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The holiday shopping season is winding down for ecommerce merchants across the internet. At the same time, credit card chargeback season is just ramping up. January is typically the worst month for chargebacks and merchants that are unprepared can suffer catastrophic financial losses.

What is a Credit Card Chargeback?

In simple terms, a chargeback is a credit card transaction that is being disputed. A Visa, MasterCard, Discover or American Express cardholder has certain protections against credit card abuses. The card brands typically give the consumer between 60 and 180 days to review their charges. If there is a charge the consumer wants to dispute, they simply call the card issuer and initiate a chargeback. The chargeback is then issued against the corresponding merchant that processed the original transaction.

Chargeback Reason Codes

Each card issuing brand has approximately twenty different chargeback reason codes. Depending on what the consumer states is the reason for the dispute, the customer service agent will then select a chargeback reason Codes that closely matches. The Chargebacks typically fall into one of three categories:

  1. Authorization: If a merchant processes an Authorization without the customer permission
  2. Consumer Disputes: Product not received, not as described, didn’t cancel reoccurring, not as described are the most common
  3. Fraud: Any instance where a credit card was stolen

When a merchant is issued a credit card chargeback, it will contain details on the original transaction (customer name, dollar mount, date of transaction, etc.). Most importantly, it’ll also contain the specific chargeback reason code. The chargeback reason codes are the key to identifying and eliminating the cause of future chargebacks.

What is a Chargeback Ratio?

The chargeback ratio is simply the number of chargebacks divided by the number of approved transactions within a given month. For example, getting five chargebacks on 1,000 transactions in a month equals 0.50% chargeback ratio. If your chargeback ratio is consistently above 0.75%, you bank or processor may deem your business too risky and they will close your merchant account.

Three Main Causes of Credit Card Chargebacks

There are basically three main causes of Chargebacks. The least problematic cause is “operator error,” which is basically a self-inflicted wound by the merchant.

Here is a sample of merchant errors which will result in chargebacks:

  1. Ship out wrong items
  2. Ship to wrong address
  3. Not shipping in a timely manner
  4. No shipment tracking/signature on delivery
  5. Lost, stolen or damaged packages
  6. Poor customer service
  7. Not refunding a returned package
  8. Not clearly disclosing refund and return policies
  9. Issuing a refund but failing to cancel further subscription billing
  10. Not making a customer happy

Any well run operation should have zero chargebacks but a poorly managed business could get hit with 30%+ of each month’s sales volume. Ouch!

Every one of these errors can easily be avoided if the merchant simply does good business. Fulfillment, customer service and billing accuracy are the fundamentals of any ecommerce-based business. Eliminate any issues within your operation and you can easily avoid chargebacks going forward.

The second area to focus on is fraud and stolen credit cards. Stolen credit card numbers are available on the black market for less the $0.05. A thief will spend five cents so they can use it to purchase a $2,000 laptop. Because the ROI is so high, this is the main method thieves use to steal products from your inventory.

To make matters worse, the consumer that had their card stolen will also call their credit card-issuing bank and hit you with the chargeback against the $2,000 charge. The merchant ends up losing merchandise, shipping costs, processing fees and eats a $35 chargeback fee. Unchecked fraud can easily put a merchant out of business!

Fortunately, the actual amount of online fraud is fairly manageable. There are a myriad of fraud detection, prevention and countermeasures available. The simplest tool is Address Verification Service (AVS) and the 3 or 4-digit security code associated with every credit card. This is the barebones level of fraud protection and should be used by every merchant.

Your shopping cart will typically securely connect to the credit card networks via a payment gateway. Payment gateways typically have additional fraud scrubbing features like volume/velocity check, black or whitelisting and the ability to customize how you approve, decline, or flag a transaction for manual review. A merchant should consider turning on or upgrading their gateway if the monthly chargebacks exceed 0.25%.

If you sell high value products, then it will be worth investing in and using a more advanced fraud prevention solution. Third party fraud scrubbing solutions are extremely sophisticated and may have 300+ additional tools to protect your ecommerce business. Things like device fingerprinting, Geo-Fencing, BIN-block, global negative databases are just a few of the many tools available.

The final and most difficult source of chargebacks to contend with is basic consumer fraud. Your customers know they can chargeback and dispute any transaction on their monthly credit card statements. Running short on rent? Need gas money? Spent too much on holiday presents? Regret a purchase choice and can’t make a return? Consumers can inappropriately or incorrectly use a chargeback simply because they often can without recourse.

Since these types of credit card chargebacks are so random, it makes it virtually impossible to predict and counteract. Every single online merchant or business has incurred these types of chargebacks and unfortunately, this is simply the cost of doing business. For most merchants, the number of chargebacks caused by consumer fraud is typically less than 0.25% of the gross monthly sales.


Credit card chargebacks are a direct hit to the bottom line and can kill your profit margin if they are not prevented or addressed, where possible. Preventing chargeback requires a bit of work. Look at the incoming chargeback notifications, determine what is the root cause of the chargeback (Operations, Fraud or Bad Customer), then take the corrective action to prevent the next chargeback from debiting your bank account.

About the Author


Rey Pasinli is one of the credit card processing industry’s foremost experts on emerging internet trends and evolving technologies. With 20+ years of industry experience, he has successfully collaborated with over 60,000 internet merchants. As Executive Director of Total Apps Inc., Mr. Pasinli is responsible for identifying and developing emerging web-based technologies to improve the performance of each client’s processing. Mr. Pasinli currently collaborates with the top executives at multiple processors alongside with 1,500+ prominent internet business service vendors, to provide clients with a one-stop-shop for everything related to selling on the internet. He holds a Bachelor of Science degree in Mechanical Engineering from California State University Fullerton and an MBA from Pepperdine University.

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