Every company occasionally encounters unsatisfied customers. Ideally, if a customer isn’t happy, they'll let you know so you can take the time to make it right. Sometimes, however, the person disputes the charge with their credit card company, initiating the reversal of funds called a chargeback.
Chargebacks can also occur as a result of credit card theft, merchant error, and other common issues. Find out why it's so important for your company to avoid chargebacks, then make a plan for prevention with some of the expert strategies we outline here.
What Are Chargebacks and How Do They Work?
A chargeback occurs when a customer disputes charges from your business. The bank investigates the reason for the dispute and decides whether to reverse the charges.
The Fair Credit Billing Act of 1974 established chargeback protection so card members could report inaccurate or fraudulent charges and get help right away.
Although this system exists as a form of fraud protection for consumers, it creates challenges for businesses when unexpected chargebacks occur. Buyers might request reversal of their credit card charges for many reasons. For example, they may:
- Not recognize or remember the charge when it appears on their billing statement
- Feel the brand didn't represent the product accurately
- Need help and be unable to reach the company for a refund
- Be dissatisfied with product quality
- Report fraud resulting from credit card theft
Understanding the different types of chargebacks can help your business avoid these costly scenarios.
Different Types of Chargebacks
Chargebacks generally fall into three broad categories:
- Merchant error, which includes chargebacks resulting from problems with the fulfillment process, ongoing subscription payments, and the customer service process, as well as system errors and authorization errors
- "Friendly" fraud, when customers claim they didn't receive the product or that it wasn't as described to justify a chargeback
- Criminal fraud, which occurs when someone makes a purchase with stolen credit card information and the card owner requests a chargeback
You can look at your company's transaction data to see where and why chargebacks occur.
Why Is It Important to Avoid Chargebacks?
Chargebacks can cost your business tens of thousands of dollars in fees and lost sales. According to one study by Lexis-Nexis, companies lose about $3.75 for every dollar of fraudulent charges. That expense includes chargeback fees that range from $20 to $100 per instance.
Chargebacks also affect your company's credit rating, making it difficult and expensive to get a business loan. Too many chargebacks will even jeopardize your ability to accept credit card payments. Merchant service providers may suspend your account for this reason.
Most merchants should aim for a chargeback rate of less than 1% of total sales. In other words, if your business brings in $20,000 a month, you shouldn't see more than $200 in chargebacks.
6 Best Practices to Prevent Chargebacks
You can reduce your company's chargeback rate with a proactive approach to fraud prevention. Try implementing one or more of these strategies to address the common causes of chargebacks for your business.
1. Know the Red Flags
When you see a suspicious transaction, checking the details can prevent a potential chargeback. Be aware of these signs of ecommerce fraud:
- Unusually large orders, especially when out of character for the customer
- Shipping addresses that don't match the provided billing addresses, especially when an account has multiple different shipping locations
- A customer email address that's been used in other fraud attempts (searching the address on Google can reveal this information)
- A customer phone number that doesn't work
- An IP address that doesn't match the customer's geographic location
If a red flag appears, take the time to follow up on the order. A simple internet search and call to the customer can save you the stress and expense of a chargeback down the line.
2. Establish a Clear, Thorough Return Policy
Your customers should be able to access a detailed return policy on your ecommerce site. Customers often file chargebacks when faced with a challenging or lengthy refund process. They're more likely to contact you rather than their bank if you make it easy to reach out.
You can optimize your return policy by:
- Adding around-the-clock customer service channels, with a variety of contact options like chat, email, text message and phone
- Offering online tools to submit returns and track their status
- Covering the cost of return shipping so customers don't need to pay to get products back to you
- Reaching out after each purchase to make sure the product arrived as expected and address concerns
- Publishing a return FAQ on your website, app, and social media pages
- Requesting reviews from buyers who've successfully navigated your return process
3. Prioritize Transaction Security
You can reduce the risk of fraudulent charges by adhering to the Payment Card Industry Data Security Standards (PCI DSS). This industry organization establishes data safety standards merchants must follow when accepting customer credit cards.
Fortunately, protecting private financial information isn't a solo endeavor. Pay.com complies with PCI DSS at the highest possible level, which means we'll shield each and every transaction as your payment services provider. You can even add PCI DSS compliance badges to your checkout page so your audience knows you take their security seriously.
4. Create Accurate, Comprehensive Product Pages
Incomplete or incorrect product descriptions increase your chance of chargebacks. Customers may be unhappy with or be unable to use the item they received if it isn't what they expected.
Make sure all your brand's ecommerce product pages include:
- Clear, colorful images of the product from all angles, including 360-degree views
- Full dimensions
- Detailed descriptions of product features
- Benefits and value associated with the product
- Comprehensive customer satisfaction policies, including return instructions
Having this information at hand can protect your company from unwanted chargeback fees. When a chargeback occurs because the customer is displeased with their order, you can prove to their bank that the item in question closely aligns with the product description. Most financial institutions give you 30 days to respond to a customer chargeback.
5. Enhance Authentication
When you sell products and services online, you naturally increase the number of card-not-present transactions. Unfortunately, so-called CNP purchases have a higher percentage of chargebacks since the merchant can't identify the customer at the point of sale.
Pay.com gives your business the power of multi-factor authentication, which adds an extra layer of protection for CNP transactions. We use 3D Secure 2.0 (3DS2) to identify transactions that can benefit from added security, then ask buyers to verify their identity by entering a code received through text or email.
6. Review Chargeback Data
If your business experiences an unprecedented number of chargebacks, check the data to find out why these incidents occur. This analysis can inform changes that will save both time and money while protecting your company and your customers from fraudulent charges.
Pay.com puts transaction data at your fingertips through our intuitive Pay Dashboard. You'll be able to trace back every purchase to see why chargebacks occurred and take real action to correct the problem. For example, if you notice delayed shipping precedes most chargebacks, it's probably time to review and optimize your fulfillment process.
The Benefits of Using Pay.com as Your Payment Service Provider
Selecting Pay.com gives you access to a full-service payment infrastructure with state-of-the-art security measures. In addition to Level 1 PCI DSS compliance, benefits for your business include:
- Multi-factor authentication to verify customer identity for card-not-present transactions
- Advanced APIs so your developers can seamlessly integrate our platform with your existing ecommerce system
- Streamlined onboarding process so you can begin accepting payments almost right away
- The ability to accept multiple payment methods including credit cards, debit cards, electronic transfers, digital wallets, and many other options
- Convenient ways for your customers to pay, including customizable checkout pages and secure Pay Links sent through email or text
- Robust reporting so you can analyze and optimize your payment process to reduce chargebacks and other concerns
The Bottom Line
Taking steps to limit chargebacks has multiple benefits for your business. Fewer chargebacks can improve your revenue, reduce costs, protect your brand reputation, and preserve the strong relationship you have with your customers. Left unchecked, chargebacks can compromise your status as an online merchant and impact the company's financial health.
Pay.com can help ensure the safety of your customers and your company when you sell products and services online. We provide the platform you need to accept multiple methods of payment with the peace of mind that comes from innovative tools for fraud prevention.