As more and more transactions are carried out online, instances of chargebacks are growing along with it. Providers flag many merchants as high-risk as newer industries begin to expand. If one’s a merchant categorized as high-risk by a Merchant Service Provider, then this translates to more significant restrictions on what the merchant can sell and higher fees associated with each transaction.
At EMC2 Billing, we provide reliable and accessible payment processing to high-risk merchants. With our expertise, we’ll dive into the definition of a chargeback and some tips on how to prevent them.
What is a chargeback?
Chargebacks are commonly associated with credit card transactions that occur ith online wmerchants. Typically when the owner of the credit card has an issue with the posted transaction on their credit card, they’ll contact their credit card issuer to dispute the transaction.
Common reasons for a dispute are:
- The product or service purchased was never received
- The product or service did not accurately reflect what was described as being purchased (e.g., significantly poorer in quality).
- The transaction value is incorrect.
- The transaction itself is fraudulent and was never placed by the buyer.
These are just the four most common causes of chargebacks, but there are more. Any of these dispute reasons will result in the credit card issuer triggering a dispute with the Merchant Service Provider (MSP). This will cause the MSP to debt one’s merchant account for the disputed value, and typically add on an extra dispute fee (usually between $15 to $100). This disputed value is then returned back to the credit card.
Many times, disputes are avoidable and rarely are they truly fraudulent. They can also be more common with high-risk businesses. Let’s explore in detail the reasons for chargebacks occurring:
Reasons For Chargebacks
Chargebacks fall under three main categories:
This is when the chargeback occurs due to a simple technical error during transaction processing. Examples of this include billing an incorrect amount, failure to apply a discount or coupon code, or authorizing a refund but not returning the money to the customer. There are many more ways a technical error could happen, but these are the common ones.
The second most common reason for a customer triggering a dispute is not being satisfied with a product or service they purchased, and in rare cases, the overall customer service they were provided when interacting with one’s brand.
Many times, what’s advertised by a brand as a product or service they’re selling may be inflated in quality versus what’s actually shipped to them. A physical product may look exceptionally high quality and well-built online, but when actually received in the mail, it might look very cheap. In such a case, if there’s no easy way for the customer to ask for a refund or voice their concern, a dispute is their next best option in getting their money back.
Long shipping times or lost items can also cause chargebacks to occur where the customer claims to have never received the item and thus starts a dispute to get their money back. Sometimes companies will also have unclear return or refund policies that cause customers to buy their product or service. Still, when they realize that getting a return or refund isn’t straightforward, it becomes easier for them to trigger a dispute.
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Finally, the main reason the dispute and chargeback process exists is to prevent fraud. This can be defined as when the:
1) The customer does not recall ever authorizing the purchase
2) The customer’s card was stolen and fraudulent purchases were made
3) The merchant has charged the customer’s card without seeking permission/authorization from the customer first
When a chargeback occurs, the merchant will receive a categorized reason for why the chargeback happened (e.g., product not received) and the merchant then has a set number of days to provide evidence to the MSP to challenge the chargeback and prove it was authorized by the customer.
In all of the cases above, the customer is usually favored by the credit card issuer instead of the merchant, and it’s very difficult for a merchant to win a dispute even after providing sufficient evidence. This is why it’s good to get ahead of the problem and ensure chargebacks don’t occur in the first place. Let’s take a look at some ways to prevent chargebacks:
Ways of preventing chargebacks
1. Clearly communicated and visible policies
An easy way to prevent chargebacks is improving all publicly available communication material on one’s site that a customer might read through before purchasing a product or service.
For example, refund policies should be easily available to reference on every page a customer will go through when completing a transaction. In addition to this, clear statements regarding ‘trials’ or ‘refunds’ should be displayed. When completing payment, for example, display a fine line item reiterating one has 30 days to request a return/refund instead of assuming the customer will dig through a brand’s policies to read up on the policies themselves.
2. Verifying payment methods
When a cardholder completes a transaction, the most basic required information is the credit card number, expiration, and sometimes CVV/CVC. However, there are options to request for more details to be verified. Asking for the customer’s billing address and cardholder name can be used to run an additional match to ensure it’s the authorized cardholder making the purchase.
3. Accurately described services or products
False advertising is a major driver for chargebacks occurring. If a brand promotes a fine-crafted leather bag to only deliver a poor-quality product in the mail, a chargeback may occur.
The same goes for services provided online by businesses. If the description of the service is vague and open to interpretation, then many buyers may be expecting one quality of service or range of services offered versus what’s actually delivered. A way to combat all of this is to ensure the description of a products/service, and any supporting images or videos are realistic and accurate.
4. Billing statement and brand name should match
Many times a business may operate under one name, but have their merchant account name under another. This means customers may see a transaction from a merchant they don’t recognize when looking at their credit card statements. Even if they made the purchase, they might report it as fraudulent.
This is why ensuring the name of one’s brand and the billing statement name are identical is crucial to avoid such instances of confusion. This happens often, since customers sometimes only review their credit card statement at the end of the month. Long after they’ve purchased an item from your business, they might immediately assume it’s fraudulent since quick checks of the billing statement name in their emails would yield no result of a receipt or order confirmation.
5. Seamless customer contact channels
Customers should also be kept aware of the entire buying process. Once they’ve completed a purchase, they should be alerted when the order is fulfilled, shipped, and delivered.
In addition, there should be multiple channels available for them to reach out for clarification on order (e.g. live chat, email, phone) and these must have quick response times. If not, then a customer is forced to dispute the purchase as their attempts to resolve their concerns directly with the merchant have failed.
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6. Have an audit trail
Chargebacks can be challenged if a business presenting strong evidence that the customer was aware of the purchase and confirmed the authorization. This means that any communication one has with a customer should be collected, along with other information such as whether emails have been delivered and received.
All of these provide a clear trail of evidence that can be used to fight any chargebacks that are incorrect. In addition, there should be evidence that no information was withheld, such as receipts or invoices never mailed to the customer once an order was made.
7. Train staff to identify instances of fraud
A good line of defense againt chargebacks is ensuring that staff have been trained to identify any instances of fraud. Examples of this include unusually high volume orders or transactions from areas where you do not usually receive business. Comparing shipping and billing address information, and whether the name matches the cardholder name, are also easy ways to spot fraud. When fraud happens, these strategies can help staff get ahead of a chargeback by canceling the transaction and refunding the amount charged immediately.
8. Use fraud prevention tools
Finally, given the prevalence of chargebacks these days there are many third-party software or add-ons offered by MSPs that help to detect any instances of fraud and flag them for a business. Merchants can also adjust their sensitivity towards fraud, such as any cart over a specific dollar amount is not automatically processed until it’s independently verified by staff through reaching out to the customer. Similarly, the same automation can be applied to verifying whether billing and shipping addresses match, etc.
As an online business thrives and grows, there will be more instances of chargebacks happening. Because of this, it’s important to get ahead of the scenario and implement any measures necessary to ensure the chances of disputes happening are minimized. At EMC2 Billing, our experience with high-risk merchant accounts means we’re experienced with chargebacks; we know how to prevent them and what to do when one occurs. Find out how to get started with EMC2 Billing here.