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Preventing and challenging chargeback disputes

Chargebacks are an unfortunate part of ecommerce - and also a major threat to an online business. In this article we'll look at what a chargeback dispute is, the costs involved, how the process works, challenging chargebacks and steps you can take to minimize the number of chargebacks you experience.

What is a chargeback?

A chargeback is where a sale is refunded to a customer; i.e the merchant's account is debited at the direction of the card issuing bank after a dispute from a customer. Complaints vary, but it could be due to fraud, a claim by the customer the goods didn't arrive or the service wasn't rendered, faulty goods and services, misleading advertising or a double debit - to name a few. 

Chargeback period

This is really important - the customer has 6 months to dispute a transaction in many cases. If you offer subscription services, the situation is even worse. Let's say you provide access to a subscription service and your longest subscription plan is 2 years - cash up front. Your customers can dispute the transactions up to 2.5 *years* after they originally made payment. It's one of the reasons why subscription services offering long term pre-paid plans are considered high risk.

How does the chargeback process work?

  1. Client files complaint with card issuing bank

  2. Bank researches the transaction 

  3. Bank debits merchant via merchant provider and credits cardholder

  4. Merchant account provider sends you documentation

  5. You can then refute the chargeback by providing evidence. This includes screenshots of the customer's account (for service usage), copies of receipts, relevant communications etc.

  6. Further evidence may be required, or a decision is made

  7. In the even the chargeback challenge is successful, cardholder is debited again

  8. If the chargeback challenge ultimately fails, merchant is charged a chargeback fee

Due to the to and fro with evidence requests, it can literally take months to resolve a chargeback one way or another. 

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What level of chargebacks causes problems?

If your chargeback level is too high, you can lose your merchant account and this is an area where smaller merchants get caught out. Usually the figure bandied around is 1% of transactions is the threshhold. While that doesn't sound too bad, the hidden gotcha is it can mean 1% of transaction *value*. Where this can be especially dangerous is if your average ticket price suddenly skyrockets due to a change of product lineup or business model. 

For example, let's say you sell Pink Flombles for $10 bucks each and you sell 150 of these a month - that comes to $1500. One chargeback isn't going to be a threat. But if you start selling a special collector's item Purple Flomble for $150 and you sell 149 Pink Flombles and one Purple Flomble and that Purple Flomble sale is charged back - you have problems. In this scenario, while your chargeback rate based on transactions is still under 1 percent, your chargeback rate based on transaction value takes you up to nearly 10%. If that happens for a couple of months, your merchant account will be threatened.

How much do chargebacks cost?

Chargeback fees are usually around the $30 mark - but that's only scratching the surface of the costs involved. If you dispute the chargeback, there's the cost of your time. Then there's the loss of profit on the goods or services you may have supplied. Also, if your chargeback levels are too high, you may find yourself having to pay increased transaction fees or worse still, your merchant account can be terminated - leaving you unable to process transactions until you find another provider. 

Once you've had an account terminated, it's a bit like having a criminal record - you're blacklisted and likely the only merchant services provider that will take you on will classify you as high-risk and charge accordingly.

Preventing chargebacks

It's important to understand that the way the chargeback system works is in favor of the customer and the process is sometimes abused. You need to do everything you can to ensure that if you do have to issue a challenge or your account comes under scrutiny, you've taken all the appropriate steps. Here's some do's and don'ts that will decrease your risk of chargebacks while increasing the probability of being successful in chargeback challenges.

Misleading marketing

If you're exaggerating claims in your promo, that will certainly create disgruntled clients and chargebacks - make sure you can deliver on what you promise

Fraud

Fraud is a major reason for chargebacks - so ensure you have the proper screening processes in place. This guide provides a series of tips on fraud screening.

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Refund policy

Be as generous in your refund policy as you can - particularly when it comes to digital goods and subscription services. While refunds are a pain and impact your bottom line, a refund policy will help with conversions as it acts as reassurance to customers. It's also better than having to refund and cop a chargeback fee as well. If you do have a refund policy in place, ensure you adhere to it and that it's publicly posted. 

Some laws and credit card issuer rules state that consumers are able to chargeback for items or services not delivered or are defective, regardless of any "all sales are final" policies of a merchant.

Communications

Ensure it's easy for people to contact you. In the case of fraud, the cardholder will often try to contact the merchant before issuing a chargeback to see what's going on. This is an excellent opportunity to deal with the issue before it gets to chargeback stage. Ensure that your company's name is clearly stated on cardholder statements so they know who to look for. If your company's name is "Bill's Flombles", but "Flingle Holdings" appears on card statements as being the merchant, the affected cardholder may have trouble tracking you down.

Always provide invoices and receipts to customers that very clearly state your business name and contact details - it helps the customer to recognize your company name when they see the charge on their credit card statement and is required by card companies.

It's also vitally important that your email address, phone, fax number and address on file with your merchant account provider is kept up to date as usually chargeback notifications are sent via fax or snail mail unfortunately - and often they are delayed.

Use CVV2 

The Card Security Code (CSC), aka Card Verification Value should be a feature on your order forms - it's an additional layer of security, further minimizing fraud. The CVV2 number isn't included on the magnetic stripe of the card and online merchants are forbidden in the USA by Visa from storing the CVV2 number - so if card numbers are stolen, without the CVV2 number, they aren't usable.

Clear terms of service

Be very clear in your terms about issues relating to cancellation, refunds and the way your services and/or products are provided. Any grey area that's challenged will likely work against you.

Record keeping

You need to keep a copy of all receipts and communications with a customer as these may be valuable evidence in a chargeback challenge.

Rapid response

Chargebacks are another reason why good customer support is crucial. Tardy responses to support requests or ignoring support requests altogether are a recipe for chargebacks - and for your consequent challenge to fail.

Professional approach

You need to be professional in all communications - bear in mind these communications may be used as evidence by the customer. If you're rude or aggressive, this can go against you in a chargeback review. Even if the customer is being totally unreasonable and rude themselves; stay calm - their behavior will work against them.

Be thorough in challenges

A chargeback notice will contain detail on what you need to provide in order to challenge it. Read these notices carefully as failure to supply the required information will just cause further back and forth; wasting time and money. If you're unable to provide a particular item; call the merchant account provider for advice - they may offer suggestions as to what other forms of evidence would be acceptable.

For online merchants, chargebacks are a particularly vexing problem, mainly because the cardholder signature isn't provided. In many ways, the banking and credit card system is still stuck at a pre-Internet stage. Merchant account providers will often suggest getting a faxed order form from customers with signature and ID before debiting the cardholder's card, but they don't understand this can really impede conversions. Until such time that the card industry is dragged screaming into the 21st century on these issues, merchants just need to cover as many bases as they can.

Michael Bloch
Taming the Beast
http://www.tamingthebeast.net 
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In the interests of transparency and disclosure, please note that the owner of Taming the Beast.net often receives goods and services mentioned in reviews for free, or may receive payments or affiliate commissions for advertising or referring others to merchants of products and services reviewed.

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