Knowing how to prevent and avoid chargebacks can benefit your business and customers. If you are looking for ways to prevent, avoid, and reduce chargebacks, you are in the right place. The first step toward avoiding chargebacks is understanding them. Being proactive with chargebacks can save you money in the long run. There are three main types of chargebacks – merchant error, true fraud, and friendly fraud chargebacks. Of the three types of chargebacks, merchant errors are the most common. Merchants are bound to have chargebacks. However, merchants with chargebacks exceeding 1% – 1.5% of monthly transactions may need to investigate. Merchants that have a lot of chargebacks may have several errors going unnoticed causing chargebacks or the merchant may not be adequately preventing fraud. Keep reading to learn and gain valuable insight about what chargebacks are and how you can prevent them.
What is a chargeback?
A chargeback is simply a disputed transaction. In most cases, chargebacks are initiated by the cardholder’s bank and are designed to be a form of consumer protection. However, chargebacks are often overutilized. As a result, merchants and customers are often inconvenienced and frustrated by chargebacks. If a customer contacts a merchant and receives a refund, this is not a chargeback. In order for a refund to be considered a chargeback the consumer must ask the bank for their money back. Once the consumer initiates a chargeback the bank should investigate to determine if the request is valid. In most cases, merchants do not know about chargebacks until the money is reversed. Because chargebacks are designed to protect consumers, the process is in favor of the cardholder’s safety rather than the merchants livelihood.
Why were chargebacks created?
In the early stages of credit cards, there was a lack of confidence. Most people were paranoid about using a credit card wondering whether it is safe or unsafe. What happens if my card is lost or stolen and used? Will I be responsible for the bill? These were valid concerns and still are. Concerns such as these are one reason why chargebacks came about. Another reason was complaints regarding “fraudulent” charges made my merchants with a customer’s credit card information. While some merchants may have actually made fraudulent charges, other merchants may have just been trying to collect money the believed was owed to them. To promote the use of credit cards while alleviating customer concerns, chargebacks were created. As a business owners and consumer, there are times when you are probably thankful for chargebacks and other times when you wish they did not exist.
What are the 3 main types of chargebacks?
As we mentioned earlier there are three main types of chargebacks; merchant error, true fraud, and friendly fraud chargebacks. So what’s the difference? Is there a way to prevent any of these? Let’s take a closer look at the three main types of chargebacks. . .
#1. Merchant error chargebacks
Merchant error chargebacks are usually unintentional errors such as system errors or clerical mistakes or just about anything that may leave your customer unsatisfied. For example, if a customer paid for five burritos but only received four, you may get a merchant chargeback. With delivery services on the rise many merchants are experiencing a rise in chargebacks as they are not dealing directly with customers face-to-face. Another example of a merchant error chargeback could be charging customers a subscription fee for a subscription the customer believes they cancelled.
#2. Criminal fraud chargebacks
Criminal fraud is less common than merchant error chargebacks. Criminal or true fraud chargebacks are when products or services are purchased using stolen credit card information. When the legal cardholder notices the fraudulent charges they will most likely report them to their credit card company, thus causing a chargeback. As a merchant it’s critical to verify customer identification with credit card purchases. However, this may be more challenging with online purchases. In some cases, criminal fraud charges may occur due to a misunderstanding. Let’s say your wife or husband or child uses your credit card but you were unaware, you may report that charge as fraud, thus causing a chargeback. It’s important to do everything possible to avoid criminal fraud chargebacks as they can cause negative claims against your business and be time consuming.
#3. Friendly fraud chargebacks
Friendly fraud chargebacks may be unavoidable. Friendly fraud chargebacks occur when customers file a claim stating they were unaware of a purchase. Customers could also claim that they never received a product. Another consumer trick to get products without paying for them is to say they returned the product but did not get a refund. Merchants that have 100% online transactions will most likely encounter their fair share of friendly fraud chargebacks.
How does a chargeback work?
Chargebacks occur when cardholders dispute charges. When a cardholder disputes a charge or charges, the funds are usually held from the business until the issue is resolved. If the bank approves the customer’s claim, the funds should be returned to the cardholder. If the bank denies the customer’s claim, the business should receive the funds back. In between the claim and resolution there can be a lot of paperwork and documentation required.
Chargeback reason codes explained
If a bank issues a chargeback, they should provide a 2-4 digit alphanumeric coded known as a reason code. Reason codes can be used to identify the reason for a dispute. Certain brands may have their own system for reason codes. You should be familiar with the reason code systems for the credit card brands you accept. As a merchant when you receive a reason code you can either accept the dispute or fight back. Using the reason code, merchants can provide evidence proving the original transaction was valid. Reason codes are designed to eliminate guesswork and opinion-based decisions. Reasons codes such as “DP” meaning “Duplicate Processing” are easy to recognize, but others may not be.
Types of chargebacks to avoid
Ideally, merchants should avoid all types of chargebacks. However, this is probably not possible, no matter how hard you try. While all chargebacks can be time consuming and costly, criminal fraud chargebacks can be especially time consuming. Ensuring you have fraud prevention systems in place for online or instore purchases can help you avoid criminal fraud chargebacks.
How merchants can avoid chargebacks and credit disputes
If you own a business you should evaluate the frequency that chargebacks are occurring. Furthermore, you should determine what type of chargebacks are occurring most often. Once you have analyzed your chargebacks, you can put preventative measures in place. Another way to avoid chargebacks is to provide superior customer service. It’s important your customers know how to reach your customer service team if there is an issue. If they feel that your company can resolve an issue they may be less likely to contact their credit card company. This could result in a fewer amount of chargebacks. Here are 3 ways merchants can avoid chargebacks. . .
#1. Enforce payment processing protocols
Ensuring that employees follow processing protocols for card-not-present transactions can help avoid chargebacks. If a processing network feels you are ignoring protocols they may rule unfavorably.
#2. Maintain excellent records
In the event of a chargeback, you may be required to provide documentation to prove the transaction was legitimate. Keeping records and backups that are easy to retrieve can help you in the event you have to fight a chargeback.
#3. Set realistic expectations for customers
Being realistic with customers can improve customer satisfaction and lessen your chance of a chargeback. If customers are unsatisfied with a product or service or feel it was improperly represented they may justify disputing the charge with their credit card company.