If you are a new merchant in ecommerce, you will likely find yourself asking “what’s a chargeback?” at some point. Chargebacks are an unfortunate reality for online merchants, though with the right knowledge and planning, chargebacks can be minimized. A chargeback is happens when a customer disputes a charge with their payment card issuing bank and the bank refunds the transaction to the customer.
Thoroughly understanding the answer to the “what’s a chargeback” question can help a merchant prepare. There are various types of chargebacks, but all have negative consequences for merchants by way of fines, fees, penalties, and damage to a business’ reputation.
If the “what’s a chargeback” question is still perplexing to you, don’t worry. We’ll walk through the different types of chargebacks and how you can avoid them.
“What’s a Chargeback?” Type #1:True Fraud
When evaluating the types of chargebacks, the first term you need to understand is true fraud, or unauthorized use. This happens when bad actors use stolen payment card information to make a purchase and the true cardholder files a chargeback to dispute an unauthorized charge.
This type of chargeback typically occurs as the result of identity theft of card skimming. Fraudsters gain access to a cardholder’s payment card data and use the information to make unauthorized purchases, which the cardholder becomes aware of when reviewing the monthly statement. In some cases, however, unauthorized use could be the result of a family member making a purchase without the actual cardholder’s knowledge. This is a less nefarious type of chargeback, but just as costly for merchants. Simple miscommunication among family members could result in a chargeback that costs the merchant in lost merchandise, shipping fees, and fines incurred by the card networks.
“What’s a Chargeback?” Type #2: Friendly Fraud
Friendly fraud is not “friendly” at all. This happens when a customer seeking a refund chooses to bypass the merchant and go directly to the issuing bank in an attempt to achieve the desired outcome. This can occur if a merchant has a confusing or “unfair” return/refund policy—or if the merchant has no refund policy at all.
After receiving the product, some customers may claim that they were unaware of the purchase or say that they never received the product or say that they returned the product without receiving credit for their return. Simply put, the customer could be looking to use the product or service without paying for it.
In these cases, customers claim they never received the product or were unaware of the purchase, even after receiving the merchandise. In some cases, a customer may claim they returned the product and did not receive a credit for it. This can happen with digital services as well. Regardless of the type of purchase, the customer is seeking to defraud the merchant through dishonest means.
This type of chargeback can be combated by having clear returns and refund policies that are clearly listed on the website. Having excellent shipment tracking and delivery confirmation that requires a signature can also aid in avoiding and/or fighting these types of chargebacks.
Tips for Preventing Chargebacks
- Use Proper Authorization Protocol: When processing card-not-present (CNP) transactions, use AVS and CVV2 to confirm the purchaser’s identity. Protocol like 3D Secure 2.0 can add an extra layer of security to online transactions and cut down on chargebacks.
- Make Sure the Billing Descriptor Is Clear: Many disputes happen because of confusion or miscommunication. Merchants can eradicate these types of chargebacks by using clear billing descriptors, which include the merchant name (DBA) and other details that identify your business. When the customer checks their card statement after making a purchase with you, there will be less confusion about when or with whom the purchase was made
- Clearly Present T&Cs and Policies: Having clearly articulated and posted terms & conditions, return policies and refund policies can cut down on chargebacks.
- Optimize Customer Service: Merchants should have properly staffed customer service phone lines that minimize wait times. Allowing customers to contact by email can be beneficial as well—so long as emails are promptly (within 24 hours) returned. Also consider implementing chat lines to quickly address customer issues.
- Work With a Reputable Payment Processor: Working with a trusted payment processor that offers consultative services regarding chargeback management can save merchants hundreds of thousands of dollars in the long run. Having a chargeback prevention plan—and a chargeback management strategy—is essential to guarding hard-earned profits from true and friendly fraud.