Chargebacks are a necessary evil of being in commerce. But business owners who operate in the eCommerce realm are subjected to ever-increasing levels of chargebacks. Chargebacks cost businesses in more ways than one, they can even force you into a high-risk merchant account.
At its heart, the chargeback option was created by card issuing banks to protect their customers. It was meant to protect customers from substandard products and services. It protects consumers from having to pay for items never received. And to protect them from unscrupulous merchants.
But, over the years, consumers have also abused the chargeback option out of convenience and, sometimes, to steal. This type of “friendly Fraud” is on the rise, especially with the recent flock towards greater online commerce.
Unfortunately, when chargebacks get out of hand, it has a profound and costly effect on a business.
Merchant’s initial losses to chargebacks are triple fold. They cost the merchant the investment in the product and the product itself, the profits from selling it, and the fines and fees assessed for the chargeback filing. Chargebacks cost businesses billions of dollars each year.
But it doesn’t end there. Merchants that experience a high incidence of chargebacks are moved to a "high risk" merchant category by the banks. And that means they pay higher rates for their payment processing. They can also be required to open a reserve account where a portion of their funds are held for up to 180 days.
If chargebacks get out of hand and exceed the thresholds set by the card brands, the bank can freeze or even terminate the merchant account all together. Worse case scenario, problem businesses get put on the TMF or MATCH list.
If you’re not familiar, MATCH is MasterCard’s Member Alert to Control High-Risk Merchants. TMF stands for Terminated Merchant File. It's basically a black list that has become the industry standard referenced by Acquiring banks to determine an applicant’s risk.
The most important thing to keep in mind is that chargebacks protect the customer, not you. And as a merchant, you have to jump through hoops to fight a chargeback and prove a legitimate sale.
The best thing you can do is everything you can to prevent chargebacks before they happen. Some chargebacks are stopped by increasing and updating security measures. Others are avoided by addressing the root cause and eliminating the need to resort to the chargeback as a solution.
We could go into a whole article about why chargebacks happen (and we have). But what might be a whole lot more useful are tips and steps you can take to prevent chargebacks. Besides, many of the tips for prevention inherently address the “why” of chargebacks.
So without further ado, here are 9 tips for preventing chargebacks.
1. Create honest Product Descriptions/Promises:
Sometimes, to lower the chance of a chargeback, you need to start long before the actual sale. That means beginning with the things you do and say on your website. Chargebacks are often initiated because the product wasn't as described or didn't meet the customer’s expectations.
Don't over promise and under deliver. Be realistic with product descriptions. Make sure your products can live up to customer expectations.
2. Create a customer-centric Returns and Refund Policy:
Merchants who create very clear and easy to find Return and Refund Policies have customers with normal expectations. When your policies are as customer-forward as possible, they’re more likely to turn to you to resolve an issue. If they don’t like the terms of the policies or they’re difficult to manage, it's easier to resort to a chargeback. At the end of the day, a refund and happy customer costs way less than a chargeback followed by a disgruntled customer.
3. Set Clear Shipping expectations followed by ongoing Shipping Stats:
Management shipping expectations by clearly listing estimated shipping times. Make sure you continue to stay in contact throughout the delivery process and notify of any delays. This way customers will be less likely to assume they never received the product and file a chargeback. Plus, it’s just good customer service.
4. Subscription services Special Note:
We all know that when it comes to free trials and recurring/subscription orders, customers just seem to brain fart. Because of this, auto-renew and subscription services are particularly susceptible to chargebacks. Provide a quick and easy way for customers to manage or cancel subscriptions. Make sure to send reminder notifications to customers prior to the renewal date. Offer refunds for customers who no longer need your services. Customers who have a satisfying refund or cancellation experience are much more likely to return when they want the service again.
When you provide exceptional communication and customer service, you’ll notice your chargebacks dwindle.
5. Meet Payment Security Standards:
Make sure you are following all security protocols for credit card processing. Then you need to make sure to regularly update your security protocols to the most recent standards. In fact, PCI DSS will be rolling out new security standards (PCI DSS v4.0) later this year.
Be sure to use AVS and CVV2 to verify card-not-present transactions. Keeping security standards up to date and following the correct payment processing protocols can go a long way to reducing chargebacks.
6. Advanced Fraud Detection Measures:
Stats show that 30% of chargebacks filed are due to stolen credit cards. There are things merchants can do to flag potentially fraudulent transactions. Utilize the transaction thresholds and parameters available within your payment gateway to flag sketchy transactions.
You want to focus on any transactions that are out of the norm for your business. You can set red flag notifications for transaction types that fit the fraud profile. Things like excessively large purchases, delivery to a different address than the billing address on file, or from countries well known for fraud. This allows you time to review the sale before the transaction goes through and decide if it seems legit.
7. Payment Descriptors:
I can't say it enough. Customers want convenience. And they don't like anything that creates friction. Frictionless is a word we use a lot in the payments industry. Your payment descriptor is the business name that appears on the customer’s bank or credit card statement. When you use a code name and the customer can't figure out what the heck it is, they get scared. If they have to go Google the name and try to figure out who you are, you’ve caused friction.
But when you put your name clear as day right there on the statement, it's like “Hi! You know us!”. And when you include your phone number right there with it...you're saying - “We’re here for you! We’ve got nothing to hide”. Convenient. Frictionless. And as a bonus, you’ve secretly built trust with the customer too.
8. Superior Customer Service:
81% of customers say they filed a chargeback simply because it was the most convenient option. Make it more convenient for them to deal with you. And this goes back to the refund/return policies. If they know it will be easy to talk to you, they’ll be more likely to do it. Again customers hate friction. They aren't going to call you if it's going to be difficult to deal with you and hard for them to get what they want.
9. Chargeback prevention and management software:
Chargeback prevention software catches a transaction dispute before it becomes a chargeback filing. It pauses the chargeback, giving you time to contact the customer and resolve the issue in a satisfactory way. This can be very beneficial for businesses that are particularly prone to chargebacks.
Certain business types are more prone to chargebacks than others. If you're in one of these high-risk industries, it's beneficial to enlist the help of the pros. Anytime you can prevent an issue from turning into a chargeback, you’ve made headway towards keeping your ratio in check.
Chargeback prevention conclusion
Chargebacks cost U.S. businesses billions of dollars every year. Every one of those dollars is a reason to take steps to reduce your incidence of chargebacks.
Once you’ve taken these steps to reduce the incidence of chargeback filings, all you have to do is continue to monitor your processes. Monitor and evaluate. Monitoring can help reveal weak spots in your security as well as your processes.
Evaluating the data will reveal areas that most chargebacks stem from allowing for improvement. You’ll spend less time fighting chargebacks and find a positive impact on your bottom line.
And lastly -
Keep an eye out for our follow-up article to Preventing Chargebacks - "Tips For Fighting Chargebacks You Couldn't Prevent"!
In this article we’ll give tips on the best way to handle or fight chargebacks when, inevitably, you do have one.
If you’d like to find out more about preventing chargebacks or how we can help our merchants, call us today.