The chargeback mechanism was introduced in the 1980s. And it served the crucial purpose of helping to remediate payment disputes between retailers and their customers.
If cardholders face unresolved transaction issues, they can file a chargeback with their card issuer. And it worked. The system boosted consumer confidence in card transactions. The eCommerce industry flourished.
Over time, scammers began exploiting loopholes in chargebacks to steal from merchants. Friendly fraud, an intentional abuse of the chargeback mechanism, became a significant business risk. Chargeflow’s State of Chargeback research indicates that as much as 80% of all chargebacks are friendly fraud. It costs merchants over $100 billion yearly. Mastercard estimates that retailers lose $15 to $70 in operational costs for every card dispute.
This article will uncover chargeback management insider secrets that are rarely discussed. We’ll shed light on key strategies for navigating the friendly fraud mayhem effectively – from prevention and response to leveraging data and technology.
What is a Chargeback and Why do Chargebacks Happen?
A chargeback is a forced credit card transaction reversal, initiated by the cardholder's bank or card issue. Chargebacks happen when a shopper disputes a transaction, going over the merchant’s head to request a refund through their bank, rather than seeking resolution directly from the seller.
Cardholders file chargebacks for several reasons, the first reason being when they suspect transactions is unauthorized. Customers also dispute charges if the product or service falls short of expected outcomes or was not delivered as promised. Merchant missteps, such as incorrect billing or processing issues, can equally lead to chargebacks.
Furthermore, problems with service quality or delivery delays can prompt chargebacks if customers are dissatisfied. Difficulty obtaining refunds or unclear policies may also drive customers to request chargebacks. Nevertheless, most chargebacks are the result of first-party fraud, as we noted earlier.
Understanding these chargeback causes helps retailers better manage and prevent their impact. It ensures smoother operations and improved customer relations.
Source: Visa
How Do Chargebacks Affect DTC Merchants?
The chargeback system is intricate and lengthy. It seems to have been carefully constructed that way. As a consumer protection instrument, chargeback provides zero liability to cardholders, while merchants are almost always guilty until proven innocent.
The card issuer will automatically initiate a chargeback if they cannot readily determine that a dispute is invalid. They do this to preserve their reputation and customer relationship. The burden of proof is then on the merchant to prove the bill's legitimacy and reverse the deduction.
“On average, 17 percent of cardholders will stop using their card or use it less after an unfavorable disputed charge experience,” Mastercard analysis says.
DTC eCommerce retailers often suffer the most losses. Each chargeback attracts lost revenue from refunds, chargeback fees (sometimes exceeding the transaction amount), and operational costs. Reclaiming sold goods may also be impossible. The merchant’s reputation equally tanks with rising disputes. When you do the math, merchants lose at least $3.7 for every $1 charged back.
The increasing ease of use makes disputing charges so common among consumers. Many do it for fun. Seriously, the internet is replete with stories of people using chargebacks to cancel legitimate transactions.
Besides the immediate monetary consequences, excessive chargebacks also impact a merchant negatively. It affects their ability to process card payments due to penalties imposed through card network monitoring programs. In severe cases, such merchants may lose their processing privileges.
Chargeback Management Best Practices for DTC Merchants
Ever wondered why chargeback fraud is a threat to DTC eCommerce? Well, the reasons aren’t farfetched. For one, there are no one-size-fits-all prevention strategies. Each business is different. And friendly fraud doesn’t happen the same way to every merchant. Friendly fraud is a generic term that could mean different things.
For example, a digital goods seller experiences chargebacks differently than a physical goods seller. Additionally, merchants not using their exact business name on billing notices attract unwarranted chargebacks. The chargeback law allows cardholders to dispute such charges as fraudulent since they cannot recognize the bill.
That said, let’s examine chargeback management best practices for DTC merchants in the various verticals: digital goods, physical merchandise, and services.
Chargeback Management Best Practices for Digital Goods Sellers
Digital goods merchants are particularly susceptible to online fraud, with cumulative losses reaching $60 billion by 2025, according to Stripe. Also, the average chargeback ratio for digital goods merchants often exceeds other verticals.
Digital goods merchants have low chargeback recovery probability. Proving service delivery isn’t straightforward. Card issuers typically side with cardholders when merchants cannot provide evidence of product delivery or use.
Thankfully, there are effective strategies to navigate this challenge and improve your chances of success:
- Keep accurate transaction records. That includes the following:
- Transaction timestamps.
- User’s IP address and geographic location.
- Content download attempts and quantity of files launched or transferred.
- Successful deliveries and download IP addresses.
- Transaction receipts and any other ancillary evidence.
- Customer communication that indicates a successful transaction.
- Make it easy for buyers to contact you before contacting their bank. Ideally, you should:
- Fine tune your policies and make them easily accessible for self-service.
- Have multiple communication channels so buyers can quickly reach you and address any disputes directly.
- Implement a system that routes queries to human support when needed rather than directing all queries to the AI system.
- Use your landing pages to manage customer expectations. Set user expectations for your products with well-crafted, custom landing pages and accurate product descriptions that incorporate testimonials from past customers as social proof.
