It’s never too late to take action to prevent chargebacks. However, prevention is somewhat like insurance: the best time to start it is before you need it. You’re much better off acting before chargebacks become a problem.
There’s no “set it and forget it” solution for preventing chargebacks, though. Both immediate and long-term chargeback reduction requires a well-planned, multi-tiered strategy.
In this post, we’ll explore some of the best steps you can take to stop chargebacks before they happen. First, though, we need to ask an important question: why are chargebacks such a problem?
The Problem with Chargebacks
A chargeback is a bank-initiated refund for a credit card purchase. Rather than request a refund from the merchant who facilitated the purchase, cardholders can dispute a particular transaction by contacting their bank and requesting a chargeback.
Chargebacks were designed to be a type of “safety net” that allowed cardholders to retrieve money lost to fraudand other unauthorized purchases. While it still serves that purpose, the process was created nearly half a century ago-long before the rise of eCommerce.
The system has not kept up with the changes in technology. Many customers game the system by going straight to the bank with illegitimate claims; a practice known as friendly fraud. This occurs when authorized cardholders (innocently or deliberately) bypass the merchant and file chargebacks to recover their money. Ironically, today’s retailers lose billions of dollars each year through a system originally designed as consumer protection.
Some merchants are willing to write this off as an unavoidable cost of doing business. That may be due to misunderstandings of how much they actually lose to chargebacks.
A successful customer dispute means you lose revenue from the sale, as well as the cost of any merchandise shipped. You also lose ancillary costs like shipping, fulfillment, interchange, and restocking fees, and will get hit with chargeback administration fees, too. Overall, studies show that every dollar lost to a fraud will ultimately cost you a total of $3.60.
8 Tips to Prevent Chargebacks
Businesses in the card-not-present (CNP) space are the most vulnerable to chargebacks. This is because you never actually have physical contact with the card or customer signature.
Still, preventing chargebacks caused by CNP fraud is vital to protecting your bottom line. You have to understand where the process breaks down, and what you can do about it to prevent chargebacks. These seven tips can help you build a better strategy to prevent disputes and protect your revenue.
Take Advantage of Chargeback Prevention Tools
As we mentioned earlier, there is no “one-size-fits-all” approach to chargeback prevention. That said, there are several tried-and-true tactics that will help. These tools have limited utility on their own, but they work very effectively when combined as part of a multilayer strategy.
Start by leveraging common validation tools such as Address Verification Service (AVS), geolocation, and 3-D Secure, and by requiring card security codes (CVV2, CVC2, etc.) at checkout. Ideally, you should also require secondary identification, such as a PIN, fingerprint, or one-time use code sent to the customer if this is an option.
You should also take advantage of card network response programs like Order Insight for Visa, and Customer Clarity for Mastercard. These tools help clear-up customer confusion and invalidate unwarranted claims.
Up Your Customer Service Game
Customers want to feel supported throughout the transaction process. If they feel you’re willing to work with them, they’re less likely to turn to the bank. Here are some suggestions taking your customer service to the next level.
- Share contact information everywhere: Share phone numbers, email addresses, and social media links anywhere a customer might look for them. Every page of your website, on receipts and invoices, even on packaging-all should feature links to your contact info.
- Be available by phone: Having contact information is pointless if your phones never get answered, or if customers must talk to a machine. Answer all phone calls in 3 rings or less.
- Expand customer service hours: Customers expect a reply to their service inquiry within 48 hours at the most. With eCommerce, you’re making sales 24/7, so you must expand customer service hours to match.
- Provide immediate email responses: Automatically acknowledge all inquiries. Let customers know you received their message, then follow up with a personalized response within three business days.
- Monitor social media accounts: Monitor social media accounts regularly and acknowledge customers comments (both praise and grievances) within the hour.
- Communicate the order status: An email and tracking number upon pick-up will let the buyer know the order has been filled and shipped. If an item is unavailable or on backorder, tell the customer as quickly as possible. Always give them the option of cancelling the order.
