You’ve been dreaming about starting your own online business and you have finally done it!
After months of effort, research, development, and trial and error, you have your ecommerce website up and running.
You have been taking in the fruits of your labor and then, one blissful day, while you’re busy thinking about how you’re business is blooming…
The chargeback appears!
What is a chargeback you ask?
Not to worry! Sit tight and we’ll explain everything you need to know about chargebacks including how to identify their causes and how to fix them.
What are Chargebacks?
A chargeback is a reversal transaction that is initiated by the cardholder’s, or your customer’s bank when they dispute a merchant charge. Meant to protect the cardholder as a fraud prevention tool, this service has become exploited by consumers in recent years.
The chargeback tool originates with the issuing bank, which is the financial institution backing the card. The chargeback process begins when the cardholder opens what is called a billing dispute with the issuing bank. In this dispute claim, the cardholder makes a formal statement with their card issuer that a company that was to provide them with a product or service did not deliver what was promised, and they would like their money back. A dispute can also be claimed by the cardholder if a single transaction has been processed more than once, and has resulted in a double or multiple charges. An additional chargeback dispute scenario is if a cardholder’s card has been used fraudulently without their consent. These are just a few examples of the circumstances that could initiate a chargeback for a merchant.
After opening a dispute, the issuing bank will usually immediately take the transaction funds from the merchant’s account, to recoup the funds on behalf of the cardholder. It is then up to the merchant to then to identify the reason for the chargeback, and determine if they wish to go through the process of responding and resubmitting the transaction back to the issuing bank if they believe the charge was legitimate and the chargeback was issued without merit.
Phew.That was a lot to grasp and we can all agree chargebacks are not your friend if you are a merchant. However, it provides valuable insight that can help you improve your business operations. That’s why it’s important to know the types of chargebacks that can occur.
Types of Chargebacks
We’ll help you get an understanding of chargebacks by listing them out for you. While different sources will define chargeback types in different manners, all fall under three distinguishable categories:
Criminal Fraud (1-10% of all chargebacks are caused by criminal fraud)
While it seems to be the least cause of chargebacks, criminal fraud still makes it on the list of chargeback types. This is primarily because this was the initial reason that chargebacks were introduced as a consumer protection mechanism.
These can occur when a stolen or lost card is found and used, counterfeit cards are made using the user’s information, or when the account information is used to make a card-not-present transaction.
Merchant Error (20-40% of all chargebacks are caused by merchant error)
Second, on the list are merchants themselves. Yes, it happens to the best of us. Whether it is an invalid authorization, a transaction charge being processed more than once, the user being charged more than expected, or simply not holding up your end of the bargain.
These are the easiest errors to eliminate. All you need is a little help from your payment services provider.
Friendly Fraud (60-80% of all chargebacks are caused by friendly fraud)
Finally, the most common type of fraud is the so-called friendly fraud. Friendly fraud occurs when cardholders file for a chargeback from their bank without first requesting a refund directly from the merchant.
Providing your buyers with around-the-clock customer and billing support can help reduce the need for your cardholders to contact their banks instead of coming directly to the source - you.
Now that you have been presented with the types of chargebacks, we can get into more detail and talk about the status of chargebacks in recent years.
The Rise of Chargebacks
At times, it can be mind-boggling when it comes to trying to understand the causes of fraud and chargebacks. However, as most business people know, looking at past and current data can provide some clues as to what one can expect in the future.
To prove this point, take a look at these figures provided by chargebacks911.com:
- 81% of customers freely admit to filing a chargeback out of simple convenience
- 86% of all chargebacks are probable cases of friendly fraud
- Friendly fraud increases at a rate of 41% every two years
- 49% of friendly fraud chargebacks resulted from a simple misunderstanding - The cardholder didn’t even know they were filing a chargeback
- Roughly 40% of consumers who commit friendly fraud will do it again within 60 days or more
This is better understood by looking at the actual chargeback process itself.
The Chargeback Process
The chargeback process is closely regulated by credit card associations. It typically carries a timeframe between 7 and 120 days, during which the chargeback can be filed.
Chargebacks filed after 120 days will not be accepted, though occasionally there are exceptions.
Some credit card companies require a waiting period before a chargeback can be filed. Also, before issuing the chargeback the issuer must make every attempt to ensure that the right to issue a chargeback is only exercised when the cardholder has been billed and refuses to pay the transaction amount.
Credit card associations such as Visa and MasterCard have specific rules and regulations regarding chargebacks for their accounts and the procedures that surround them. Each chargeback has what is known as a reason code, which is used by the bank to justify the chargeback. Each reason code has a specific set of criteria that must be adhered to justify the reason code, and therefore legitimize the chargeback. If the reason code criteria cannot be satisfied, then the chargeback cannot be processed.
The process looks something like this:
- The cardholder contacts their bank and states that they have a transaction that they would like to dispute, which could include:
- The charge was not authorized
- They did not receive what they paid for
- Their card was charged more than once for a single purchase
- If their bank agrees the transaction is a chargeback, they will issue the chargeback to the merchant, pull back the funds from the merchant’s account and return them to the cardholder’s account.
