How to Protect Your Business From the Rising Costs of Chargebacks
Chargebacks — reversals of card payments by cardholders — are rising, at significant cost to merchants. Why? While PYMNTS explained that 75% of chargebacks fall into the category of misuse or first-party fraud, the fact is, there are many reasons for this pattern.1
Most chargebacks fall under the umbrella of first-party misuse or “friendly fraud,” meaning a customer is taking advantage of a company’s policies to get out of paying for a purchase or claiming fraud when they have knowingly transacted with the merchant. In other cases, the customer filing the chargeback has been the victim of fraud and is disputing a purchase they legitimately didn’t make.
A charge from a mysterious name on a billing statement may cause a consumer to assume there has been an error. Or when a business makes it too hard to cancel a subscription service, a consumer who wants to cancel may find it easier to dispute the charge than to follow the proper procedure.
With chargebacks occurring for all these reasons and more, businesses are experiencing a variety of effects, each of which can complicate operations and demand a response:
● Guidelines and regulations differ from one card provider to another, making them hard to follow.
● Dispute and resolution processes are often time-consuming and manually intensive.
● Weaknesses in companies’ return policies and recordkeeping can make disputes difficult.
● Without a dedicated fraud team, it can be hard to know the full cost of chargebacks.
Taking on these challenges head-on is a worthwhile cause for businesses, but first it’s important to establish the basics. Why are these chargebacks happening and what should companies’ immediate responses be?
Why Do Chargebacks Happen?
Before delving too deeply into chargeback management, it’s important to define what a chargeback is. As Mastercard explains, there are multiple classes of chargebacks, based on why a debit card or credit card transaction is being reversed.2
Cardholders may contact their payment card providers and dispute charges for a variety of reasons. Some of the leading chargeback reason categories, as defined by card providers, are:
● Goods being ordered but not delivered — or arriving damaged.
● A merchant breaking the terms of a contract.
● A card being billed for a recurring subscription payment despite cancellation.
● An order arriving, that is an incorrect product.
Though these types of chargebacks involve circumventing a merchant’s own return or refund policy, potentially causing problems for the seller, there is a more troublesome form of chargeback: intentional fraud.
Chargebacks made for malicious purposes are harder to fight than ones made for legitimate reasons. In the latter case, customers are trying to achieve a simple outcome — getting their money back due to confusion or displeasure.
The Costs of Chargebacks
Every time a customer disputes a transaction, there is a cost to the merchant. This adds up quickly. The expense of settling each chargeback consists of some combination of:
● Lost revenue and product from a reversed transaction.
● Chargeback fees from a debit card or credit card issuer.
● Labor costs to dispute an illegitimate chargeback.
The concern that challenging chargebacks will be too expensive to be worthwhile may stop companies from pursuing a resolution. But simply accepting the expense can be untenable as rates of friendly fraud rise.
How Chargebacks Work, and Why Disputing Is Difficult
For a chargeback, a consumer contacts their bank or credit card issuer and highlights a charge, gives a reason why the charge is illegitimate, and the payment provider decides whether to reverse the charge.
PYMNTS noted that consumers are taking advantage of the ease of chargebacks to dispute a wide variety of transactions.3
Once the payment card provider approves a chargeback, it is incumbent on the affected business to dispute the process and attempt to reclaim the revenue. Winning these disputes is difficult, however.
Javelin research in partnership with Accertify revealed that under half of online retailers, 49%, had seen recent increases in their win rates.4 Doubt about whether the complex resolution processes are winnable can make companies hesitant to pursue them — the same survey found 43% of merchants had given up on disputing chargebacks.5
The Impact of Chargebacks on Your Business
If the losses due to increasing chargebacks were small, it might be possible to accept them as a cost of doing business. Unfortunately, the consequences are considerable.
What are these negative effects?
● Direct and indirect costs: The actual lost income, supplemented by the labor cost of responding to disputes and the fees imposed by payment providers, can add up quickly.
● Reputation issues: Beyond extracting substantial additional chargeback fees, payment providers may charge higher rates to deal with companies that incur chargebacks over a predetermined monthly level, adding up to an ongoing expense.
● Snowballing difficulties around disputes: A company dealing with an extremely high volume of chargebacks — for example, a subscription provider that relies on numerous small payments — can find it prohibitive to dispute chargebacks. The expense and complexity of dealing with constant chargeback issues can make companies give up and accept the losses.
Fighting Back Against Chargebacks
When fighting chargebacks, there are two critical components to build into the system. The first involves managing the human element, giving customers an alternative to disputing charges. This is important for limiting chargebacks made in good faith by legitimate customers. The second is based on using technology to implement a more efficient, effective workflow for disputing chargebacks of all kinds.
1. Enhanced Customer Care: It can pay to review and update policies around returns, exchanges, subscription cancellations, auto-renewals and more. It is essential that interactions are as clear, simple and frictionless as possible to dissuade consumers from taking that action.
2. Technical Chargeback Management: A tech-based solution that uses automated tools to monitor every chargeback allows companies to take control of this process with less wasted time and effort from employees. Rather than having to assess and collect information on every case manually, the business can receive quick, accurate determinations about which are worth contesting.
With both human and automated controls in place, your organization can stand up to chargebacks, alleviating customer frustration on the front end and taking a tough, automated stance against first party misuse on the back end.
See how automation can deliver a better chargeback remediation experience.6
Find a Better Approach to Managing Chargebacks
Infusing a company’s approach with a modern, tech-driven chargeback system is simply good business sense. Numerous companies are looking for ways to automate and improve processes, chargebacks among them.
While using automation doesn’t take 100% of the human element out of chargeback management, as there will always be complex cases that need hands-on assessment, its streamlining effect limits the time and effort needed to respond to disputes.
Whether your primary business is e-commerce, subscription services or any other directly customer-facing model, you need a powerful solution for chargeback management. The potential losses from first party misuse add up quickly, which means the ROI on a system can be immediate.
Accertify’s chargeback solution streamlines data collection, providing automated tools that make it easy to determine the necessary steps for chargeback representment.
Want to learn more about automating chargeback management? Request a demo.
Our services offer end-to-end protection, from login to dispute. We help you stay ahead of emerging fraud threats with the right trade-off between customer experience and risk.
Move at the speed of right – accertify.com