How to Protect Your Business From Costly Chargebacks

Chargebacks are a common source of frustration for retail and ecommerce merchants. Initially, chargebacks were created to protect consumers from credit card fraud and merchant error. While they still serve that purpose, chargebacks are increasingly misused, costing merchants time, money, and resources.

Some companies use advanced technology to help pinpoint suspected chargeback fraud, but not all businesses have the budget to implement specialized systems. However, even without high-level tech, businesses can use five tactics to reduce chargebacks and protect against chargeback fraud.

Understanding chargebacks: valid vs. friendly fraud

Sometimes chargebacks are legitimate. Merchant billing errors, unresolved customer complaints, or an unauthorized transaction can prompt customers to dispute a charge.

However, many chargebacks are not legitimate and result from friendly fraud. Friendly fraud may occur when a customer doesn’t want to pay for a product and disputes the charge. This type of fraud can also occur when a customer wants to bypass the return process and instead claims to have not purchased the product. First-party misuse, or friendly fraud, accounts for up to 75% of chargebacks. The volume of global chargebacks is expected to reach $337 million by 2026, a clear indication that chargebacks are continuing to be a significant threat to merchants.

The true cost of chargebacks

Experts suggest that the true cost of chargebacks can greatly exceed the amount of the initial transaction.

Regardless of the reason for the chargeback, its impact is the same. Businesses lose money from the loss of the sale, loss of merchandise, and chargeback fees. They likely also spend extensive time and resources researching and resolving chargebacks.

Businesses suffering chargebacks face even more costs. They lose the opportunity to sell the item which is no longer in inventory. Moreover, if businesses accumulate numerous chargebacks, credit card companies can deem them as high risk, and require a reserve fund or even terminate the account.

On top of these tangible costs are intangible ones, such as reputational damage among consumers and financial institutions. In an effort to curtail the number of chargebacks, businesses may feel compelled to introduce friction into the payment and return process. While this may dissuade fraudsters, it can also discourage legitimate customers.

Five ways to reduce chargebacks

Whether the chargebacks are legitimate or fraud-related, merchants cannot afford to ignore the risks to their bottom line.

These five low-tech approaches can help proactively stem the escalating costs and increased occurrences of chargebacks.

1. Ensure product information is clear and complete. Inaccurate or incomplete product descriptions or blurry or missing product photos make it difficult for customers to judge what they’re buying. Without this clarity, customers are more likely to be dissatisfied with the purchase and not want to pay for it. Providing as much information as possible about the product can decrease this confusion.
2. Make sure the return and cancellation policies are transparent and upfront. Policies should include how and when an order can be canceled, how long a customer has to make a return, what the return process is, how much shipping costs are, and what reimbursement options are available. Be sure to provide these details before the customer completes the purchase.
3. Verify the customer information. Ensure the address and all other shipping and payment details are up to date and accurate by using Address Verification Service tools. This step can eliminate delayed shipping or deliveries made to the wrong location.
4. Use clear billing descriptions. Chargebacks can occur when the transaction description on the customer’s credit card statement is unclear. Vague descriptions may lead customers to believe the purchase is fraudulent – leading to a dispute of the charge. Research shows that unclear billing descriptions were the reason for 27% of customers’ charge disputes. Solve this problem by using accurate billing descriptions that are similar to your business name so customers can quickly recognize the legitimacy of the purchase.
5. Focus on customer service. Make it easy for customers to get help when they need it. Provide multiple ways to reach customer service (phone, email, text, chat, social media) and respond promptly to customer concerns. Proactively update customers on their order status and notify them promptly if a product is out of stock or a delivery is delayed. Offer them free expedited shipping once the product is ready or give them options to cancel or change their order. By establishing a good relationship with customers, keeping customers informed, and showing they are valued, they may be less likely to leap to a chargeback when an issue occurs with their purchase.

Regardless of the cause or intent, chargebacks affect multiple aspects of a business. And while there is no panacea to preventing all chargebacks, these precautionary measures will help you curtail them and minimize the impact on your business.