What are chargebacks and why are they a problem for merchants?

Chargebacks are an important consumer protection mechanism. If a supplier fails to deliver, a shopper can initiate a chargeback. The payment card provider then issues a refund, reversing the payment to the retailer.

Chargebacks protect customers against fraud, merchant errors or when the cancellation and return procedure breaks down. They’re a significant headache for retailers, though. Scammers often trigger chargebacks to defraud e-commerce businesses. Shoppers may lodge an illegitimate chargeback request after experiencing buyer’s remorse.

For retailers, managing chargebacks brings added cost in administrative overhead, wasting resources and eating into profits. Payment providers may also levy financial penalties against – or even terminate accounts of –merchants that subject to too many chargebacks.

Legitimate or not, chargeback prevention is an essential strategy for retailers.

When can a customer request a chargeback?

Consumers have the legal right to request a chargeback:

• To recoup unauthorised transactions (usually when a payment card has been stolen or cloned).
• When a supplier fails to deliver goods or services.
• When products do not match the retailer’s description.

Rules regarding claims differ among providers.

How and why do chargebacks happen?

Understanding how the chargeback process works Can help merchants build an effective strategy to prevent them.

A chargeback dispute typically follows this process:

• The consumer registers a dispute with their card provider.
• The provider requests additional evidence and sends it to the merchant.
• The merchant must accept the chargeback or raise a dispute.
• In the event of a dispute, the merchant must supply evidence supporting its case to the payment provider.
• The card provider assesses the evidence and decides in favour of the merchant or the customer.
• If the customer wins the dispute, they receive a full refund at the merchant’s expense.

Most chargebacks, legitimate or fraudulent, happen when customers dispute a transaction with their bank. Many disputes arise from merchant errors: Unclear return policies, shipping problems and incomplete product descriptions can lead to disappointment – and a request for a refund.

Another increasingly common source of chargebacks is “friendly fraud.” This occurs when a shopper later regrets a legitimate purchase. A chargeback request can allow the shopper to circumvent the retailer’s return policies.

Finally, the chargeback process may be initiated when shoppers fall victim to scammers. The chargeback mechanism protects against fraudulent transactions made with cloned or stolen cards. Unauthorised purchases are often very high value, leading to costly disputes – and significant losses for retailers.

7 proven strategies to prevent chargebacks

In practice, merchants work to prevent all chargebacks, not just fraudulent refunds. Here are our top 7 chargeback prevention tips:

1: Implement clear and transparent policies

Customers must understand your terms and conditions of sale – particularly relating to returns and refunds. Ensure policies are easy to find on your website. Follow this up with training for your employees. They must be able to explain the returns process to customers in person or via email, social media or live chat.

It’s best to avoid legal speak for customer-facing policies. Choose simple, everyday English to make policies easy to read and understand. Clarity and transparency prevent confusion and help to reduce disputes after purchase.

2: Use strong fraud detection tools

Payment card providers offer several built-in fraud prevention solutions to protect businesses.

The AVS, the Address Verification Service, ensures that mailing addresses match those registered by the cardholder. If a customer makes a purchase from another address, the transaction may be flagged as suspicious.

The 3-digit card verification value number printed on the back of every credit card, , known as the CVV, provides some additional proof that the customer owns the card in question when making a card-not-present payment.

3D Secure is a two-factor authentication technology that requires customers to enter a secure PIN whenever they make a transaction. The transaction will not be processed without the correct PIN.

These security protections can be enhanced with real-time transaction monitoring. Systems like Worldpay’s dispute management solutions monitor transactions for suspicious activity, providing real-time alerts and allowing businesses to act before a fraudulent payment takes place. These tools are faster and more accurate than manual transaction monitoring.

3: Offer excellent customer service

Angry customers may overreact, resulting in a chargeback request when they feel they have received poor service. Respond quickly and proactively to customer queries to resolve issues before they escalate into disputes.

Delivery disputes can be prevented by providing order tracking and delivery updates. Simply keeping customers informed about deliveries can help prevent chargebacks caused by impatience or unrealistic expectations.

Merchants also should ensure they have internal resources to handle disputes. Taking ownership and solving problems in-house will help deter customers from requesting chargebacks prematurely.

