While chargebacks represent security for consumers, they can be an inconvenience for businesses. Especially if consumers are trying to trick companies by falsely claiming transactions are fraudulent. This is known as friendly fraud and poses a big risk to businesses.
However, any chargeback is a threat to a business. Here, we examine eight proven ways on how to reduce chargebacks.
Chargebacks explained – what exactly is a chargeback?
The simplest way to describe a chargeback is when money for a certain item or service is returned to the debit or credit card of a customer after they dispute a charge on their statement.
While similar to a refund, they are not interchangeable. Unlike refunds, chargebacks don’t come from the merchant. Instead, they are issued from the consumer’s card issuer.
What can businesses do when notified of a dispute?
A consumer has a set time within which they can request a chargeback. The bank that issued the card involved in the transaction will then contact the merchant bank, who will then inform the business about the chargeback.
The merchant will then have the option to issue a refund or dispute the chargeback. If disputing the chargeback, the business needs to provide proof of the transaction, including proper documentation, within a specific period.
The merchant’s bank will then send this information to the issuing bank, who then sends it to the consumer with a result. Suppose the merchant loses the case, but their bank can clearly see that the evidence provided proves the transaction’s legitimacy. In that case, they will once again send the evidence to the issuer, who will decide whether to accept or reject it. The merchant can send it to the card association to settle the dispute if the issuer rejects it again.
If the consumer wins the dispute, the charge is returned to the consumer’s card, and the merchant is charged with a fee for chargeback transactions. Businesses that face too many chargebacks can suffer further penalties, such as a fine. This is why it is so important to avoid chargebacks at all costs.
Why do chargebacks occur?
Chargebacks can happen because of:
- Duplicate charges
- Goods not received
- Fraud (Identity theft)
- Non-sufficient funds
- Expired authorisation
- Refund not received
- Incorrect amount charged
The most common reason chargebacks occur is because of fraud, usually when someone else uses the cardholder’s card without their knowledge or permission.
This is caused mostly by criminals who got hold of sensitive card data. Businesses are liable for chargebacks that occur because of this if they have not upgraded to EMV technology, now that chipped cards are in use.
However, chargebacks can also be friendly fraud.
What is friendly fraud?
As mentioned above, friendly fraud is when a consumer contacts their card issuer to request a chargeback, falsely claiming that they never made nor recognise the transaction on their statement.
Friendly fraud can happen for one of two reasons. Either the consumer was genuinely confused and mistakenly thought they didn’t make or recognise a transaction, or they purposely did it so that they could benefit from a chargeback.
Both cases are friendly fraud, and either could negatively impact your business. This is one of the main reasons you need to ensure you avoid or reduce chargebacks to the best of your ability.
A chargeback ratio refers to the number of times a business/merchant has received a chargeback. Chargebacks can be bad for businesses, especially if the ratio stands at 1% or more.
This is why it is important for you to calculate and keep track of your chargeback ratio to protect your business and stop it from reaching a 1% ratio. If your chargeback ratio is 1% or above, your business will run into difficulties.
There is some leeway when it first happens, as processors will give you a period within which you need to rectify it. However, if it continues to be an issue, your business may be put on what is known as a risk list.
Being on the risk list means processors basically blacklist your business. Even worse, they can accuse you of fraudulent behaviour. It is very important to avoid this at all costs, so make sure you do your best to reduce chargebacks to stop this from happening.
8 proven ways to reduce chargebacks
While chargebacks may seem like a threat looming over your head that you have no control over, it doesn’t have to be. There are ways to avoid them. All it takes is some effort on your part.
1. Ensure the quality of goods
When customers buy online, they trust that what they are getting is what they see on the site and that it is of good quality.
To avoid chargebacks from customers dissatisfied with the quality of a product, make sure you provide products of the highest quality.
Ensure products you sell are:
- Genuine – avoid counterfeit products.
- Correctly described on the site.
- Undamaged – customers are unlikely to buy from you again if they receive damaged products.
