A chargeback is when a previously processed card sale is returned. This may happen if a cardholder disputes the sale because they suspect it’s fraudulent, the services were not provided or the merchandise wasn’t received — to name just a few reasons.
To initiate a chargeback, the cardholder contacts their card issuer to dispute the payment. They must have what’s known in the industry as a ‘chargeback reason code’ — essentially the reason for the card issuer to charge the transaction back through the system.
In many countries, chargebacks typically reflect consumer protection regulations. They’re also inherent to so-called ‘pull’ payment methods, such as card payments and direct debit, where customers provide account details for businesses to ‘pull’ payments from them.
25% of ecommerce merchants say they have experienced a significant spike in chargebacks during the pandemic.
Why do businesses dislike chargebacks?
Chargebacks have been part of card scheme rules for years, however, they can be complicated to manage and often come at a cost to the merchant.
Chargebacks can leave merchants out of pocket in three main ways:
- Businesses may have already shipped the goods or provided the service before the chargeback is processed. If the chargeback is successful, they won’t receive payment.
- The merchant incurs the administrative cost of dealing with the chargeback or disputed payment. If businesses have a high number of chargebacks, this cost can add up (particularly considering the additional resource required to manage the chargeback process).
- If a business receives too many chargebacks, it could be forced to work with high-risk processors charging higher fees, which adds to the cost of card acceptance. Or, in a worst-case scenario, if a business persistently appears on the chargeback compliance programs from Visa and Mastercard, they might lose card acceptance, which can frustrate customers and reduce sales.
What are the most common reasons for chargebacks?
If a card issuer returns a transaction to an acquirer — charges it back — they must do so using specific codes that define the reason the transaction is being disputed.
Most transaction-related disputes happen when businesses do not follow standard procedures. For example, when they fail to check a card’s expiry date, forget to authorize a transaction or accidentally submit a transaction more than once.
Other common causes include failing to cancel regular transactions when asked, an unrecognizable business name on the card statement, non-receipt of goods or the cardholder claiming that the transaction never took place.
There’s also so-called ‘friendly fraud’, sometimes known as ‘first-party fraud’ or ‘chargeback fraud’. This is when a legitimate customer claims they don’t recognize or didn’t make a card purchase. They then keep the goods or benefit from the service purchased without paying for it.
How can businesses prevent chargebacks?
One of the best ways to manage chargebacks and disputed transactions is to prevent them from occurring in the first place.
Here are some quick wins:
- Check the billing descriptor that flows through the system on to the cardholder’s statement can be easily understood. This helps prevent ‘transaction not recognized’ disputes.
- Communicate return, refund and cancellation policies clearly to customers at the time of the sale. Failure to do so may be detrimental if the cardholder decides to return the merchandise or cancel the service.
- Provide customer service contact details for cardholder billing queries, complaints and address them promptly and fully. This is not only good business practice, it may also avoid unnecessary chargebacks or disputed payments later on.
Don’t charge cards too early…or too late
To help prevent ‘non-receipt of merchandise’ disputes, don’t submit transactions until goods have been shipped. If cardholders see transactions on their statements before goods arrive, this may lead to confusion and a preventable dispute. Just as it’s best not to submit transactions too early, don’t submit them too late either. This helps avoid ‘late presentment’ or ‘credit not processed’ disputes.
Obtain proof of genuine cardholder participation
Providing compelling evidence that the genuine cardholder participated in the transaction and/or received the goods helps defend friendly fraud chargebacks. Configure your internal processes to capture the customer’s account order history, clearly showing all transactions. Collect and retain signed delivery receipts from the customer, courier tracking documentation, or the customer’s IP address, description, date and time of download, if you sell digital services.
Leverage Strong Customer Authentication rules
The introduction of Strong Customer Authentication (SCA) in Europe is a potential game-changer for preventing certain types of chargebacks. That’s because it offers a layer of protection for both merchants and issuers against the fraudulent use of accounts.
Using 3D Secure 2.0 (3DS2) provides payment protection against fraudulent disputes. Using 3DS2 is also an opportunity to share more data and help issuers conduct risk-based authentication to provide better customer experiences at the checkout.
Update expired cards
There’s no need to incur chargebacks, lose sales or miss payments because your customer’s card has expired. Our Account Updater service is available to merchants in the EU or US who tokenize their cards with Checkout.com. It automatically updates expired cards helping you maximize revenue, reduce churn and the manual work of prompting customers for new card details.
“Our chargebacks have gone down substantially since switching to checkout.com. And the time spent dealing with these disputes is down by 50%"
Jason McMillan, Director, SelectSpecs
Minimizing the impact of chargebacks
Dealing with chargebacks, customer disputes and instances of friendly fraud is a reality of accepting payments. But there are plenty of tactics and tools at your disposal to minimize the impact and all the costs and complexities involved.
Our Disputes API provides recommended solutions and advice on responding to each dispute, helping you with case-by-case decision-making, resolving disputes faster and reducing the administrative costs involved.