Earlier this year, we wrote about the rise of remote purchase fraud and how to best protect your business online. For this blog, we’re digging a little deeper to discuss one particular threat to businesses trading online: chargebacks.
Chargebacks are essentially disputed transactions between a customer and a merchant. If the chargeback is successful, the transaction is reversed and the customer has the money returned to his or her account.
Chargebacks were originally created to protect consumers from fraudulent usage of their cards so the onus is then on you, as the merchant, to prove the transaction was bona fide.
While chargebacks were originally created to protect the consumer from fraud, they can, and are, misused by people who simply do not want to pay for something. This is called friendly fraud and it poses a serious threat to legitimate businesses.
A study from Global Risk Technologies estimated that 86% of chargebacks are placed fraudulently.
However, even though fraud is the most commonly cited reason for chargebacks, they can also stem from genuine reasons like processing errors, issues with goods or services and incorrect authorisation.
How Can I Limit Chargebacks?
A chargeback prevention plan doesn’t have to be super complicated nor does it have to take up days of your time.
Below are five simple steps you can take to protect your business from chargebacks.
#1: Choose a recognisable name
There is a US tech company called 37signals that sells a range of digital products. Their most famous is a project management tool called Basecamp.
Pre-2009, when a customer bought a subscription to Basecamp, their bank statement would include a charge for 37signals LLC rather than Basecamp.
This left a lot of people scratching their heads and wondering what the mysterious charge actually was. Instead of researching the company’s name, many customers decided the charge wasn’t legitimate and submitted a chargeback.
37signals bore the brunt of their confusion and received a high number of chargebacks.
In 2009, the company began experimenting with their statements and, after a bit of trial and error, opted to use a URL — 37signals-charge.com — as their statement descriptor. This URL directed customers to a page explaining what 37signals is and detailing all the products they sold.
The impact was immediate. Chargebacks fell by 30% overnight, saving 37signals a huge amount of time and money.
The takeaway tip here is clear: Choose a statement descriptor that your customers will actually recognise!
#2: Clearly offer refunds
The refund process for a bricks-and-mortar shop is pretty straightforward. If you decide you don’t like a t-shirt, you take it back to the store, walk up to the customer service desk, hand it over and request a refund.
For online purchases, however, it’s a lot more difficult. Common concerns for online merchants include:
- Who pays for the return shipping?
- Who organises the pickup?
- When does the merchant actually pay the refund?
However, no matter how a refund is handled, it typically takes up a lot of time and causes a fair bit of stress for both merchant and customer.
So, if a customer sees a hassle free way to get their money back, they’re probably going to use it.
Rightly or wrongly, some people see chargebacks as that hassle free method. After all, why would someone slog through a long refund process when they can demand the money back right now?
Your refund process has to compete with the appeal of chargebacks so you better make it as streamlined and friction-free as possible.
Don’t ask customers to jump through hoops, don’t ask them to fill out reams of paperwork and don’t employee frontline service staff who can’t actually deal with problems.
Once your customers know that you offer stress-free refunds, they will start using it instead of chargebacks.
Some online clothes retailers have actually started shipping packages with jiffy bags with prepaid postage included. If a customer doesn’t like something, they stick it in the jiffy and mail it right back! Now that’s what you call a great refund policy!
#3: Keep communicating
Think back to the last time you had to deal with poor customer service. Remember all the canned responses and generic replies. Remember the frustration it caused and irritation it provoked.
Well, when a customer experiences that sort of awful service, can you really blame them for resorting to chargebacks? I certainly wouldn’t.
Do the simple things like responding to emails, phone calls and social media posts and do them well. Get back to people as soon as you can and provide genuine answers to their queries. You’ll be amazed how compliant a customer will be if they think you’re working for them rather than against them.
#4: Prevent fraudulent transactions
Unfortunately, when it comes to remote purchase fraud, the liability falls on you as the merchant. Whether you manage an established multinational or a cash-strapped startup, dealing with fraud is exceptionally disruptive to your operation.
To deal with this, all businesses require a solid online fraud prevention plan to block as many dodgy transactions as possible and set processes to address with any cases that slip through the cracks.
If you don’t already have a fraud prevention plan or want to improve your existing plan, check out our blog on preventing card fraud.
#5: Dispute the chargeback
If all else fails, you can still dispute a chargeback. While the process is typically fairly time-consuming, it means you can recoup your losses, which might be worth your time.
Once the cardholder has contacted their issuer to dispute a transaction, the issuer will contact your acquirer. You will then receive written notification detailing the reason for the chargeback. This may include a request for information from the issuer to help determine the authenticity of the chargeback.
It’s this point when you get to argue your corner and present a rock solid defence to the chargeback.
All acquirers will ask for different information so ensure you read their requirements to the letter and provide exactly what they’re asking for.
Average Chargeback Rates
Accurate chargeback statistics are difficult to pin down as rates vary to a huge degree between industries. Below are figures from Ingenico.
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How does your business perform against the industry standards? Let us know in the comments.