- Once receiving a chargeback, a merchant not only has the transaction funds pulled from their account, but they also are issued a chargeback fee from the bank.
- Merchants do have the right to respond, by fighting the chargeback with the issuing bank and sending it arbitration.
- If the merchant has evidence that supports that the transaction was valid, the arbitrator may side with them, and remove the chargeback from their record.
- If the arbitrator sides with the bank, the chargeback remains on the merchant's account.
To learn more about these chargeback costs and consequences, read the What It Means for Your Businesssection below.
So what now? How do you protect yourself and your business?
All this can be a hassle when you are not sure of your rights as a merchant.
Know Your Rights as a Merchant
Raise your hand if you knew that you could dispute a chargeback.
We thought so.
As mentioned above, there are a couple of measures available for you to prevent loss as a merchant.
First and foremost, if you have your own merchant account, then in most scenarios you will be responsible for handling chargebacks on your own. If you have a payment processor that is handling your payments, then they should be doing this for you.
One way to help prevent chargebacks is to clearly define your product to your customers in your product information and advertising. Also, make sure your refund and return policies are clearly outlined where your buyers can see and read them. These efforts can help ensure that the customer is following proper procedures and is taking the right amount of responsibility for their transaction. You will greatly minimize your chargeback ratio if consumers are fully aware of what to expect from the product and your policies.
Keep up to date with the latest news on chargebacks. As FinTech or financial technology evolves, so does the chance of chargebacks from new and not yet foreseen methods.
What It Means for Your Business
You may be asking yourself “Wait, how does this affect me and my business?” After all, a merchant can simply fight the chargeback and have their money returned, can't they? Let’s take a deeper dive into this question:
Chargebacks and Your Business
When it comes to how your customer views your business, if they have a reason to dispute and chargeback their transaction, it may cast a negative light on your brand and your reputation. The customer may see your business as the central point of failure. Also, if you receive a large number of chargebacks on your merchant account, the banks and credit card associations that file the chargebacks will most likely blacklist you as a fraudulent company, and your business loses credibility. Once this occurs, merchants, affiliate marketers, and your partners will be hesitant to conduct business with you.
Do you see the downward spiral that chargebacks can cause? Having a reputation in your industry means everything and a chargeback or two could put you at the back of the industry race.
Perhaps the biggest problem with chargebacks is the financial blow that is suffered by the business. Even when a chargeback is proven erroneous, merchant fees and administrative costs still impact the business. Sometimes cardholders will file for a chargeback even after they have received the goods or services that a merchant offered. If the business does not investigate such a chargeback, the merchant ends up losing revenue and potential future profit.
If chargebacks continue, there is the problem of fines inflicted on the business if chargeback rates are exceeded. This could get worse and your account could get terminated or blacklisted. What does that mean? Being terminated or blacklisted is like a serious disease for your merchant account, and once you reach this stage you will no longer be able to secure a new merchant account with a different processor for years.
Chargebacks and Business Owners
The moment chargebacks occur, you’re likely to see the importance of the items listed below.
A chargeback has hit your business and you know that you can fight it. What’s the first thing you need? Documentation to prove the chargeback is illegitimate. This requires resources, time, and professional help. Keeping track of all purchases, transactions, and each client is a tedious and difficult task. Without the right support, it can translate to serious costs for the business.
Once a chargeback occurs, you’re going to need some form of customer service to handle disputes because handling it on your own can be difficult and time-consuming.
Hold on, do you have customer service? This could also be the reason that you have gotten a chargeback and not a refund request.
One of the most frequent chargeback issues occur when a package does not reach the cardholder who purchased it, is not delivered on time, or the item is not as it was described. Having a reliable shipping service at your disposal is of great value as this eliminates much of the hassle of chargebacks.
Cardholders tend to file chargebacks through banks instead of reaching out to the merchant because of presumed hassles communicating directly with the business. This is where a good reputation and a great customer service department is essential. A recent study found that over 80% of cardholders filed a chargeback simply to save the time it takes to request a refund from the merchant.
I know what you’re thinking; why would cardholders want to do this to businesses? Is it done out of spite? How does all this happen?
Why Chargebacks Happen
Wouldn’t life be easier if dissatisfied cardholders just asked for a refund instead of filing for a chargeback? I guess it depends on business owners, merchants, and their reputations. Consumers trust businesses that protect the best interests of their customers and listen to their requests and inquiries.
Let’s get to the root of the problem.
Imagine you’re a consumer and you’ve come to an E-commerce website to make a purchase. After ordering a product or service, the following scenario takes place; the product or service you order arrives late to your door, the product you ordered does not fit the description that was on the website, or you get charged more for the product than what the website advertised.
Any or all of these issues would cause frustration and possibly anger. You wouldn't be too happy about it, would you? Neither would your customers.
