How to Prevent Chargebacks: A Practical Guide

For merchants, the financial impact of chargebacks can be substantial. Each chargeback represents not only the loss of the sale but also additional fees and hidden costs. That’s why strategies to prevent chargebacks are so crucial to an effective risk mitigation strategy.

By understanding the chargeback process, implementing proactive prevention strategies, and employing best practices for managing and responding to disputes, merchants can minimize the impact of chargebacks on their operations and safeguard their revenue.

Proactive Strategies for Chargeback Prevention

Chargebacks can occur for a variety of reasons, but they generally fall into three main categories:

• True Fraud
• Merchant Error
• First-Party Misuse

Each of these types of chargebacks requires a different approach to effectively prevent them.

Preventing True Fraud Chargebacks

Preventing fraudulent transactions is one of the most effective ways to reduce chargebacks. Merchants should implement a multi-layered approach to fraud prevention that includes the following strategies:

• Fraud Detection Tools: Utilize tools such as Address Verification Service (AVS), Card Verification Value (CVV) checks, and 3D Secure to verify the identity of the cardholder and detect potential fraud. Machine-learning based fraud detection tools can also be an effective check on fraudulent transactions. The correct balance between fraud prevention and customer friction will vary from one business to the next.
• Transaction Monitoring: Regularly monitor and analyze transaction data to identify patterns indicative of fraud. Look for unusual purchasing behaviors, such as multiple high-value transactions from the same IP address, or transactions from high-risk countries.
• Multi-Layered Authentication: Implement multi-factor authentication (MFA) for transactions and account logins, especially for high-value purchases or transactions after account data (such as the shipping address) has been changed. This may include requiring additional verification steps, such as sending a one-time password (OTP) to the customer’s phone.

Preventing Merchant Error Chargebacks

Merchant errors can be a significant contributor to chargebacks, often stemming from simple mistakes during transaction processing. Entering the wrong transaction amount, billing the customer twice, or charging the wrong account can lead to immediate customer dissatisfaction and subsequent chargebacks.

To prevent these issues, merchants should ensure staff are well trained in operating any payment system in use. Implementing internal controls, such as requiring dual verification for large transactions, can also help minimize the risk of these errors.

Authorization-related problems are another frequent cause of merchant error chargebacks. For instance, failing to obtain proper authorization before processing a transaction, or proceeding with a transaction after an authorization has expired, can lead to disputes. Regular training for employees on the importance of adhering to these protocols can reduce the risk of chargebacks due to authorization issues.

Another challenge in preventing merchant error chargebacks arises in industries where the final transaction amount is not always known at the time of authorization, such as car rentals and hotels. In these scenarios, merchants often obtain an authorization for an estimated amount, which may differ from the final charge once the service is completed.

For example, a hotel may authorize a certain amount at check-in, but the final bill could be higher due to added expenses like room service or incidentals. If the final charge significantly exceeds the initial authorization, customers may dispute the transaction, leading to a chargeback. To mitigate this risk, merchants should attempt to obtain a new authorization if the charges are likely to exceed the original estimate by a significant margin.

Preventing First-Party Misuse

Preventing first-party misuse, also known as friendly fraud, is where things get more complicated. The reasons behind these chargebacks vary widely, and the exact strategies best suited to prevent them will depend on the merchant’s industry, business model, and customer base. However, there are a number of general principles that can help any merchant reduce chargebacks due to first-party misuse.

Clear Billing Descriptors

When customers see unfamiliar or unclear billing descriptors, they may not associate the charge with their purchase, leading them to mistakenly initiate a chargeback. A well-crafted billing descriptor should include a merchant name the customer will recognize as well as a customer service phone number.

Dynamic billing descriptors can be used to include more specific information. By ensuring that the descriptor is recognizable and informative, merchants can minimize confusion and prevent chargebacks that result from customers failing to identify legitimate charges.

Setting Expectations

Clear communication with customers is crucial in preventing chargebacks, as many disputes arise from customers getting an unpleasant surprise. Merchants can minimize these risks through:

• Accurate Product/Service Descriptions: Ensure that product descriptions are detailed, accurate, and match what the customer will receive. Include high-quality images, dimensions, and other relevant information to set the right expectations.
• Clear Return and Refund Policies: Clearly outline return and refund policies on the website and ensure they are easily accessible. Providing detailed instructions for returns can help prevent disputes related to dissatisfaction with the product or service.
• Notification of Future Charges: For subscriptions and other recurring charges, notifying customers whenever a new charge is about to be processed can prevent chargebacks from customers who intended to cancel before the next payment.

Enhancing Customer Service

Good customer service can prevent disputes from escalating into chargebacks. Merchants should focus on:

• Multiple Support Channels: Offer various customer service channels, including phone, email, and live chat, to ensure customers can easily reach support. Ensure that all channels are staffed with knowledgeable representatives who can assist customers effectively.
• Responsive Communication: Ensure that customer inquiries and complaints are handled swiftly and professionally. Slow or unhelpful responses can lead frustrated customers to initiate chargebacks.

Chargeback Analytics

Truly effective chargeback prevention requires a customized strategy that can only come from detailed analytics. By using analytics to identify the root causes of chargebacks, merchants can understand why chargebacks are occurring and take targeted actions to prevent them. Here are a few examples of chargeback causes that can be revealed by analytics:

• Repeat Offenders: Some fraudsters will target a business repeatedly if they succeed in making a chargeback claim against them. These repeat offenders aren’t always obvious, and often make efforts to obscure their identity. Through analytics, repeat offenders can be identified and blocked from making any further transactions.
• Problem Locations: For businesses with multiple locations, problems with training or equipment at a particular location can lead to increased levels of chargebacks. This can be a store where employees aren’t processing transactions correctly or a warehouse where unreliable equipment leads to shipments being misplaced.
• High-Risk Products: Certain products are more attractive to fraudsters than others. By identifying products where chargebacks occur more frequently, merchants can employ additional layers of authentication or stricter fraud controls to reduce losses.

Analyzing chargeback data, whether in-house or using the technology of chargeback management company like Chargeback Gurus, is the most effective way to prevent chargebacks in the long run. Data-driven insights can inform process improvements that result in an ongoing reduction in disputes, often without ongoing costs.

Continuous Improvement

Chargeback prevention is a multifaceted challenge that requires a combination of proactive and reactive strategies. And as the payments landscape continues to evolve, so too must the strategies for preventing chargebacks. By implementing robust fraud prevention measures, enhancing customer communication and service, and analyzing chargeback data, merchants can enhance their risk mitigation efforts and set their business up for lasting success.