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.
Chargebacks can occur for a variety of reasons, but they generally fall into three main categories:
Each of these types of chargebacks requires a different approach to effectively prevent them.
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:
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, 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.
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.
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:
Good customer service can prevent disputes from escalating into chargebacks. Merchants should focus on:
Chargeback prevention alerts give merchants an early warning when a customer initiates a dispute, allowing them to take action before the chargeback is officially filed.
Instead of learning about a dispute weeks later when it’s already counted against your chargeback ratio, an alert gives you a short window to refund the transaction and avoid a chargeback. By intercepting disputes at this stage, merchants can reduce their chargeback ratio and avoid penalties from acquirers and card networks.
When a customer contacts their issuing bank about a charge, the bank typically begins the chargeback process. In most cases, the merchant would never know until the dispute is finalized. However, when enrolled in an alert program, such as Verifi’s Cardholder Dispute Resolution Network (CDRN) or Ethoca Alerts, that process is paused.
The merchant receives a near-real-time notification—often within hours—giving them the opportunity to issue a refund before the case becomes a chargeback. If the merchant believes the claim is invalid, they can let the process continue and prepare to dispute it through the standard representment channels.
While there is a cost associated with alerts—typically $35–$40 per alert, depending on volume—the savings can be substantial for merchants who would otherwise exceed the chargeback ratio limits set by card networks. The fees associated with the Visa Acquirer Monitoring Program (VAMP) or the Mastercard Excessive Chargeback Program often far outweigh the cost of alerts in the long run.
The two major alert networks, Verifi and Ethoca, cover most issuing banks across the U.S., Canada, Europe, and Asia. Many merchants choose to enroll in both for the broadest protection, often through an authorized reseller such as Chargeback Gurus.
Based on Chargeback Gurus internal data, alerts can prevent anywhere from 17% to 41% of chargebacks, depending on factors like product type, transaction volume, and customer location. For example, digital goods tend to see higher interception rates than physical products, since those transactions often have clearer digital evidence and faster resolution paths.
For merchants that want the benefits of alerts without the operational overhead, fully managed alert services are an effective option. In a fully managed model, a dedicated team monitors incoming alerts, issues timely refunds, and applies custom response rules based on transaction risk and business goals.
This approach combines automation with expert oversight, ensuring that complex or high-value cases receive the right level of review. Merchants can even configure alert settings to disable low-value notifications or apply unique refund strategies, reducing unnecessary costs while maximizing prevention rates.
Partnering with a chargeback management provider that’s authorized to resell Verifi and Ethoca alerts ensures full coverage and expert administration. Providers like Chargeback Gurus can integrate additional services—such as Visa Rapid Dispute Resolution (RDR) and Amex Advance Dispute Resolution (ADR)—to create a unified prevention ecosystem.
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:
Analyzing chargeback data, whether in-house or using the technology of chargeback management company, 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.
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.