Guide: Merchant Chargeback Protection
Credit card chargebacks pose a serious and growing threat to e-commerce merchants. It might seem like chargebacks are just one of the many costs of doing business, but the reality is that 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, fraudulent chargebacks can end up costing up to 40% of your revenue.
The reason chargebacks are so damaging is because they cost far more than the transaction amount they seek to 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 various types of chargebacks to watch out for:
- True fraud chargebacks, against fraudulent or improper charges that the customer should not be held responsible for
- "Friendly fraud" chargebacks, initiated by the customer against legitimate charges
- Merchant error chargebacks, where payments were processed incorrectly
If you're wondering how 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
Understand Your Root Causes
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 divergent 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 customer disputes
Put Chargeback Protection Methods in Place
Some of the best methods of chargeback prevention are simple and intuitive.
For true fraud chargebacks:
- Use Address Verification System (AVS) and Credit Verification Value (CVV) protocols
- Screen incoming orders for red flags like address mismatches, rush shipping requests
- Contact customers whose orders contain red flags to verify that the purchase is legitimate
For friendly fraud chargebacks, your best defense is excellent customer service. Friendly fraud often happens when a customer can't get the resolution 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 comprehensive refund policy
- Fulfill orders promptly and be communicative and transparent about any delays
- Use clear transaction descriptors so your customers can easily recognize your charges on their credit card statement
Improving your internal operations and procedures can eliminate many merchant error chargebacks. Some suggestions:
- Use a strong Customer Relationship Management (CRM) system
- Screen orders for duplicates, address errors, and other potential issues
- Quickly and proactively issue refunds for erroneous orders
- When you're not sure if an order is correct or valid, contact the customer directly before charging their card
Enlist Help from Third-Party Protection Tools
Another way to protect your business from chargebacks is to use tools and services provided by third parties.
Chargeback alerts, offered by companies like Ethoca and Verifi (as well as chargeback management companies, who may bundle alerts from both services), provide an early warning system for chargebacks that gives you a chance to respond to them before they reach the banks' attention.
In most cases, you can make the chargeback go away by refunding the customer. 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.
To combat stolen card 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
Call in The Cavalry
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.
Chargeback management companies have the experience, resources, and 24/7 availability to fight chargebacks more effectively than most small businesses can on their own.
Retaining their services isn't cheap, so it's important to weight the costs against the fees and loss of revenue continued chargebacks will cost you. 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!