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.
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:
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.
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:
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:
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.
Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions or requests for advice to: win@chargebackgurus.com