By raising the quality of service offered, issues can be resolved before they escalate into a full-blown dispute. Using disputes solutions can convert a disappointed buyer into a loyal repeat customer.

4: Maintain accurate records

The chargeback dispute-resolution process requires a business to defend its position with evidence. Detailed transaction records – particularly receipts and shipping information – are essential.

Similarly, you must be able to prove goods were delivered to, and received by, the customer. Photographing the item being delivered and the condition it was received in is powerful proof that your business has met its obligations.

Finally, keep a record of every customer interaction. A customer relationship management system can assist, allowing you to note details that may prove useful in defending chargebacks. You can learn more about recording transactions in our merchant support resources.

5: Implement proper billing descriptors

When reviewing account statements at the end of the billing period, customers can easily forget specific transactions. If they see any unfamiliar transactions, they can overreact, assuming they have been defrauded. A chargeback claim often follows.

To avoid confusion, make sure the business name and charge descriptions are easily recognisable, preferably matching the brand. If this is not the case, specify this at the point of purchase so that customers – and sellers – don’t get a surprise at billing time. This simple step will reduce instances of “no authorisation” chargebacks due to unclear billing details.

Find more tips in Worldpay’s best practices guide.

6: Use recurring payment best practices

Recurring payments can become a point of contention, particularly when clients feel they have lost control of the agreement. Dissatisfaction with enrolment or termination processes can lead to costly chargebacks.

When offering subscription-based services, always obtain explicit consent before enrolling customers in a recurring billing programme. Outline terms, costs and payments dates to ensure transparency and prevent nasty shocks.

Keep customers updated through the lifespan of the agreement. Send billing reminders before each recurring payment, and give them the option to cancel the agreement according to clearly stated terms and conditions. This is especially important when approaching a renewal date.

Finally, make the cancellation process as simple as possible. Recurring payments are an important revenue stream – but chargebacks and reputational damage may cost more in the long term.

7: Use chargeback alerts and response services

The speed at which a business responds to disputes and chargebacks will affect the overall cost of each incident. As well as avoiding costs, it prevents diverting time and resources from revenue-creating activities.

Signing up for Worldpay’s Chargeback Alerts service can help regain control of disputes. Merchants receive an automated notification every time a customer registers a dispute, allowing them to respond and recover situations before they escalate into formal chargebacks.

Catching a complaint quickly at the dispute registration stage allows for faster resolutions, avoiding fraudulent chargeback costs and wasted resources.

Chargeback prevention alerts are not the whole solution. Partnering with a chargeback management company gives access to industry specialists who can navigate the complexities of the dispute process. A service like Worldpay fraud prevention can help navigate the chargeback steps as quickly and cost-effectively as possible.

The risks of ignoring chargeback prevention

Chargeback prevention is a strategic necessity to protect profits. Neglecting it can have serious, long-term consequences including financial penalties.

A successful chargeback costs more than just the amount of the transaction. Payment providers and banks add extra fees and fines to cover dispute resolution costs. These charges can add up.

Chargeback fraud prevention is extremely important. Scammers will continue to attack a business they identify as a “soft target.” Also, payment providers actively monitor chargeback requests. If the ratio of disputes reaches a certain level, providers may terminate merchants’ accounts.

Excessive chargebacks also create reputation problems. Chargebacks resulting from negative shopping experiences hurt credibility and damage customer trust. At the same time, resolving disputes quickly and effectively builds credibility, establishing a seller’s brand as a trusted provider.

Conclusion

There are many good reasons to strengthen your chargeback prevention strategy, not least to protect profits. The costs of chargebacks extend far beyond the transaction value – there’s fees, fines, additional resources and reputation damage to consider as well.

The issue is more than simply chargeback fraud prevention. Your goal should be to resolve disputes with all unhappy customers before they escalate into full claims. Taking a holistic view of chargeback prevention will ensure you’re not losing cash through poor customer service, for instance.

The strategies will help you protect revenue, maintain your merchant accounts and build stronger customer relationships, laying a foundation for future success.

Worldpay offers a comprehensive suite of tools to help your business streamline payment processing, protecting you and your customers against fraud. Start taking payments now and prepare yourself for a more profitable future.