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How to Understand, Avoid, and Win Chargebacks

by Kimberly Baylies on July 24, 2020

In these times, when it comes to fraud and chargebacks, we have the makings of a perfect storm. First, more people are shopping online more often than ever before. At the same time, there’s been a significant increase in online payment fraud in recent years.  And consumers are living in fear of losing their money and becoming a victim of fraud. These scenarios combine to create a whirlwind of chargeback filings. There’s never been a more important time for merchants to take a proactive role to fight fraud and chargebacks. In this article, we’ll talk about how to avoid chargebacks and win the ones you can't avoid. Also covered, how to tap into tools offered by your high-risk merchant account provider to help reduce fraud and chargeback incidence in eCommerce.

Fighting chargebacks is just as important as avoiding them.  Learn how to be prepared.Fighting Fraud and managing chargebacks has never been more important.

Fraudsters take the path of least resistance. Implementing EMV chip technology made it more difficult for fraudsters to commit credit card fraud. So as cybercriminals do, they adapted.  In the wake of the EMV switch in the U.S., eCommerce saw an increase of 33% in online fraud in the first year. That was 2016.

Four years later, eCommerce fraud has hit an all-time high. In fact, researchers found that the beginning of 2020 experienced the highest attack rate they’ve seen. According to recent reports, 26.5% of all transactions over the first quarter of 2020 were fraud attempts. This number is 20% higher than in the last quarter of 2019. The increase is likely due to the vast increase in digital transactions we’re experiencing because of Covid-19.

The recent business shutdowns and shelter-in-place orders have resulted in more online shopping than ever before. Not only are consumers doing more shopping digitally, but they’re finding they like it! In a recent study by Statista, experts projected e-retail revenues to grow to $6.54 Trillion by 2022. 

The digital payments landscape is evolving rapidly. At the same time, fraudsters have greatly increased their efforts. They estimate that online payment fraud will cost online sellers $180 Billion dollars over the 5-year period between 2018 and 2023.

Unfortunately, these trends are a recipe for increased fraud and chargebacks filed against online merchants. With more consumers shopping online, there’s a greater chance of them committing friendly fraud (chargebacks). And, with more online shopping, there’s also a greater increase in true fraud. More fraud leads to consumers filing more chargebacks. Can you see how this is a vicious cycle?

Both consumer chargebacks and fraud are extremely costly for merchants.  Between chargeback fees, operational costs, and lost transaction fees, chargebacks result in the loss of 2-3 times the transaction amount. In 2019, fraud cost U.S. retailers $3.13 for every dollar of fraud committed. By that calculation, U.S. merchants pay over three times the cost of the initial theft when they’re victims of fraud. 

Merchants must take steps to reduce and prevent fraud more than ever before.

As more and more merchants take to the internet they have to be prepared to prevent fraud.To reduce the incidence of chargebacks, we first need to understand what a chargeback is and why they happen. Once we understand that, we can consider ways to avoid the situations that lead to a chargeback.

A chargeback is pretty much what it sounds like. It's a reversal of a payment transfer. When a customer makes a purchase, the merchant charges their credit card. When a chargeback is filed, that initial credit card charge is charged back to the merchant. The card issuing bank orders the chargeback to reimburse the customer who disputes a charge on their account statement.

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Chargeback rules were put in place to protect the customer in the event they fall victim to credit card fraud. If a customer wants to dispute a charge on their credit card, they call the bank and file a chargeback. The bank will then transfer the money from the merchant’s account back to the customer’s account. There’s a small window of time allowed for the processing bank to gather information that either supports or debunks the claim. It's during this period the merchant has the chance to dispute the chargeback claim and submit proof of the purchase. If they ignore the chargeback claim, cannot prove the validity, or find there was fraud, the refund is finalized.

Why chargebacks happen even when there is no true fraud.

Don't let so called friendly fraud cost your businessEven though banks designed chargeback policies to protect consumers from fraud or identity theft, they often abuse the benefit. Consumers will dispute a charge for reasons that don't align with what the policy was meant for. There was no actual real fraudulent use of the credit card. They just want their money back. This is referred to in the industry as friendly fraud because it is committed by a merchant’s own customer.

There are many ways a customer can commit friendly fraud:

Often they will use chargeback policy when they are not happy with the product or service they ordered. Sometimes they’ll claim they never delivered the product, or they did not receive it. Or they may file a chargeback when another family member made an unauthorized purchase with their card. Another common reason consumers file a dispute is because they don't recognize the company name on their statement.

With many of these types of chargebacks, the bank will perform a refund before notifying the merchant.

Chargebacks from friendly fraud are still a form of credit card fraud.  And unfortunately, friendly fraud makes up a sizable portion of a merchant’s total chargeback.

Not all disputes result in a chargeback, but they all affect your chargeback ratio.

The goal of avoiding chargebacks is two-fold. First, it will save you the expense that comes with fighting the claims. Second, it will help to keep your chargeback ratio at an acceptable level. Even if a merchant wins a chargeback dispute, it still goes on record and contributes to your chargeback ratio. Winning chargebacks will save money. But avoiding them keeps your ratios in check. Therefore, it's important to take steps to accomplish both.

