Five Tips for Cutting Chargeback Costs

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Retail Info Systems News, August 1, 2011

A chargeback occurs after a cardholder contacts his or her bank to dispute a charge, causing the retailer's account to be debited. While credit card fraud is a major source of chargebacks, there are other reasons triggering them including ambiguous sales policies, customer claims that the goods didn't arrive and disputes about the quality of products or the amount charged to a card. Additionally, there can be processing or authorization errors involved in transactions.

Regardless of the cause, chargebacks are a burden, especially for online and digital retailers. Processing and disputing chargebacks requires expertise and operational costs are high, even if a merchant succeeds in reversing a high percentage of them. The cost of managing chargebacks can consume as much as three to four percent of a merchant's total revenue.

Retailers can take steps to reduce the problem by cracking down on fraudsters with improved screening technology and by addressing customer service issues. Yet they find it isn't realistic or even economically wise to completely eliminate chargebacks. They remain an inevitable and cumbersome aspect of a merchant's business.

Having spent the last 10 years helping merchants manage chargebacks and fight fraud, we've learned that there are a number of steps they can take to reduce the manual efforts and operational expenses involved, and boost revenue recovery. Here are five of the most effective strategies found in working with merchants:

  1. Get control of your data. Tracking chargebacks and metrics surrounding them can provide valuable intelligence to inform your business practices and alert you to potential internal problems.
  2. Take an end-to-end approach. To control costs, look for a software platform that can perform all the functions necessary to handle chargebacks, from review and analysis through representment and reporting. It should support rules, regulations and processes for multiple card brands and payment streams.
  3. Utilize automation. Automating time-consuming routines and processes can streamline and reduce processing time to a matter of minutes. Automation can also reduce human error, make it easy to monitor the status of each chargeback throughout its lifecycle and keep merchants up-to-date on new processing rules from card brands so they don't miss opportunities to dispute chargebacks.
  4. Know when to dispute and when to retreat. A merchant needs to understand its tolerance level for chargebacks in order to maximize its revenue stream. Many factors come into play here, especially profit margins. It's not unheard of for a merchant to spend $50 fighting a $40 chargeback. For maximum cost efficiency, merchants should be able to calculate the cost of a chargeback, the cost of fighting a chargeback and the probability that they'll win.
  5. Consider outsourcing. Outsourcing, either on a full or partial basis, can free up time and resources, enabling a merchant to stay focused on its core business.

Regardless of the type of product or service a retailer offers, its business will inevitably encounter chargebacks that can't be ignored. Implementing a few key strategies to address the issue can save time and manual labor and reduce the cost of managing chargebacks by as much as 50% or more.