- Working – customers won’t want to buy from you again if they receive defective products.
2. Ensure all product descriptions are accurate
To avoid the chance of chargebacks, you should make sure the product or service descriptions on your site are correct at all times. Furthermore, always ensure that you remove products that are no longer for sale or in stock.
By providing accurate, detailed descriptions and pictures of your products, there is no way for a consumer to successfully request a chargeback by claiming they were misinformed.
3. Increase security with card verification and AVS
If you don’t have any form of card verification or AVS, it is highly recommended that you get it as soon as possible to avoid fraud.
Card Verification Code (CVC) is the three-digit security code that is found on the back of every debit or credit card. This form of verification is commonly used in most transactions when customers are asked to enter their card information. It is then compared to bank records to see if it matches. If the numbers do not match, the transaction will not go through.
One way to add an extra layer of security with card-not-present (CNP) transactions is with Address Verification System (AVS). Customers are asked to provide their billing address during a CNP transaction so that it can be compared to bank records to see if it matches.
A code is then assigned depending on the accuracy of the match, and the business can accept or reject the transaction. This helps them spot and avoid potentially fraudulent transactions.
Also, remember to keep your site updated at all times and encrypt data to secure your website.
4. Implement 3D Secure
3-domain structure (3D Secure) was created by Visa and MasterCard to prevent fraud. If a business has 3D Secure on its website, there is an additional layer of security and an added advantage – chargeback liability transfers from the business to the acquirer. This protects businesses from certain chargebacks.
5. Be easily accessible
Most customers who have an issue much prefer contacting the business directly instead of issuing a chargeback, as it takes a lot of time and effort for a cardholder to do so.
Instead, businesses should make it clear on their site that they are just a call/email away so that consumers know they can contact the support team first to resolve the matter before initiating a dispute.
In cases of friendly fraud/chargebacks, some disputes can be resolved simply by explaining and reminding the customer of the transaction made. This is why it is so important for businesses to have reliable support services to be able to communicate with customers.
If the business is unable to run support 24/7 it should clearly state support hours on the site.
6. Get chargeback insurance
Chargeback insurance is insurance that will protect your business from transaction fraud, such as transactions made with lost/stolen cards or counterfeit cards. Chargeback insurance will sometimes reimburse you for costs related to chargebacks caused by fraudulent transactions.
However, while this may seem like the end to your chargeback worries, you need to keep in mind that it does not protect you from all chargebacks, such as friendly fraud.
Make sure you read through the fine print, so you know exactly what you’re getting with chargeback insurance. While it may not cover everything, it is useful in certain cases.
7. Keep records of past fraud
It is important to keep records of all transactions, especially past fraud attempts. This will give you examples to work off in the future and give you the ability to spot any risky transactions.
You can then act quickly to avoid chargebacks, or to have enough evidence to dispute one if needed.
8. Provide refunds
By simply giving a refund, your business can avoid a lot of hassle. Customers trust businesses that have clear and fast refund processes and are less likely to ask for a chargeback if they can simply get a refund. This is another reason it is vital to have clear contact information on your site.
If they request a refund, ensure they are informed as soon as possible as to when they can expect their refund to be issued and have it reflected in their account. A good idea is to give them a way to track their refund.
The refund must always be returned to the card that was charged, and you need to keep a record of the refund.
Transparency is key to keeping customers happy and your business safe when it comes to the refund process.
How to reduce chargebacks with LumiPay
Chargebacks are no laughing matter and can seriously undermine your business, even leading to its downfall. While the above steps can help you reduce chargebacks, there is even more help for you from LumiPay.
LumiPay is a payment platform that has advanced fraud protection that protects your business from fraudulent chargebacks.
It gives both you and your customers security against fraud and protects your business from any fraudulent transaction chargebacks, thanks to 3D Secure authentication.
Give your business and customers peace of mind with LumiPay and reduce chargebacks. Find out more here.