Guide: Merchant Chargeback Protection

Table of Contents

1. What causes chargebacks?
2. What are common chargeback protection methods?
3. Third-party chargeback protection tools
4. Leave chargeback protection to the experts
5. Can a merchant refuse a chargeback?
6. Do companies get charged for chargebacks?
7. How long does a company have to dispute a chargeback?

Chargeback protection is an important aspect of any modern eCommerce business. Credit card chargebacks are on the rise, in part due to growing levels of online fraud.

It might seem like chargebacks are just an unavoidable cost of doing business, but the reality is that they can be prevented in many cases, and they're far more pernicious than they may seem at first glance. Collectively, merchants are losing nearly $4 billion to chargebacks each year. Left unchecked, chargebacks can be a major drain on your revenue.

The reason chargebacks are so damaging is because they cost far more than just the transaction amount they reverse. When you add in the bank fees, overhead, and other associated costs, the true cost of a chargeback can be up to two and a half times the original amount.

When you look at the numbers, it's clear that protecting yourself from chargebacks should be a priority for every merchant.

There are three main types of chargebacks to watch out for:

• True fraud: The purchase was made using stolen payment credentials.
• Merchant error: The merchant made a mistake in processing the payment or delivering the purchased goods or services.
• Friendly fraud: The cardholder got what they paid for but disputed the charge out of ignorance or ill intent.

If you want to protect your business from credit card chargebacks, the first thing to do is take steps to prevent them from happening in the first place. To do that, you need to understand the root causes of the chargebacks you've been getting

Different types of chargebacks happen for different reasons.

There's no one-size-fits-all solution that works to prevent every type of chargeback, and two merchants in the same industry can have wildly different reasons for the chargebacks they're each getting.

That's why tracing chargebacks to their root causes is the first step in planning a prevention strategy.

Fortunately, every chargeback comes with a reason code that will tell you where to start looking. The reason codes will tell you if chargebacks are occurring due to authentication errors, fraud, processing issues, or cardholder disputes.

Unfortunately, the reason code doesn't always give you the real reason that cardholder filed a chargeback. In cases of friendly fraud, you might see reason codes indicating true fraud or damaged goods when the real cause is something else entirely.

Preventing true fraud chargebacks means making sure your customers are who they say they are. There are a wide variety of fraud prevention tools available with varying capabilities, but common methods include:

• AVS/CVV matching
• 3-D Secure
• Velocity checking
• Fraud risk scoring

For friendly fraud chargebacks, your best defense is excellent customer service. Friendly fraud often happens when a customer can't get the result they want from the merchant, they lose their patience, and they take it up with their bank instead.

If your customers know they can come to you with their issues and get a quick and satisfactory response, your friendly fraud rates should go way down.

The following specific approaches can also help: 

• Set realistic product expectations that don't leave your customers feeling disappointed or misled
• Have a clear and generous refund policy
• Fulfill orders promptly and notify customers of any delays
• Use clear a merchant descriptor so your customers can easily recognize your charges on their credit card statement

As you might expect, preventing merchant error chargebacks simply means improving your business operations to reduce errors. What specific problems you need to address will depend on the reasons your customers are filing chargebacks, but here are a few general suggestions:

• Use a reliable customer relationship management (CRM) system
• Screen orders for duplicates, address errors, and other potential issues
• Quickly and proactively issue refunds for incorrect or canceled orders
• When you're not sure if an order is correct, contact the customer directly before charging their card

Third-party chargeback protection tools

Another way to protect your business from chargebacks is to use tools and services from third parties that are designed to prevent chargebacks.

Chargeback alerts, offered by companies like Ethoca and Verifi (as well as through chargeback management companies, who may bundle alerts from both services), provide an early warning system for chargebacks

When a customer contacts their bank to dispute a charge, either you or a chargeback management company working on your behalf will receive an alert. In most cases, you can prevent a chargeback by immediately refunding the customer immediately if you wish.

You lose the sale, but the chargeback won't be counted against you by your bank, so you won't risk getting higher fees or losing your merchant account due to excessive chargebacks. You also won't be assessed a chargeback fee.

To true fraud, you can use tools like 3-D Secure. This embeds technology in your checkout page that communicates with your customers' issuing banks to verify their identity and validate the transaction

Leave chargeback protection to the experts

If you're suffering from a high number of chargebacks, losing significant revenue, or teetering at the edge of your chargeback threshold, it might be time to get help from the experts.

A good chargeback management company will have the experience, resources, and 24/7 availability to fight chargebacks more effectively than most small businesses can on their own.

Even larger companies that handle chargebacks in-house have been shown to win disputes significantly less often than a chargeback management company can.

Retaining their services isn't cheap, so it's important to weigh the costs against the fees and loss of revenue from continued chargebacks. However, when you don't have the time and staff necessary to put up a good defense, remember that there are professionals out there who can step in and come to your rescue!

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