You must have a plan when it comes to preventing chargebacks and fraudTo avoid chargebacks, start with the customer and friendly fraud.

As you may have discovered, many of the reasons customers file a chargeback can be avoided or resolved. Therefore, avoiding chargebacks begins with excellent customer service. The goal is to provide ample support for customers to get what they need. This way you can avoid them filing a chargeback claim to resolve their problem.

One easy way to avoid a claim is to make the company name easily recognizable to the customer. All too often, merchants will use a different business name for the merchant account than what is on their website. Customers don't recognize the name and file a chargeback. The payment description that appears on their statement should match your e-commerce storefront. This alone will save both you and the customer a lot of headaches.

Prominently display customer service contact information and hours of operation. The easier you make it for them to reach out, the more likely they’ll try to resolve the problem before resorting to a chargeback.

Make sure you have shipping rates and times clearly stated prior to purchase. Provide tracking methods for every product and deliver updates throughout the process. This way customers will know how long it’ll take for them to receive a product. Tracking not only keeps customers updated but also helps prove delivery.

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Another effective way to avoid chargebacks is to be generous with your refund policy. Give customers ample time to try the product or service with the confidence they won't get stuck with it. It's almost always far less expensive to make a complete refund than to deal with a chargeback.

Handle returns just like you do purchases. Utilize tracking on all returns, so you know for sure they made a return when refunding customers.

Stay in contact with the customer after the sale. This can include sending emails asking for feedback on the product or service and/or confirmation of delivery. You also want to send out reminders for upcoming recurring billing so customers expect the charge. Again, make sure you include information or links to update, postpone, or cancel the subscription. It is better to lose the sale and keep a future customer than to have a chargeback on your record.

Be prepared to fight.

Sometimes you have to fight.  Be prepared to fight and win chargebacksUnfortunately, some amount of chargebacks are inevitable, as long as you're in business you will have chargebacks. You're going to have to determine which chargebacks are worth fighting. It’s also important to keep in mind that even if you win, the filing will affect your chargeback ratio. Yes, it costs time to fight chargebacks. But it costs more to let people get away with it if it was a legitimate purchase.

If you decide to fight a chargeback, you must be armed with the proper proof. Merchants are only given a limited amount of time to respond to a chargeback claim. And every processor is different. You may have as little as 7 days to respond or as much as 30 days. You’ll need to provide receipt of purchase, tracking receipts to show delivery, and any proof the customer authorized the charge.

Since merchants are given such a brief window to dispute a claim, it’s important to find out about it as soon as possible and have all documentation ready. The best way to do that is to use a chargeback protection program.

A Chargeback Protection program gives you the support you need to fight chargebacks systematically.

Once you’ve taken steps to reduce friendly fraud by your own customers you can focus on the true cyber-criminals.  Chargeback management software applies a comprehensive system to identify common risk factors of chargebacks and help mitigate them. Chargeback management programs help prevent disputes by sharing transaction information between customers and issuing banks. This helps merchants quickly resolve disputes before they become a chargeback. And they handle dispute representment throughout the process to help recover lost revenue when merchants do have a chargeback.

It includes a real-time merchant notification system to give merchants more time to take a proactive approach. The alert system notifies merchants in real-time when a customer files a dispute. This gives merchants the upper hand by giving them time to act and potentially resolve the issue with the customer before it becomes a chargeback.

Entering a chargeback management program is the most effective way to manage “friendly fraud”, recover lost revenue and keep your chargeback ratio in check.

Bankcard International Group can help manage risk of fraud and chargeback preventionB.I.G. can help you manage risk for fraud and chargebacks and nip real fraud in the bud.

We have over 20 years of experience in the high-risk payment processing arena. Because we’re well versed in the risk factors involved, we know what solutions will best serve your needs.

The payment gateways we provide have PCI Level 1 security certification. This is the highest level certification available in the industry. It comes equipped with robust credit card fraud prevention filters and integrates with your existing shopping cart. These fraud prevention tools are your first line of defense against credit card fraud. They help to weed out fraud attempts that lead to customers filing a charge dispute. And when combined, they are very effective in credit card fraud detection.

Our Fraud prevention filters include:

Address Verification System (AVS), Card Verification Value (CVV), volume tracking filters, threshold filters, IP tracking, and tokenization. 

  • Address verification compares the billing address provided with the one on file with the card issuer.
  • CVV codes help to prove the user is the actual owner of the physical card.
  • Volume and threshold filters help detect irregular transaction amounts and flag them for review.
  • IP tracking can flag potentially fraudulent transactions from countries outside your set zone, or known high-fraud hubs.
  • Tokenization keeps sensitive card data from being decrypted and getting into the wrong hands.

Bankcard International Group is dedicated to providing our customers with a solution that makes accepting payments safe and affordable. We understand that it is just as important to avoid losing revenue as it is to keep your customer’s data safe. You can accomplish both of those things with great customer service, fraud prevention, and chargeback management. To learn more about how we can help you accomplish these goals give us a call. Our ETA-Certified payment advisors are here to provide you with honest advice and dependable solutions.

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Topics: High Risk Merchant Account, Fraud Management, eCommerce