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What Are Chargebacks And How Can You Overcome Them?

This is a guest article from Mageplaza, a leading Magento 2 extension provider.

Every merchant can tell you that fighting with customer disputes is no fun, but it is incredibly frustrating when you have to deal with chargebacks.

In fact, a chargeback is a hidden threat many new merchants do not know about until it is too late.
Merchants who want to reduce the chargeback and protect their revenue, business account, and reputation must take steps to address the problem.

In this article, we help you to understand what chargebacks are, how they work, and what to do to prevent them in the first place – so that you can continue to create a profitable business.

What is a chargeback?

Chargebacks are returns of credit card funds used to make purchases to buyers. Chargebacks can happen when customers contact their credit card companies and ask for reversals of charges on their credit cards.

They claim that these purchases were fraudulent or made without their knowledge and permission. An investigation follows, and in case the cardholder’s request is valid, the credit company will reverse the charge, reimburse the buyer in full and debit the business account.

The consumer, on the other hand, has no obligation to return whatever was purchased.

By default, the chargeback is a simple way to protect consumers from fraud and theft.

However, in some cases, many people overuse the chargeback or even commit illegal activities against the merchants to get the money back.

Whether the chargeback is valid or not, it represents a severe danger to the longevity and sustainability of any business.

Chargeback process

There are many stakeholders involved in a chargeback process:

  • Cardholder: the customer who disputes a charge.
  • Issuer: the bank that issued the card that the customer used for the purchase.
  • Acquirer: the bank or credit company that handled the transaction for the merchant.
  • Merchant: the business that sold the product or service whose charge is being disputed.

The chargeback procedure is relatively lengthy and complicated, so stemming the flow of chargebacks is quite challenging.

Below is the process of a chargeback in basic:

  1. The cardholder files a claim to the issuer.
  2. The issuer investigates and reviews the claim/ disputed transaction to determine whether it is valid or not.
    Scenario one: If the claim is invalid, the chargeback process will end there. The cardholder will be notified of the decision.
    Scenario two: If the claim is valid, the chargeback process will continue to the next step.
  3. The chargeback is declared to the acquirer.
  4. If the merchant’s bank has evidence to dispute the chargeback, it does so on behalf of the merchant. If not, the merchant is notified.
  5. The merchant either receives the chargeback or contests its validity.
  6. In case, the merchant has evidence and proper documentation to refute the chargeback, the acquirer will carry out the dispute.
  7. If the customer wins the dispute, the money is returned to the cardholder. If not, the money will be permanently deposited into the merchant’s bank account.

The negative influences of chargeback to business

There are a few reasons why a chargeback can be a double whammy for merchants. The most significant and painful reason is the fees.

As a business owner, you have to reduce business costs to the best of your ability. Yet every stage of the chargeback process incurs expenses. Even when you win a claim against a customer, you still have to pay some fees for your merchant service provider.

Coping with a chargeback can mean more than just paying back the money to the customer. According to one of LexisNexis Risk Solution reports, $1 in fraud can cost a eCommerce store $3.29 in fees and expenses. Depending on your acquiring bank, the chargeback fee can vary from $10 to $100 per incident.

And that’s not all.

Chargebacks can hurt your business reputation to both your customers and sponsoring banks. Having too many chargebacks can get you ranked as a high-risk merchant, meaning you have to pay much higher monthly rates and account fees.

Eventually, if your store has a hugely excessive number of chargebacks, your merchant service provider can freeze and terminate your business account.

In that case, you have no way to accept credit or debit cards. It is catastrophic for any eCommerce merchant whose customers have no way to purchase its goods and services.

Reasons for chargebacks

There are a wide variety of reasons why chargebacks can occur. Here are some of the most common causes of a chargeback:

Customer dissatisfaction

In some cases, customers are not happy with their purchases, so they may request a chargeback without contacting you first. As you’ll know, customers can be dissatisfied for any number of reasons, but here are some recurrent causes:

  • The items that the customer receives are not as described, poor quality, etc.
  • Products are lately delivered or damaged during shipment.
  • The customer attempts to return an item, but their request is refused.

Clerical or technical errors


Between you, your merchant service provider and your customer, there are plenty of opportunities for someone to make an honest mistake or for technical errors.

For example, maybe it was an expired credit or debit card, accidental duplicate billing, or the customer clicked something in the checkout process that they did not intend to.

For whatever reason, customers feel they were incorrectly charged, and a chargeback may be required.

Fraud

Fraudulent transactions are a common source of inconvenience to merchants and customers alike. Fraud can take one of three forms:

  • Customer fraud

    Some customers abuse the chargeback to turn a profit for themselves at the expense of the business. For instance, a cardholder places an online order for a product with the intention of claiming its performance. When the product arrives in perfect conditions, the consumer files a chargeback and get both the product and money.

