The Hidden Cost of Chargebacks
By Richard Parkin
One of the single most frustrating and expensive issues for eCommerce businesses, chargebacks can almost single-handedly derail a company’s profitability, transforming sales into total losses.
In some ways, the modern version of a bounced check, chargebacks happen when buyers opt to reclaim the money they’ve spent, often taking away both payment and product from affected businesses.
While chargebacks often happen for legitimate reasons – undelivered products, damaged goods, and the like, they’re also a frequent option for fraud. With chargeback fraud rising annually, particularly in 2020, you need a way to prevent and fight back against chargebacks wherever possible.
Even if there’s a real reason for your chargebacks, they’re something to avoid as much as possible. Most payment processors issue fees along with any chargeback, so companies can potentially lose even more than the payment and product alone.
High chargeback rates can potentially have an even more severe effect. Companies with consistently high numbers of chargebacks are at risk of losing their merchant accounts entirely.
Depending on your specific sector, average chargeback rates vary dramatically, but typically average around 1%. Of course, even if it’s less than one percent, losing any amount of your revenue thanks to fraud is a serious problem – here’s how to stop it.
Collecting Evidence to Fight Chargebacks
Depending on the processor you use, you should be able to pull a full report about any chargebacks for your business, along with a code explaining why the chargeback has occurred (at least, according to the bank involved).
While some of these chargebacks may be for legitimate reasons, some may be entirely fraudulent. There’s not much you can do to reverse legitimate chargebacks – you should focus on preventing them from occurring in the first place, as we’ll see next section.
However, for fraudulent chargebacks, it’s important to start a dispute as soon as possible, telling the card company that the customer in question is attempting to defraud your business. The dispute process looks different depending on the card provider, but most options work in a similar way:
After hearing about the chargeback, you should collect evidence proving that the user is attempting to commit fraud. Demonstrate that their card was correctly used with all the required details, confirm that any products were sent, along with customer IP address information wherever possible.
For most providers, the evidence for fraud needs to be completely convincing – so make sure that you’re collecting enough information during the purchase process!
Unfortunately, even when you manage to contest a chargeback successfully, you’re losing out. Some chargeback contest fees are permanent, while the time-consuming process of contesting chargebacks puts many off.
How to Prevent Chargebacks
The best approach is to do everything you can to stop chargebacks from occurring in the first place. Ensure that your system requires several verification features, and collect as much customer information as possible.
Legitimate chargebacks are often a lot easier to prevent. By having an adequate, customer-friendly refund policy, you can essentially take away the motivation behind these chargebacks.
If someone can claim a refund, they’re almost always going to pick that option, rather than the more inconvenient chargeback option. Where possible, make this a core part of your business practices – emphasize the possibility of claiming refunds, and train your support team to prevent chargebacks from occuring.
With constant advances in technology, many are turning to a new way to prevent chargebacks automatically.
Ready to find out about one of the most popular new anti-chargeback options? Tune into the Shockwave Solutions podcast (available on Spotify and more) this Thursday (January 7th), as our team talks with Adam Pivko about Kount, an AI-driven tool to prevent chargeback fraud and vastly improve your revenue.