Chargebacks are a good thing. Small business owners will probably disagree, but the chargeback program is a form of consumer protection provided by card-issuing banks designed to hold businesses accountable for failure to deliver their products or services. They occur when a customer contacts their bank to dispute the legitimacy of a payment appearing on their credit card statement and the bank forcibly reverses the transaction, returning the funds to the consumer.
For the consumer, the chargeback program seems ideal. Of course, there is a dark side. The associated fees of a chargeback fluctuate depending on the industry, but can be as much as $100 USD per chargeback. This is a costly and significant burden to bear for entrepreneurs and small-to-medium sized enterprises (SMEs). Additionally, more than half of all chargebacks are associated with fraud, resulting in losses of up to $100 billion USD per year.
Chargebacks are a two-way street, however. Both parties are given the opportunity to present evidence to support their claim. The program is inherently biased toward the consumer – most chargebacks result in the transaction being reversed and the merchant being fined – but if you, as a business owner, believe you did nothing wrong and take cares to document the sales and fulfilment process, you can dispute the claim and prevent the chargeback.
The Costs and Causes
Globally, credit cards are still the most popular online payment method. Even if they are not the preference of your customer base, offering multiple payment methods, including credit cards, is a sure way to increase your conversion rate. If you accept credit card payments for your products or services, you can count on having to deal with the occasional chargeback.
It’s hard to predict a business’ chargeback rate. Some industries are hit harder than others: in the first three months of 2015, a whopping 24% of all digital goods purchased in the UK were hit by chargebacks, and both the Beauty and Diet & Nutrition product categories experienced chargeback rates above 12%. The typical chargeback rate, however, is much lower, below 0.5%.
The fines associated with chargebacks can amount to thousands of dollars per month on their own, but the real cost can actually be much higher than that. In addition to the fines, you also lose the revenue from the original transaction, and with it the money invested in making the sale, the price of merchandise and the shipping costs involved in getting the product to the customer. And if your chargeback rate exceeds 1%, you could be facing more fines from your payment provider and could even lose your ability to process credit card payments at all.
The best way to combat chargebacks is to understand them and to anticipate when they might arise. Once you have this information, you can take steps to correct the issue in time to prevent the chargeback from arising.
Here are the main causes of chargebacks:
- Technical: Due to a bank processing error, non-sufficient funds or an expired authentication, the transaction was not properly completed.
- Clerical: The cardholder was erroneously billed in duplicate, was billed the incorrect amount or was mistakenly never issued a refund.
- Non-receipt: The cardholder claims the product purchased was never received as promised.
- Fraud: The transaction was completed with stolen credit card information and processed without the legal cardholder’s knowledge.
- “Friendly” Fraud: The cardholder knowingly performed the transaction and the product was delivered as promised, yet they filed a chargeback dispute anyway.
For the first three causes, you can prevent chargebacks by being more diligent in your post-sales processes. Ensuring products are shipped on time is essential; same is true for timely refunding a customer before they have a chance to dispute double charges due to technical errors. If you fail to resolve these issues before your customer decides to take action, giving them a clear line of communication to your business and customer support team can also help you reduce chargebacks. Make sure your customers can come to you directly with their issues and they won’t need to file a chargeback through their card issuer.
For disputes arising from fraud, having the necessary fraud screening procedures in place can help keep this type of chargeback to a minimum. If your company is constantly dealing with chargebacks due to fraudulent transactions, that’s a sign that you must strengthen your fraud screening measures.
Friendly fraud, however, is no fault of your own. There are a number of reasons this could happen — perhaps the customer was confused by the transaction description or legitimately couldn’t recall making the transaction. Unfortunately, in most cases, friendly fraud is a deliberately dishonest tactic for consumers to receive goods without paying for them. In other words, it is theft.
Despite the fact that the burden of proof lies on the merchant, the good news is that according to Radial, 54% of challenges to chargebacks are won. So if you do have compelling supporting evidence suggesting that the chargeback is invalid, you should dispute it.
That being said, you should be selective of which disputes you challenge as it can be a lengthy process and can incur additional costs. Chargebacks are part of the cost of doing business in e-commerce. The goal then is not to completely eliminate your chargeback rate but rather to achieve a balance between chargebacks and sales, boosting your profits and keeping your losses to a minimum.
The best practice is always to treat the cause rather than the symptom. This can be done in two very simple ways:
- Fraud Prevention – Enhance your fraud detection and controls. Enact a solid Know-Your-Customer policy. Participate in programs such as Verified by Visa and MasterCard SecureCode. Make sure that the customer’s shipping address matches the billing address on their card.
- Communication – Always be available for your customers. Answer phone calls, reply to emails, monitor comments online and on social media. Be open and transparent when communicating product costs, specifications, conditions and shipping times. Resolve customer complaints quickly so they never have reason to resort to chargebacks.
Especially for entrepreneurs and SMEs running on slim profit margins, the importance of controlling your chargeback rate cannot be understated. While you shouldn’t accept every chargeback without a fight, you also don’t want to waste time and resources on disputing every single one of them either. And don’t forget that chargebacks directly correlate to sales volumes, so sometimes, an increase in chargebacks is just a sign of how successful your business has become!