How to Manage and Reduce the Rising Cost of Chargeback Expenses

rising-cost-chargebacks

Learning how to reduce chargebacks is a great way to ensure that customers have good intentions when buying from your store.

It's estimated that 17 percent of all sales will occur via e-Commerce channels by 2022. This dramatic rise in e-Commerce adoption over the last few years is also creating significant problems for online merchants. Card-not-present (CNP) fraud is also on the rise, and is becoming an increasingly debilitating problem for businesses to try and handle on their own.

It’s projected that merchants will lose a total of $130 billion due to CNP-related fraud by 2023. Chargeback fraud is undoubtedly one of the key contributors to this problem. In this article, we'll be focusing on how chargeback expenses actually impact merchants, and what steps you can take to mitigate and reduce the impact of chargebacks on your business.

What Is A Chargeback?

Let's start by defining what a chargeback—if you're not already familiar. A chargeback refers to a transaction reversal that was issued by the cardholder's bank. This process is intended to protect the consumer, but is often exploited by fraudsters for personal gain. 

The typical process for a chargeback starts with a consumer noticing an incorrect charge on their bank statement. They'll contact their card issuer to dispute the charge and request a refund. Meanwhile, the merchant receives a notice from the card company saying that the customer has disputed the charge and they'll need to refund the money back.

The card company then conducts an investigation and determines if the dispute is valid or not, during which time they'll usually refund the money back to the customer. This investigation process can take up to 75 days to complete.

How Do Chargebacks Impact Merchants?

If the customer wins the chargeback dispute, they keep their money. The card company reverses the charge which takes money out of the merchant’s account. ChargeDesk reports that only 21 percent of businesses win disputes.

In this case, not only does the merchant lose the revenue from that sale, but they also lose the merchandise that was shipped to the fraudster. If a business has a large percentage of chargebacks, the card company can even potentially close their account or subject the business to increased card processing fees. 

Between processing fees, chargeback fees from the acquiring bank, and operational costs (labor to store, package, and ship the product), merchants stand to lose a lot from chargebacks. 

Why Do Chargebacks Occur?

Customers can file disputes for several reasons. Common examples include:

  • Not receiving the item they ordered
  • The item was defective or damaged in transit
  • They don’t remember making the charge
  • The account was charged several times for the same purchase
  • An unauthorized (i.e. fraudulent) charge

It’s typically very easy for the customer to initiate a charge dispute with the card company. They also have more trust in their card company compared to the individual merchant.

Ways to Manage and Prevent Chargebacks

There are several actions that merchants can take to prevent and manage chargebacks. Here are four recommendations we often make to businesses that struggle with high chargeback expenses.

1. Meet Customer Expectations

The first and most obvious recommendation is to meet the expectations of your customers. Your website must accurately depict your product and give a realistic description. Anticipate customer questions and acknowledge them up-front. Don’t attempt to oversell your product, because you'll likely end up paying for it in the long-term. 

2. Be Transparent

Give an accurate estimate of shipping times and fees. Describe how you bill credit cards or cash apps. If delays occur, notify the customer and provide them with a way to contact your business.

3. Follow PCI Data Security Standards

It's important that your business complies with all of the card processing rules, specifically the payment card industry (PCI) data security standards. These standards help protect the safety of private customer data and set the technical requirements for any business accepts and processes payment transactions.

If you're not correctly following these standards, you can be held liable for fraudulent transactions that occur on your site.

4. Establish a Clear Return and Dispute Policy

Make it simple for customers to ask questions or report problems with the product. Enabling your customer support team with live chat is one of the best ways to establish a direct line of communication with customers and quickly resolve problems. This will keep your customers interacting with you rather than reporting an incorrect charge to their card company and filing a dispute.

5. Use Multi-Factor Payment Protocols

Card-not-present transactions increase the merchant's risk for fraud. One of the best ways to fight this is by using a fraud-prevention solution that offers:

  • Address and email verification services
  • Customer validation tools: biometric devices, limits based on buyer velocity
  • Card verification value (CVV)
  • 2-Factor Authentication (2FA), or Multi-Factor Authentication (MFA)
  • 3D Secure
  • Machine learning (ML) models that analyze and flag at-risk purchases in real-time

Is Your Business at Risk for Fraud?

As CNP transactions continue to increase, chargeback fraud will undoubtedly follow. It's essential that merchants find an effective strategy to fight back against chargebacks before it becomes an even larger problem. 

Vesta's end-to-end fraud solution has helped countless businesses from a wide variety of verticals reduce chargebacks, and increase transaction approval rates. If you're interested in gaining control over your company's chargeback problem, you might consider requesting a demo of our fraud solution so you can see for yourself how easy it can be to stop fraud from happening.

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