  • Merchant fraud

    Merchants commit criminal fraud when they take advantage of unknowing customers. For example, a merchant does not deliver the product or service previously paid for. It is noting that the primary purpose of chargeback policies is protecting consumers from this type of fraud.

  • Third-party fraud

    This fraud occurs anytime a person makes purchases using a card that is not theirs, and they are not authorised to use. For instance, a fraudster steals the customer’s card information to make unauthorised transactions. 

Tips to help you overcome chargebacks


Offer great customer service

Chargebacks commonly arise when your customers are confused about the credit card charges or dissatisfied with the products or services received. Proactive and effective customer services can contribute to resolve chargebacks or prevent them together.

In fact, clearly showing your contact information both on credit card receipts and online makes it easy for customers to reach you. You should consider extending the working time of the customer support team and reducing the hold time.

Similarly, you don’t want your customers to get frustrated, hang-up, and decide to call their issuing bank instead. Customers who can conveniently contact a representative to solve a problem are less likely to file a dispute.

For example:

When a customer claims for a broken item via email, you can quickly ship out a new item or offer a direct refund. By encouraging customers to contact you with questions before automatically filing chargebacks, you can reduce chargeback numbers significantly.

Respond as quickly as possible


When you get a notification that a chargeback will proceed, you should promptly and efficiently prepare a response. The quicker you respond to the chargeback the better.

There are several steps of review and authorisation during a chargeback resolution process. Each phase has a time limit, and any delayed action can result in a chargeback lost.

As such, you must provide your evidence as quickly as possible.

In order to ensure all applicable deadlines will be monitored and met, you can prepare a spreadsheet ahead of time or use a digital calendar to schedule notifications.

You should also ensure that all documentation is appropriately formatted and sent via the proper channels as required by the card network.

Preparing a chargeback response template ahead of time can make good business sense. This template can contain general information, such as:

  • Your business’s return policy
  • Terms of use
  • Delivery schedule

Once a chargeback occurs, you simply need to fill or attach specific evidence. So, you do not have to spend too much time on re-learning the process each time a new chargeback arises.

Examine the reason code

Every chargeback includes a reason code which varies by card network and indicates the reason why the customer disputes the transaction.

This code gives you details on the evidence requirements, the timeline you have to submit your evidence, the reason for the chargeback and other information.

Having strong knowledge of chargeback reason codes and associated requirements is critical to fighting with chargebacks effectively.

Keep detailed transaction records

Good records are crucial tools for you to cope with chargebacks.

The more data you record for each transaction, the better. Besides required information such as the date of purchase, amount, cardholder name, and other basics, merchants should also save other compelling documents.

Make sure to keep track of all customer interactions and maintain well-organised records of transactions like any identity verification done during checkout, delivery signature, and more.

Having this information readily available makes it simple to provide evidence for the dispute. If you do not have the essential documents, it will be difficult, or even impossible for your business to win the dispute.

Prioritise

Merchants are often impulsive to fight every dispute.

However, you need to identify which dispute is most worthy of being confronted and represented based on the expected return.

There are some types of fraud that make it easier for you to win the dispute than others. If you have clear evidence against the cardholder’s claim, it is worth it for you to dispute.

On the other hand, if you notice that there are no compelling documents and you are hard to win, it is probably better to de-emphasise that fight. Consider the return on time and money spent and choose your battles carefully.

Use the right tools

Many online businesses do not use any fraud detection tools, which can be a grave mistake.

There is a lot of fraud detection tools available in the market. By using these tools, you can detect risks on orders, receive risk notifications, stop fraud orders with ease, and more.

Whenever you recognise unusual activities with orders, you can proactively inform your customers via email or phone. Your customers will appreciate the transparency.

By allowing them to keep track of what is happening with their order, you can reduce chargebacks that happen due to shipping problems.

To reduce the possibility of clerical errors, you should avoid manual processing and use efficient processes. Choosing the right payment gateway can be a big help as well, and sometimes the most popular companies might not be the right one for you.

For instance:

If you run your business in Australia, it’s a good idea to integrate Commonwealth Bank CommWeb to your store. It is a payment acceptance service from one of the most trusted banks in Australia, so your customers will feel more secure when buying from your store.

In addition, it will be easier for you to get support when needed as your business is in Australia.

Final words

While merchants are never going to like chargebacks, your customers need this mean of protection, which we’re sure you will understand as a consumer of goods yourself.

As you grow your business, you will likely have to deal with it more. Hopefully, having a good understanding of chargeback can help your store minimise the number of chargebacks, avoid costly fees and complications.

Remember to research the chargeback process of your payment provider to ensure you have essential tools to keep your chargeback low.

About Mageplaza

Mageplaza is a leading Magento 2 extension provider and we have an incredible passion for eCommerce as well as business development. To learn more about how you can grow your eCommerce business in the most efficient way, check out their blog.

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