Everything You Need To Know About Chargebacks

What is a Chargeback?

A chargeback occurs when a credit cardholder disputes a charge on their account. This process is initiated by the credit card issuer, which immediately refunds the charge to the cardholder. The issuer then files a chargeback claim through the acquiring bank, which deducts the refunded amount from the merchant's account and notifies them of the chargeback. Merchants typically have 3-4 weeks to respond to the chargeback by providing appropriate documentation to support the transaction.

High-risk merchant accounts are at greater risk of an unsuccessful dispute of a chargeback given the absence of a signed receipt, which provides proof of a sale. There are both valid (e.g. duplicate transactions and damaged things) and invalid (fraudulent) reasons for chargebacks. Merchants should take steps to prevent and minimize chargebacks, irrespective of whether the dispute is valid.

A Refund Versus a Chargeback

Failing to provide a refund can lead to an unwanted chargeback, which can severely affect a merchant's long-term viability. A chargeback is essentially a refund mandated by the cardholder's bank, in contrast to a voluntarily issued refund. If chargebacks exceed 1% of total sales, merchants may face fines or even have their merchant accounts shut down. Once in chargeback trouble, obtaining another merchant account becomes increasingly difficult, particularly for high-risk merchants, as many payment processors may deny applications or impose higher fees.

Chargebacks are not only costly but also time-consuming and resource-draining. Smaller retailers, in particular, may need the in-house expertise necessary to combat these customer disputes effectively.

How to Mitigate ChargebacksChargebacks can occur for a multitude of reasons, leading to significant revenue loss. While you don’t need to become an expert in chargebacks, understanding the common causes can help improve operational practices to stop chargebacks before they escalate.

1. Timely Refunds: Always process refunds promptly to avoid chargebacks labeled as "charge not processed." Ensure that refunds are made to the same credit or debit card used for the original purchase.
2. Clear Communication: Inform customers how long it will take for them to see the refund. This simple step can greatly enhance your business's reputation and customer retention.
3. Choose Secure Payment Methods: Opt for a secure high-risk merchant account to mitigate stress related to credit card chargebacks.

Top 8 Strategies to Manage Chargeback Risk

As stated before, there are various reasons a customer may dispute a fee. How a retailer manages the danger surrounding such disputes will determine whether it results in a chargeback.

Here are 8 common scenarios and approaches to mitigate risk:

1. Customer Refunds

When a client requests and is eligible for a refund, make certain to do this fast to avoid a "charge not processed" chargeback. Furthermore, make sure that your refund finance policy is clearly mentioned on every trade. The customer should be asked to click on an "I agree" button prior to the order being finalized. Make sure to only refund back to the same credit card used in the initial purchase.

2. Implement Diagnostic Controls For Fraudulent Charges

Since the card is not present throughout the trade, online transactions have higher fraud risk. Here are a few methods to reduce this threat:

• Require the security code on the back of the credit card.
• Maintain a record of problematic clients and block transactions from these customers.
• Limit the number of transactions by the exact same customer for a particular time period (e.g. hour, day, week).
• Maintain good financial records.
• Track communication with clients and document customer IP addresses.
• Use an address verification service. This will match the cardholder's address to the card prior to approving the purchase.

3. Customer Service

When a customer cannot find your information when there is a question or criticism, they can go straight for their credit card company to dispute the charge rather than contacting you first. Make your customer support contact information easy to find.

Contact information should be easily visible on your website. Include it on shipped merchandise and also have it on all mail. Respond to your customers fast. This may encourage the client to call you with the dispute before going to their charge card business. They can give you the chance to correct the problem while boosting a good reputation for customer service.

4. Recurring Transactions

Recurring transactions are usually employed for subscriptions and are usually automatic. As soon as a customer cancels a subscription, act immediately to stop the automated payment. This will avoid several chargebacks from the same customer.

5. Product Not Received

A fee cannot be processed before products or services are provided. Using a delivery service that offers delivery confirmation will provide evidence of shipping. Companies like Amazon.com adopt this method of delivery tracking in order to maximize organization and minimize future complications.

6. Paying In Installments

Make certain to disclose all terms of an installment and have customers accept those terms using an "I agree" button. The first installment payment cannot be processed prior to the shipment of products.

7. Expedited Delivery

Payment could be processed prior to shipping when the sale is called "delayed delivery." You can't process a payment deposit before shipping. Again, have the customer click an "I agree" button.

