What Can a Business Do About Too Many Chargebacks?

Receiving too many chargebacks can lead to your business being placed on an excessive chargeback program or having your merchant account terminated, which is why it’s crucial to act quickly if you see your chargeback ratio rising. If you want to hold on to the privilege of accepting credit card payments, these strategies can help you get your chargeback ratio back into the safe zone.

Step 1: Analyse the Sources of Your Chargebacks and Address Them

Chargebacks happen to every business. Even if you do everything right, you’ll still get the occasional disputed charge. However, if you’re passing VISA and MasterCard’s chargeback thresholds (1% of your transaction volume is considered a high chargeback ratio), it’s a clear sign that there’s something wrong.

The most common reasons for chargebacks on credit card transactions have been studied in depth—which is no surprise considering that chargebacks are a ubiquitous problem in e-commerce. Compare this list with your chargeback reason codes to see which causes could be contributing to excessive chargeback levels. Then, address each cause.

Criminal Fraud

A high number of credit card chargebacks are initiated because a purchase was made using a stolen credit card. In fact, the chargeback process exists specifically to protect customers in these instances. Unfortunately for you, the chargeback will still cost you in the form of penalties and a higher chargeback ratio.

To prevent fraudulent transactions from going through, it’s essential to implement a robust, multi-layer fraud prevention strategy tailored to your business and your customer base. Usually, this includes:

• Buying a secure socket layer (SSL) certificate for your website
• Installing anti-virus software and a dynamic firewall
• Implementing a PCI-compliant global payment gateway
• Using verification techniques, such as address verification service (AVS), card verification values (CVV), IP address matching and reverse lookups
• Working with a merchant services provider who uses a customised, adjustable fraud scrub

Unclear Billing Descriptor

Sometimes, a customer will initiate a chargeback because he or she doesn’t recognise the name that appears on his or her monthly bank statement. For example, your billing descriptor might be your personal name or the name of your parent company rather than your business name.

To prevent chargebacks due to an unclear billing descriptor, make sure the descriptor matches your brand name, with Inc. at the end if relevant. You can also inform your customers of your billing name at the checkout or on the receipt.

Clerical Errors

Errors such as double-billing and failing to apply a discount or coupon can lead to chargebacks if your team doesn’t catch them and refund the erroneous charges in time. To prevent these kinds of errors, you can install software that catches repeat charges before they go through and make sure that discounts and coupons are applied automatically at the checkout.

Shipping Errors

Problems with shipping and the products delivered account for a lot of chargebacks filed. These include problems such as:

• The product never arrived.
• The wrong product was shipped.
• The product didn’t work as described.
• The product looked different from the picture.

The solutions here are directly related to the problems:

• Use a reliable shipping company and include the customer’s contact details on the package in case anything goes wrong.
• Provide information about shipping times and contact the customer if there’s a delay.
• Take care to ship the right product to the right customer.
• Describe each product accurately and provide demonstrational videos if appropriate.
• Display up-to-date, professional photos of each product on your e-commerce site.

The Returns Policy Was Unclear or Hard to Find

When shipping or product issues do occur (which they will, at least occasionally), failing to show empathy or issue a prompt refund can lead to chargebacks. To prevent refund-related chargebacks, write a clear refund policy and display it prominently on your website and, if possible, on the electronic receipt. When customers notify your team of an issue, show empathy, provide a replacement or refund if the problem was your fault and direct the customer to the returns policy in cases of a change of mind or buyer’s remorse.

Subscription Billing Issues

Subscription business models can be great for increasing revenue but come with an increased risk of chargebacks. You might receive a chargeback if:

• The customer cancelled the subscription and was still billed after cancellation.
• The cancellation procedure is complicated or unclear.
• The card on the customer’s file has expired.

To reduce subscription-related chargebacks:

• Send email reminders before a subscription payment is billed.
• Provide an easy, clear process for cancelling subscriptions.
• Make sure that your cancellation process automatically prevents future charges.
• Install software that prompts customers to update their cards when they are about to expire.

Friendly Fraud

The last source of chargebacks is the hardest one to prevent, and that’s friendly fraud—customers who claim an item never arrived (or was unsatisfactory) in order to receive a refund for a product that they either still possess or resold. Friendly fraud can also occur when family members use each other’s cards without permission and the cardholder later reverses the charge. In 2021, friendly fraud was the number one source of fraud attacks—up from number five in 2019.

While it’s difficult to eliminate this source of chargebacks completely, there are several things you can do:

• Ask to speak to the cardholder for purchase authorisation if the name of the card doesn’t match the name of the customer (even if the surname is the same).

• Always require a signature upon delivery.

• Send follow-up emails a few days after shipping to make sure the item(s) arrived and that the customer is happy with it/them.

• Provide a clear time limit for refunds in your return policy, as friendly fraudsters often wait several months after the purchase to file a chargeback.

Step 2: Work to Remove Your High-Risk Merchant Status

If you’ve had too many chargebacks for a while, you might have already been placed on an excessive chargeback program or had to take out a high-risk merchant account with rolling reserves and higher fees.

If this is the case, the best thing you can do is work hard to reduce your chargeback ratios using the strategies listed above. Then, once your high-risk term is over, you can move back to a traditional merchant account.

In the worst-case scenario, you may already have been placed on the MATCH list (member alert to control high risk merchants) and could be barred from opening a traditional merchant account for five years. After five years, your regular payment processing privileges will be restored—you’ll just need to keep your chargeback ratios low to avoid being blacklisted again.

Step 3: Partner with a Merchant Services Provider that Has Chargeback Mitigation Tools in Place

To help merchants prevent chargebacks and the hefty penalties that follow, some merchant account providers provide tools to help you intercept the chargeback process before it goes through and resolve the issue with the customer. You can also enrol in Visa’s Rapid-Dispute Resolution program to issue refunds automatically according to predefined rules (set by you).

By dealing with a chargeback dispute before your acquiring bank has paid out the charge, you won’t lose money in fines (usually around €20) and the chargeback won’t be added to your score. Better still, you can find out exactly what the problem was and work to prevent it from happening again.

There Is Still Hope

The most important thing to remember if you have too many chargebacks is that the situation can be reversed—even if you’ll have to pay higher fees for a while. Eventually, you’ll be back on a traditional merchant account with lower card processing rates.

In the meantime, take time to analyse your chargebacks, correct any issues on your end and consider changing to a merchant services provider who can help you catch chargebacks in time. Working together, you will be able to put your chargeback problems behind you!