Chargebacks are an ever-present threat to e-commerce and other card-not-present businesses, and their numbers just keep growing. Few merchants can ignore them as an inevitable cost of doing business—left unchecked, chargebacks can be devastating to a merchant's bottom line and can cost them their relationships with their payment processors. Neither is it sufficient for most companies to deal with chargebacks on an ad hoc basis. To fight them effectively, you need a comprehensive system for chargeback management.
When it comes to fighting chargebacks, the burden of proof is on the merchant to demonstrate that the chargeback is invalid. That's why it's so important to have a system in place to respond to chargebacks within the allotted timeframes and provide the necessary evidence to have them dismissed.
Crafting an effective chargeback management system requires a combination of strategies, tools, human resources, and expert knowledge. You have to understand exactly what chargebacks are, how the chargeback process works, and how to weigh the pros and cons of handling chargebacks in-house or outsourcing to professionals.
Understanding Chargebacks
A chargeback is when a consumer contacts their bank or credit card company to dispute a transaction as illegitimate and request a reversal of the charge. From this point, the chargeback goes through a process that involves the four parties affected by the transaction:
- The customer
- The merchant
- The issuing bank (the customer's bank)
- The acquiring bank (the merchant's bank)
If the merchant offers no rebuttal to the chargeback, the charge will be reversed and refunded to the customer. If the merchant does challenge it, the chargeback enters a phase called chargeback representment, where the merchant is given the chance to offer documentation and other evidence that would prove that the original charge was valid.
It is important for merchants to understand that the true cost of a chargeback is far more than just the amount of the original transaction. Aside from the loss of all the overhead and other associated costs involved in making the transaction happen in the first place, banks require merchants to pay chargeback fees.
The true cost of a chargeback can be up to 200% of the original amount when everything is factored in.
Worse yet, every payment processor has a chargeback threshold for the merchants they serve. If a merchant gets too many chargebacks, they may exceed their threshold, with consequences ranging from additional fees to the termination of their account.
In-House Management Considerations
Many merchants choose to handle chargebacks in-house. Often, this makes intuitive sense, as chargebacks roll in at manageable levels when businesses are just starting out and growing.
As businesses mature and increase their size and reach, chargebacks can very quickly become a much bigger problem, and it's not always easy to scale up your in-house system for managing them.
Here are some of the key considerations to take into account when you're putting together an in-house chargeback management system:
Cost. At first glance, in-house chargeback management is almost always cheaper than outsourcing it, assuming you assign chargeback duties to yourself or existing staff. However, time spent working on chargebacks is time you and your staff aren't spending on business operations that actually turn a profit, and to do it effectively you'll need to invest time and money into tools, resources, and training.- Data security. Outsourcing chargebacks means exposing sensitive customer and operational data to outside companies. With an in-house team, you don't have to worry about unknown parties handling your data.
- Emotion. It can be difficult to relieve longtime employees of a task they've been handling for a long time because you think an outside contractor can do it better. Sometimes we develop attachments to tools and software platforms we've grown accustomed to, as well. These feelings sometimes lead merchants to keep in-house practices in place long after they've ceased to be truly effective.
- Assumption. Merchants often hold on to false assumptions about the amount of chargebacks they get, their win rate when they dispute chargebacks, and the actual financial toll chargebacks are taking on them. A more realistic assessment might lead them to conclude that they need a completely new approach to managing them.
- Reliability. What happens when your designated chargeback staffer goes on vacation or quits? How do you maintain an in-house chargeback team if seasonal sales patterns mean that most of your chargebacks hit at a certain time of year?
Outsourced Management Considerations
There are many advantages to outsourcing chargeback management, but it can be costly, and it remains the responsibility of the merchant to choose a qualified company that will provide tangible results and a good value for what they're charging.
Here are some things to consider when you're deciding whether to hire a chargeback management firm:
- Expertise. The rules and regulations governing chargebacks can change every year, and chargeback professionals have firsthand knowledge of the industry and the best practices for fighting and preventing them.
- Tools. Chargeback management companies will have invested in the latest and greatest industry-specific software tools for intercepting, tracking, and managing chargebacks, and the good ones are constantly refining their tools and processes.
- Strategy. Experts who have years of experience with numerous clients will have developed tried and tested strategies for winning chargeback representment fights, identifying the root causes of chargebacks, and implementing effective preventative solutions.
- Measuring Effectiveness. It's crucial to understand the return on investment you're getting from any chargeback management company you hire. Reputable companies will collect and report accurate chargeback data that will show you how much money you're saving and recovering, and help you can make better and more informed decisions about what solutions will best remedy your chargeback problems.
- Stability. One of the best advantages of outsourcing is that you'll never have to worry about downtime. Any worthwhile chargeback management company will be able to provide you with reliable, 24/7 representment and prevention.
Making the Right Choice
Any chargeback management system is better than having no system at all, but there's no one-size-fits-all solution for every merchant. Every business is unique, and chargebacks hit different businesses for different reasons.
Whichever solution you're leaning toward, there are many considerations to factor in. Ultimately, the most effective chargeback management system will be the one that produces the best results—as measured by ROI metrics. If you're winning chargebacks, recovering revenue, and seeing your overall chargeback rate go down, that's how you know your system is working.
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