Prevent Any Chargebacks You May Cause by Accident
No one wants to hear that they could be causing their own problem. However, the truth is that merchant errors could be responsible for up to 40% of chargebacks.
Oversights, innocent mistakes, obscure policies, and seemingly-minor missteps can trigger disputes. Fortunately, chargebacks from merchant errors are entirely preventable; all it takes is a little extra vigilance.
One of the best ways to reduce risk is to adhere to card acceptance best practices while strictly following network regulations.
- Check and verify cardholders.
- Never accept an expired card.
- Never try to force a transaction without authorization.
- Ship products within 7 days.
- Submit transactions for processing within 3 days.
- Grant credits and cancellations as soon as the customer asks
Optimize Your Policies
Of course, simply sticking to best practices isn’t always enough. In most situations, you have to go above and beyond to avoid chargebacks resulting from customer confusion.
Your fulfillment procedures and shipping policies should be as prominently displayed and easily accessible as your contact information. This includes timeframes for processing, suggested drop dates, and shipping options.
The same holds true for cancelation and return policies. A confusing or hard-to-find return policy will simply encourage customers to give up and file a chargeback.
We should point out that identifying problem areas in policies and practices can be difficult. Your familiarity with your business may cause you to miss things.
Professional, unbiased analysis from a chargeback expert will expose actionable areas and may even expose some opportunities to avoid chargebacks and boost revenue at the same time.
Make Marketing as Honest as Possible
Product descriptions should incentivize customers to buy. That said, insufficient, misleading, or incorrect information can lead to returns…or to chargebacks.
Customers-especially online shoppers-count on you to provide accurate details and specifications for everything you sell. Check all service and product descriptions to make sure they are as factual as possible.
To prevent “item not as described” chargebacks, post clear product pictures from multiple angles, including close-ups. Adding video is even better; experts say shoppers who view a video are more likely to buy and less likely to make returns.
Prevent Chargebacks from Recurring Billing
A recurring payments (subscription) business model benefits both you and your customers. That said, the use of recurring payments creates its own unique set of chargeback risks.
To prevent chargebacks from recurring billing missteps, it’s best to start at the very beginning. Clearly state the terms of service before processing the initial transaction.
Explain when the credit card will be charged, as well as any additional fees or restrictions, including early termination fees. Then require subscribers to check a box or click an “accept” button to indicate they are aware of, and agree to, the terms of service.
At the other end of the process, make it simple and painless for customers to cancel a subscription. A complex procedure won’t stop anyone from cancelling, but it may lead to chargebacks. It’s also important to inform customers ahead of time if there are alterations to the contract, such as a change in the payment rate.
Fight Friendly Fraud
We’ve talked a lot about criminal fraud in this post. In realty, though, internal data from Chargebacks911 suggests that 60% of all chargebacks will be likely cases of friendly fraud by 2023.
The only true remedy for friendly fraud-both in the short and long term-is to aggressively and intelligently challenge all invalid chargebacks through the representment process. Knowing you will challenge a claim can incentivize banks to take a closer look before filing a chargeback.
Also, ignoring friendly fraud reinforces the idea that such behavior is acceptable. This explains why nearly half of consumers who get away with friendly fraud will do it again within 90 days.
Simply put, if an act has no consequences, there’s no reason to stop doing it. Representment lets you recoup your losses and help retrain customer behavior in the process.
Seek Added Expertise
This may seem like a lot of information, but the truth is that it’s hardly an exhaustive list. Implementing all these steps-and more-would deliver the biggest impact, but start wherever you can. The sooner you begin, the sooner you’ll see results.
That said, do-it-yourself prevention tactics are typically only able to address the “low hanging fruit;” the easily-preventable chargebacks caused by obvious mistakes and mismanagement. Most types of chargebacks can only be countered with intensive management efforts that surpass DIY tactics.
Technology evolves constantly. New chargeback threats appear daily. The kind of in-depth chargeback management necessary to prevent chargebacks requires time, effort, and resources that could otherwise be allocated to growing your business.
According to the recently published Chargeback Field Report, merchants who worked with a third-party to manage chargeback responses reported lower chargeback rates and increased revenue.