Lack of Support
Let’s take a moment on your storefront. You have a product or service that does not fulfill your customers’ expectations. Unsatisfied, the buyer wants to return it or get a refund.
If you’re a retailer, the buyer would come directly to your brick and mortar store. However, your business is online so the customer will need to find a contact us page or support link on your website. If a customer has difficulty locating this information, they are not receiving a response, or they simply can't reach a live person when calling, it will only discourage them from asking for a cancellation or refund.
What does the buyer do? They turn to their bank, which may offer a toll-free number or a live chat communication option to file a claim and get their money back. Additionally, if a customer learns a merchant may not fight a bank's chargeback, the customer may "cry wolf" and continue to initiate chargebacks through the bank instead of requesting refunds from the merchant.
Lack of Cancellation Features
Now, let’s consider the few customers that do call or email your business to ask for a refund for the product or service you provided. Once the customer sees that you do not have a cancellation option for subscriptions or a refund option for your goods, the cardholder’s trust is lost. At this point, they will go straight to their bank for a chargeback. This isn’t just a chargeback case, it’s a lost account or a member without an easy method to cancel an order or subscription.
How to Fix Chargebacks
I bet you’re feeling a bit helpless and demotivated now. Well, it’s not as bad as it seems and best of all, you can avoid it! Let’s take a look at how:
Create a Great Product
Looking back at our scenario in the previous section, one easy way to prevent chargebacks is to give the customers what they want.
Ask yourself “does my product or service offer or do what I said it would?”
Adjust your description and listen to buyers’ suggestions and feedback. Consumers love to have their opinion taken into consideration. Offer the option of late delivery refunds or refunds on shipping. Once you have their trust, contacting you is their chosen option for addressing their problems.
Make It Easy to Find Support
Prevention is the first rule in fighting chargebacks.
Do your customers have a helpline or live chat client for them to turn to? How do you expect them to come to you when you have no way for them to communicate?
Make sure you provide this information on the top banner of your website, as well as each of your pages, emails, products, etc. If it's available for all to see, then it makes communication so much easier. When customers know you have a fully staffed and dedicated call center, you are the first stop instead of the bank.
Automate Your Customer Service
You can’t keep up with all the changes in industry regulations. It’s not your job and not your task as a business owner. However, a payment processor can do this for you.
A professional can see any shortcomings and work with you to remediate problems. Finally and most importantly, make sure that you have a 24/7/365 customer support system. Тhis is a benefit you get from a payment processor so that you don't have to handle chargebacks on your own.
Leave it to professionals. Don’t do it alone. There are specialized payment processors, such as CCBill. They have professional tools and years of experience, that can decrease the risks of chargebacks.
Make It Easy to Cancel a Subscription
Stop them before they file for a chargeback.
You can have a cancel subscription option on your site. It takes some coding skills to implement but it can go a long way.
Wait, am I losing money like this? No, by offering discounts at the time a customer is considering canceling, you can potentially prevent cancellations from occurring.
If you maintain your historical data, you can see how many re-billing cycles it takes before an average consumer decides to cancel a subscription. Knowing this information helps you calculate how much of a discount you can offer your customers to encourage them to stay before a cancellation occurs.
Get Good Traffic
Use proven sources of traffic.
Affiliate marketing is a great way to increase sales, get backlinks to your website, and generate valuable traffic.
It all sounds great because it is great!
You need to know one thing - not all affiliate systems are created equal. Choose platforms that are not owned and managed by affiliate marketers or merchants.
Only those affiliate systems can fairly measure affiliate sales and prevent fraud.
CCBill’s affiliate system is a fine example of such a platform. As a payment services provider, CCBill does not have the interest to be biased towards either merchants or affiliates.
It is in CCBill’s interest to prevent chargebacks and fraud so it is a win-win situation for all parties involved.
Buying traffic directly from website owners or through ad networks is a quick and easy way to get visitors on your website.
What kind of visitors are you getting? Real people? Bots? Malicious users?
In a recent study, Adobe found that about 28% of website traffic came from bots or click farms.
But how can those cause chargebacks?
Fraudsters make some real sessions on your website and purchase some items. The idea is to show you that their traffic is bringing you real customers and persuade you to buy more of their traffic.
And after some time, they initiate chargebacks. Sneaky!
That’s why you should use proven sources of traffic.
CCBill has Integration Partners that can provide you with valid traffic, tools, and knowledge to stop fraudsters and grow your sales.
These companies are battle-tested and proven in the industry.
Getting fewer chargebacks is good for merchants, CCBill, and our integration partners
If you keep all these suggestions in mind and execute them properly, you and your business will see increased profits, reduced operational costs, greater customer retention, and improved consumer trust. Sounds good to me! ?
Now that you have all of this information you are fully prepared if you receive a chargeback. Even though chargebacks occur for different reasons, at the end of the day, they will happen.
However, knowing what you now know about chargebacks, and with a little help, you can take control of the whole process and you CAN win the chargeback fight.