represent a chargeback, you need to resubmit the transaction and include a rebuttal of the cardholder’s claims and documented evidence that proves your case. Chargeback reason codes will usually provide specific information about what kind of evidence is needed to get the chargeback reversed. With the right compelling evidence, you can get friendly fraud and other illegitimate chargebacks reversed and win back your revenue.
Sometimes, you’ll send your representment and evidence to the issuing bank and they will still uphold their original decision to grant the chargeback. When this happens, you can appeal to the card network for arbitration.
This can be costly, however, as the loser in arbitration usually has to pay a costly fee. When high-value transactions are on the line and you know the facts are on your side, it may be worth pursuing arbitration. Your chargeback policy should guide your decisions in these matters, ensuring that you don’t waste time and money taking on fights that you’re unlikely to win.
When you engage in chargeback representment, it’s important to track your win rate. If you’re experiencing a lot of losses, it may mean that you’re choosing the wrong chargebacks to represent, or that you aren’t submitting the right evidence.
Is it Better to Hire a Chargeback Management Company or Handle Chargebacks In-House?
Many merchants initially manage chargebacks on their own, but as their sales volume increases, they find that they no longer have the time or resources to spend on chargeback management tasks. At this point, it may make sense to hire a chargeback management company.
The main advantage of managing chargebacks on your own is that it costs you less up front. However, you may find that you actually get a positive ROI by hiring an experienced team of chargeback professionals. The right chargeback experts will know how to handle a wide variety of dispute scenarios and will be able to provide the analytics and insights that help you craft a stronger, more effective chargeback management strategy.
If your merchant account is under threat from a rising chargeback ratio, hiring the right company can be the best move you can make to get the problem under control and bring your ratio down to safer levels.
Chargeback management can be a lot for merchants to take on, but it’s as important as any other aspect of running a retail business. The losses from chargebacks can be significant, and without an effective strategy, it’s all too easy for cybercriminals and friendly fraudsters to deprive you of your revenue.
The good news is that there are experts out there who know your industry segment and have seen nearly every type of chargeback imaginable. With the right chargeback management company working on your behalf, you can leave the fraudsters to them and focus on doing what merchants do best—delivering great products and services to satisfied, loyal customers.