Chargeback management: How to reduce revenue loss and minimise risks

Chargebacks can be costly for e-commerce merchants. Despite often being necessary to protect customers and maintain their trust, chargebacks typically incur a fee. When claims are submitted against valid purchases, the loss of revenue quickly adds up.

Access to effective chargeback management solutions is vital for all e-commerce merchants to strike a balance between safeguarding their consumers against fraud and protecting profit margins. In this comprehensive guide, we’ll share everything you need to know about managing chargebacks.

Not to be confused with a refund or reversal, a chargeback is the payment amount returned to a customer’s debit or credit card after the customer’s issuing bank has disputed a transaction. The system was introduced by card schemes to protect the cardholders’ rights when making purchases with their bank cards, protecting them from fraudulent activity and poor quality services.

When accepting card payments, merchants should be prepared to face chargebacks, even when that comes at a cost to the business. Through a chargeback, not only is the product and the revenue from its sale lost, but the acquiring bank will usually charge a fee, which can quickly escalate as more chargebacks are processed.

Customers can dispute any transactions they believe are invalid or feel they’ve not fully benefited from. Most chargebacks originate from one of three fundamental sources: product or service-related complaints, first-party (‘friendly’) fraud, and third-party (criminal) fraud.

In a time where third-party financial fraud is high, there are plenty of scenarios where chargebacks are well deserved by the customer. Card-Not-Present (CNP) fraud is common in online transactions, where unauthorised purchases are made using stolen card details. As there is no physical card presented for e-commerce purchases, CNP fraud can be difficult to detect. There’s no opportunity to examine the card for visual signs of fraud, such as incorrect details or a missing hologram, and the merchant cannot verify that it is a genuine cardholder who initiates and confirms the transaction.

Another type is Account Takeover (ATO), a form of identity theft where hackers access an account, posing as the account holder and making purchases using stored payment details.

In these instances, the fees associated with chargebacks are a loss that merchants must absorb. But what happens when the transaction is perfectly valid but has been disputed anyway?

Justt’s 2023 Chargeback Pulse research found that one in four (25%) companies estimate that over 41% of all chargebacks filed are due to friendly fraud, categorised as when a customer disputes a genuine transaction, either mistakenly or intentionally. This may be due to the customer forgetting that they made the purchase or their payment details may have unknowingly been used by a household member or friend. These disputes, although invalid, are often made without any malicious intent. Unfortunately, some instances of friendly fraud occur knowingly when a customer changes their mind about a purchase or tries to recuperate the funds without returning the item.

Customers may also dispute a charge due to merchant or acquirer error, such as duplicate billing or providing unclear billing descriptors. If the customer cannot easily identify a purchase by its billing descriptor, they may believe the transaction to be fraudulent despite paying for and receiving the item. The customers’ concerns may also arise due to an issue with the provision or quality of the product or service itself.

With a plethora of reasons why a customer may dispute a purchase, having effective chargeback management solutions is vital for merchants to protect against invalid chargeback claims.

Chargeback management is an umbrella term, referring to the tools, techniques, and strategies used to minimise the impact of chargebacks on a merchant’s business. It’s not about eradicating chargebacks to zero but addressing both dispute prevention and revenue recovery to keep the chargeback ratio within an acceptable range and helping merchants recover funds that may otherwise be lost due to the dispute process.

The three core pillars of an efficient chargeback management solution are proactive chargeback prevention, effective dispute management processes and tools, and data-driven analysis of the root cause of the claim to minimise the risk of recurrence.

Chargeback claims due to friendly fraud are out of the merchant’s hands - you can’t control whether or not a customer raises this type of claim. However, as the original purchase was legitimate, merchants can dispute chargebacks from friendly fraud.

If the merchant can provide sufficient evidence that the transaction was legitimate and that the product or service was provided in the agreed form and by the agreed date, a customer-initiated chargeback will be denied. However, chargeback management isn’t just about proving these claims wrong; an effective solution aims to pre-empt chargebacks through customer support and clear transaction details.

Prevention is always better than cure, and merchants can implement plenty of best practices to reduce the impact of chargebacks on the business.

A key starting point is to educate customer service and payment processing teams correctly on the nature of chargebacks and how to assist customers effectively. Implementing a proactive customer service strategy where customers receive prompt and effective support to resolve their issues can stop concerns from escalating into chargebacks.

Reduce potential misunderstandings by implementing clear returns policies, terms, and conditions. Keep this documentation transparent, digestible, and easy to find. It’s also vital to ensure that all transaction descriptors are easy to interpret. How the company and product appear on the customer’s bank statement can greatly impact chargeback rates, so make sure that descriptors are objectively clear.

Work with reliable delivery partners and regularly assess the effectiveness and efficiency of their service: a delivery partner should complete shipping within the expected time frame relayed to the customer at the point of purchase, as products delayed in transit can lead to chargeback claims.

If a chargeback claim makes it past these measures, having detailed records of transaction details, delivery confirmations, and any other communications can all act as evidence in a future chargeback dispute case. Support is available through chargeback mitigation solutions, which aim to gather evidence against friendly fraud or first-party misuse chargebacks to help recover merchant funds lost from these disputes.

It can be beneficial to partner with a trusted, PCI-compliant payment service provider to assist with chargeback management. Although chargebacks can be managed in-house, an external payment service provider will have access to certain chargeback management tools and solutions to prevent illegitimate chargeback claims and provide expert support to help manage disputes.

Stopping fraudsters in their tracks before illegitimate transactions are made is a key aspect of reducing chargebacks. Real-time monitoring tools, such as fraud detection and alerts, can highlight merchants of suspicious activity before it’s too late.

The best technique is a multi-layered approach to fraud detection, leveraging advanced technologies such as machine learning, behavioural analytics, and graph analysis coupled with manual fraud detection. When partnering with a payment service provider, take the time to explore their risk management offerings - look for cutting-edge approaches, in-depth monitoring processes, and leveraging of machine learning and artificial intelligence to mitigate fraud risks.

Identity verification solutions are an important measure in chargeback management, adding additional barriers to reduce the risk of CNP fraud and ATO. For example, merchants can:

The best formula for chargeback management is a proactive, multi-step approach. The number of chargebacks a merchant receives can be drastically reduced by following strict rules and guidelines that reduce the chances of accidental friendly fraud claims, and having robust systems in place to protect against legitimate fraudulent transactions will lower the risk of chargeback claims while protecting both the merchant and its customers.

Merchants should assess their current systems and policies for managing chargebacks, and consider enlisting professional support for comprehensive chargeback protection. A payment service provider will understand the card issuer’s policies and the best way to tackle chargeback claims, resulting in a higher success rate, and lower costs for the merchant.

At Ecommpay, we understand the support our merchants need when it comes to chargebacks. With an award-winning risk control system, our clients are well-equipped to manage and mitigate chargebacks.

Every chargeback case is managed on an individual basis, with proper assessment of the claim and rebuttal documents. If additional questions arise, or our expert team believes that further evidence would be beneficial, the merchant is contacted directly to assist with progressing the case. A thorough response document is prepared in-house, per the card scheme requirements, maximising the likelihood of winning the dispute.

Accessible from within the merchant dashboard, merchants can manage chargebacks at every stage of the dispute cycle, with unique advice on the most appropriate rebuttal evidence for any given case. Merchants can set up chargeback reports on a one-off or recurring basis, and our Account Managers can design custom reports upon the merchant’s request.