Understanding Chargeback: A Comprehensive Guide for Businesses

As a business owner, you should be aware of online transaction processing, most especially a chargeback, which can hurt your business. A chargeback occurs When a customer disputes a payment for a purchase, and their bank reverses the payment. 

It causes several problems to a business such as loss in income, raised charges, and maybe also harm to merchant accounts. This article discusses what it means, various kinds of frauds, effective strategies for handling them, and many other things.

So, time to break the suspense and focus on Chargeback 101.

What is a Chargeback?

In simple words, a chargeback can be called a transaction reversal. It occurs mostly when a customer disputes a purchase. In this case, the cardholder’s issuing bank will investigate the claims made by the customer after he/she requests a chargeback.

In case of validity in the customer’s complaints, money will be withdrawn from the merchant’s account so that it can be returned to the customer. It may also lead to extra charges on businesses as well as harm their relationships with merchant account processors.

DID YOU KNOW?
It is estimated that by 2026, the global volume of chargebacks will increase 42% from 2023 levels.

Types of Chargebacks

Chargebacks can be classified into three types:

1. Criminal Fraud Chargebacks — This happens when the personal payment information of a customer is stolen and used without obtaining their consent. In this case, the authentic cardholder raises an objection to the charge, leading to a chargeback.
2. Merchant Error Chargebacks – These come about because of mistakes committed by the seller such as wrong item shipping, billing errors, or non-delivery of goods/services ordered. In similar instances, if there are no positive results from interaction with the trader on this issue, the buyer may file a chargeback.
3. Friendly Fraud Chargebacks – Also referred to as fraud. In this case, after making an actual purchase the consumer disputes it to get back his/her money when still holding onto what they have bought or accessed. Merchants find it challenging to stop friendly fraud because it is a major concern for them.

The Impact of Chargebacks on Businesses

A business can suffer drastically due to chargeback occurring. In addition to losing sales immediately, there are other expenses associated with it like costs, inventory loss, higher transactional processing charges, and possible fines.

High ratios (which refer to chargebacks as a part of total transactions) may result in penalties by payment processors and result in increased charges or even the cancellation of merchant accounts.

For merchants categorized under high-risk, this becomes more serious where they need to keep low chargeback ratios to operate comfortably.

Best Practices for Chargeback Management

For a business to minimize losses from chargebacks and to maintain its good name with financial institutions and payment processors, its management is necessary. The following are some major strategies for managing them effectively:

• Deploy Strong Systems for Fraud Detection: Advanced fraud detection systems will help in preventing criminal fraud chargebacks. Such systems rely on AI and Machine learning to pinpoint suspicious transactions and ensure that questionable purchases are reported or rejected.
• Clear and Transparent Policies: To avoid disputes from growing into chargebacks, customers must access clearly communicated return, refund, and cancellation policies. Ensure that these policies can be accessed easily on your website and in your customer communication.
• Use Chargeback Alerts and Response Tools: Some service providers like Verifi offer alerts that help merchants know when their clients file disputes against them. The business has an opportunity to deal with similar issues directly to the client before those charges are made which minimizes chances of increasing the ratio.
• Keep Accurate Records: Businesses can successfully dispute chargebacks when transaction records are maintained with order confirmations, shipping details, and customer communication. This way, merchants often end up winning because they have presented enough evidence.
• Monitor Chargeback Metrics: Constantly looking at how the ratio changes over time can help identify potential issues. Doing this enables a clear understanding of what causes chargebacks so that merchants may be in a position to deal with them before they happen.
• Top-notch Customer Service: One way of avoiding a chargeback is by providing excellent customer service to resolve problems before reaching extreme requests. In addition, customers should easily get hold of support teams who would handle their complaints regarding their orders.

Understanding Chargeback Fraud and Prevention

Companies are progressively concerned about chargeback fraud or friendly fraud. Criminal fraud is when a credit card is purposely stolen and used, but fraud means an honest transaction occurred, but the customer decides to dispute after receiving goods or services.

A mix of proactive and reactive actions is necessary to stop chargeback fraud:

• Customer Verification: Use advanced customer verification procedures, such as 3D Secure (3DS), and Address Verification Service (AVS), to reduce the chances of fraudulent transactions.
• Blacklists / Whitelists: Keep lists of customers who tend to file chargebacks falsely (Blacklisted Customers) on one hand, when maintaining lists of loyal clients (whitelisted). This way, fraudsters can be detected quickly before they make their moves.
• Chargeback Fraud Education: For clients to avoid filing fraudulent changes, it is advisable to inform them about possible consequences that might arise from doing so. Sometimes informing customers adequately may help them avoid going into the practice.

The Role of Chargeback Insurance

Chargeback insurance in payment processing is a recent concept. It provides financial security to companies against some kinds of chargebacks, especially those that involve fraud. There is a great variation in insurance policies, with most of them covering the cost arising from cases that are related to fraud.

Moreover, chargeback insurance serves as an ideal safety net for high-risk merchants or businesses that are very susceptible to fraudulent chargebacks. However, you should understand that insurance is not a management element. Therefore, businesses still have to consider effective management practices to prevent fraudulent activities.

Resolving Chargeback Disputes

In case of a chargeback filing, there is a process called “representation” through which businesses are entitled to dispute it. At this stage, the merchant presents evidence to the issuing bank to show that the transaction was genuine. Such evidence could be transaction receipts, shipment details, communication with customers as well as proof of delivery.

To win a case such as this one requires good record-keeping and a clear understanding of the reason codes that are given by credit card networks. Each code has a distinct meaning depending on the network (Visa, MasterCard, or any other) and corresponds to a specific kind of request like “goods not received” and “fraudulent transactions”. 

Therefore, a clear understanding of these codes is paramount for businesses to provide relevant and convincing documents during the disputation process.

Conclusion

In the modern business world, online transactions are inevitable and companies face the complex task of managing chargebacks. Further, businesses have to focus on several layers from managing chargeback insurance to implementing appropriate management strategies.

To reduce losses due to chargebacks, businesses need proactive action that combines well-advanced fraud detection systems, effective customer service practices, and thorough monitoring for possible cases of chargebacks.

In addition, companies should know how exactly these mechanisms work so that they can protect their income streams and maintain good relations with transaction processors, making transactions safer and easier.