Six Ways Merchants Can Prevent, Reduce and Manage Chargebacks
Chargebacks are an expensive reality for merchants. Not only do they lose the transaction value (and sometimes the goods) when cardholders dispute payment card charges, they must also pay chargeback fees that can range anywhere from $25 to a few hundred dollars per chargeback.
In fact, of the $31 billion total cost of credit card chargebacks in 2017, two-thirds of that cost was borne by merchants (and the rest by card issuers) according to a report by Javelin Strategy & Research.
Due to this high cost, merchants should do all in their power to prevent chargebacks before they happen—or at least adopt practices that reduce their sting.
Here are six ways merchants can improve their chargeback prevention and management:
1. Prevent common merchant errors.
Preventing errors and eliminating confusion that cause customers to dispute charges is among the easiest ways to stop chargebacks. Many customers never contact the merchant after discovering a transaction error (perceived or real)—they simply dispute the charge with the card issuer, triggering the costly chargeback process.
Some of the most common pitfalls include:
- Descriptor confusion—when the customer cannot easily recognize the merchant name on their statement
- Double billing—when the merchant charges a customer twice for the same purchase
- Overcharging—when the merchant charges the customer above or below the correct transaction amount
- Shipment mistake—when the merchant ships a purchase to the wrong customer address
These are just a few of the hurdles that leave merchants at risk. But it’s in merchants’ best interest to find ways to reduce all sorts of errors that lead to chargebacks.
2. Create customer-friendly exchange and refund policies.
If a customer is unhappy with the product or service they received, they may simply dispute the purchase with the issuer rather than reach out to the merchant. One easy way to avoid that is by making it easy for customers to return and exchange items.
This might include a “100% satisfaction guaranteed” policy and the ability for customers to return and exchange items in-store or via free shipping. The most important thing is to broadly communicate your return and exchange policies so customers know about them and don’t rush to initiate a credit card chargeback.
Customers should have an easy way to contact you, so they turn to you—rather than the issuer—with any problems or concerns.
Here are a few best practices:
- Ensure customer return and exchange policies are clear and easily located on your website.
- Ensure customer service contact information is easily located on your website, invoice and/or monthly billing statement.
- List your customer service phone number on the card statement along with the transaction descriptor information.
- If processing a refund, make sure it is done timely so customers aren’t left wondering the status of it.
3. Strengthen cardholder verification and authentication processes.
True card fraud—when someone steals a payment card number and uses it to make purchases either online or in person—is another common reason for chargebacks.
Merchants can prevent fraud by strengthening their online cardholder verification and authentication processes a few ways:
- Require cardholders to provide the CVV code shown on the physical credit card upon checkout.
- Use multi-factor authentication methods, such as 3DS2, that require cardholders to enter a one-time password sent via text message or email or verify another piece of personal information. This also keeps your transactions compliant with Strong Consumer Authentication (SCA) requirements across Europe.
4. Give customers more detailed transaction information.
A fast-growing cause of chargebacks is friendly fraud—when customers wrongfully dispute legitimate charges that they or someone else in their household made. Friendly fraud happens for a variety of reasons, but often it’s because the cardholder doesn’t recognize a charge on their statement.
You can greatly increase the odds they will recognize charges on their card statement—and feel less compelled to dispute them—by providing them with detailed descriptions of charges on their card statement in a digital environment using a service like Consumer Clarity™. This might include:
- Detailed digital receipts
- Exact date and time of the purchase
- Clear merchant name and logo
Needless to say, it’s much easier for someone to recognize a charge as legitimate when presented with in-depth, compelling information about the sale that clearly ties it back to the cardholder.
5. Use collaborative tools.
By the time merchants get a chargeback, weeks or months may have passed, and it’s too late to stop the fraud or resolve the dispute with the customer. As a result, costs skyrocket and the customer’s relationship with the brand is damaged. Thankfully, merchants don’t have to prevent chargebacks on their own.
Today there are collaborative chargeback prevention tools that make it easy for merchants and issuers to share information about transactions quickly. This allows merchants to avoid shipping fraudulently purchased merchandise and/or refund transactions quickly to prevent dispute or fraud claims from progressing (meaning no chargeback).
Card issuers today can also tap into technology that connects them to the merchant order and account history details in real-time, giving them two options:
- Option 1: The customer can view the transaction details through their bank’s online portal or through the mobile banking app.
- Option 2: The customer service agent taking the claim information can review enhanced details about the transaction with the customer over the phone in an effort to prevent the claim from being processed.
The result? If successfully deflected, the consumer now assumes responsibility for the disputed transaction, and the merchant benefits by recovering the sale and avoiding the chargeback and representment process altogether.
6. Implement a chargeback management system.
Many tech solutions, such as chargeback management software platforms, are often marketed as a “one-stop” way to reduce and manage chargebacks. But those platforms often don’t solve the real problem: that cardholder dispute information doesn’t get passed along to merchants until it’s too late to do much about it.
Collaborative tools that connect merchants and issuers across the globe are a more effective solution. They can be integrated seamlessly with leading fraud prevention tools and provide near real-time alerts to merchants when customers dispute transactions—so they can prevent the costs and reputational damage caused. They also provide an effective way to greatly reduce friendly fraud by providing enhanced transaction data to the issuer and cardholder up front—preventing some disputes from progressing to the chargeback process.
Creating a holistic chargeback management system requires that issuers and merchants share information in real-time, and collaborative tools provide that ability.
Customer chargebacks happen for many different reasons, so it only makes sense that merchants take a multi-pronged approach to preventing them.
Want to learn how Ethoca’s solutions can help you prevent chargebacks? Connect with one of our fraud experts>