4 common chargeback terms and what they mean for your business
The chargeback process may seem relatively straightforward, but beneath the surface, there are lots of pieces and facets to the process that merchants may not be aware of. It’s important to understand how it works, so your business can take steps to reduce chargebacks and ultimately lower the high costs of them.
What are some common chargeback-related terms that are helpful to at least have some basic understanding of? Here are four:
Term #1: Chargeback recovery
Chargeback recovery is another term for “representment”— the official process by which a merchant challenges a chargeback with an issuer to prove a disputed transaction was legitimate and in hopes of getting the chargeback reversed.
Whether a merchant should fight a chargeback depends on the specific circumstances—as sometimes the chargeback recovery process takes more effort and time than it’s worth. It really comes down to how much the chargeback is for and what sort of compelling evidence you have.
The issuer ultimately decides whether the merchant wins the representment process and can receive a chargeback recovery. Merchants, on average, have a “chargeback win rate” of 42%, according to survey data. In other words, more than half of chargeback representment attempts by merchants will get rejected by the issuer. That said, some merchants report having an average net chargeback recovery rate of just 12%.
Takeaway: It’s best to prevent disputes from happening altogether—as chargeback prevention is better than having to fight them after the fact. Luckily, solutions like Ethoca Alerts can help by alerting you in real-time to disputes before the costly and time-consuming chargeback process is initiated.
Term #2: Chargeback prevention services
Chargeback prevention services offer merchants a way to be alerted of transaction disputes—the term before they are officially charged back and refunded by the merchant—immediately after a cardholder lets their issuer know they are disputing a purchase.
This means merchants can take proactive steps to protect themselves and prevent certain costs before disputes turn into chargebacks—helping them keep their overall chargeback amounts low. Merchants selling digital goods like streaming services, for example, can use these alerts to spot customers who routinely dispute charges as a way to simply get their money back. Those selling physical goods can use cardholder dispute alerts to cancel orders before shipment, so they can retain their merchandise and minimize loss.
Without chargeback prevention services, a merchant may not find out about disputes until days or even weeks after they happen, which is often too late to stop the chargeback process.
Takeaway: There are plenty of providers out there—including Ethoca—that help businesses reduce their chargebacks. Some key considerations when choosing one: How quickly can a provider send you notifications of disputes? The sooner the better. And how big is their network? Are you getting as many notifications from as many issuers and card brands as possible? In order to reduce as many disputes as possible, more information is better.
Term #3: CNP fraud prevention
Card-not-present (CNP) transactions are those in which a cardholder makes a purchase without physically presenting their card to the merchant. They’re usually online purchases but also include mobile payments or even phone purchases where the customer reads their card details to the merchant.
CNP fraud, then, is fraud stemming from CNP transactions. It’s important for merchants to work diligently to prevent CNP fraud, because the business (not card issuers) are generally held liable for this type of fraud and bear the costs of any chargebacks.
CNP fraud has soared in recent years due in part to the e-commerce boom. In fact, CNP fraud accounted for almost 7 in 10 fraud losses to merchants and acquirers in 2020, totaling $19.4 billion worldwide, according to the Nilson Report.
Takeaway: Merchants need to be especially vigilant to the risk of CNP fraud due to their liability for it and the real risk of that fraud turning into chargebacks. Tools such as Ethoca Alerts can let merchants know about fraud-related disputes right when they occur, so they can cancel orders and stop delivery to limit the impact of that fraud.
Term #4: False chargebacks
False chargebacks—also known as first-party fraud—are those chargebacks that are initiated by customers when they dispute legitimate purchases. It generally happens for two reasons:
- Transaction confusion—where a customer simply doesn’t recognize the charge on their statement and assumes it’s fraud.
- Misuse—when a customer knowingly disputes a valid purchase, whether due to buyer’s remorse or a product- or service-related issue. This could also occur when someone other than the cardholder makes a purchase without the cardholder’s knowledge.
Various studies have found that false chargebacks are increasing. A report by Ethoca and PYMNTS.com, for example, found that 71% of consumers surveyed had disputed a legitimate purchase for a service-related reason.
Takeaway: Regardless of the reason—whether due to a service-related issue or transaction confusion—providing merchant and transaction details upfront helps cardholders more easily recognize legitimate purchases. Having this same level of detail in the call center can also help issuers determine when a dispute is legitimate versus when it’s a “false chargeback.”
Being “armed” with information
Merchants that know at least the basics of how the dispute process works and tools available to them will be best positioned to reduce chargebacks. Understanding these four terms will help your business better navigate today’s increasingly complex disputes and chargebacks landscape, while significantly preventing chargebacks and the negative toll they can take on your bottom line.