Top 3 Strategies to Respond to Chargebacks

When a chargeback occurs, swift action is crucial. Here are three strategies for effectively responding:

1. Timely Response: Respond to chargeback notifications immediately. Failure to do so could result in losing the dispute and incurring penalties.
2. Collect Documentation: Gather all relevant documentation, such as order confirmations, delivery notices, and any correspondence with the customer, to support your case.

Learn from Disputes: Analyze each chargeback to identify patterns and implement systems to prevent future occurrences.

Return Item Chargeback

There are many reasons a consumer may file a return item chargeback. There are over 50 chargeback reason codes between all the major card brands. While that list is too long to cover here, we wanted to address the most commonly abused reasons for a credit card chargeback dispute and how to fight chargebacks.

Chargeback Fraud

How to avoid this in the future: When it comes to credit card chargeback fraud, there are many tools available to merchants to alleviate fraud in the online payments world.

• iSpy Fraud Tools: iSpyFraud is a rules-based fraud prevention tool that merchants can use to screen suspicious transaction activity. This helps merchants to stay one step ahead of credit card chargeback fraud.
• Verified by Visa/MC Secure Code: Both Visa and MasterCard have programs that allow you to add an additional layer of security to your sales. This can potentially avoid a return item credit card chargeback fee.
• 3D Secure: 3D Secure was created by Visa and MasterCard to add an additional layer of security for Card Not Present (CNP) and high-risk merchants.
• Gateway Tools: Utilize the standard gateway tools at your disposal to avoid an unnecessary return item chargeback. Be sure you turn on and make use of AVS (Address Verification Services) and CVV (Card Verification Value).

Transaction Not Recognized

Processes to implement preventing this: In high-risk payment processing, your payment descriptor is the merchant name as well as other identifying details that appear on the customer's statement when they make a purchase. If the customer doesn't recognize the name that appears on their statement, it is unlikely they will know what the charge was for. To avoid a chargeback dispute, be sure your descriptor reflects what the consumer will recognize.

Incorrect Transaction Amount / Fraudulent Multiple Transactions

What to look for: You may run into a system error that can lead to the customer's credit card being charged twice. This risks the potential of a return item chargeback fee. Occasionally, a customer accidentally presses the "Check Out" button twice, leading to a duplicate charge. If you see a duplicate order, assume that it was a mistake and contact the customer to confirm. If there is a manual process, the person processing the credit card might make an error. Avoid doing manual processing of orders, if possible. Be sure to state the chargeback time limit somewhere within your return policy guidelines.

Not as Described or Defective Merchandise

Here is what you should do: You can't make everyone happy. That goes double for consumers. Make sure you have a responsive customer service team with short hold times. One thing infuriates a consumer more than long wait times; speaking with a customer service rep for a company with too strict of a return policy. You need guidelines for how to fight chargebacks. Make sure your return policy is clearly located on your website in a way that is fair for both parties involved.

Services Not Provided or Merchandise Not Received

The resolution: Start with clear expectations. Make a visible shipping policy on your website. Keep your customers informed by emailing order status updates. Sometimes there are circumstances out of your control, especially for those with a mobile merchant account. This can cause a delay in shipping. Issues in this area can range from unexpected weather causing shipping delays, to an unexpected turn in sales causing you to run out of product. Regardless, for a return item chargeback to be avoided, advise the customer of the delay and give them the option to cancel.

Canceled Recurring Transaction

The solution: If a customer requests cancellation of a recurring transaction that is billed periodically (monthly, quarterly, annually), always respond to the request and cancel the transaction immediately – or as specified by the customer. If you don't want to fall subject to a credit card chargeback, advise the customer in writing that the service, subscription, or membership has been canceled, and be sure to state the effective date of cancellation. Failure to respond to customer cancellation requests almost always leads to a chargeback.

Credit Not Processed

How to dodge this problem: Always make refunds in a timely manner. Make sure to refund the same credit or debit card the consumer paid with. Failure of timely refunds can result in a return item chargeback or a basic credit card chargeback. Make sure you communicate to your customers how long it will take before they see the refund.

When it comes to the integrity of how your business is conducted and your consumer retention, it's always best to be overly cautious. Knowledge is power. Knowing how to fight chargebacks in regard to the chargeback time limit can be a powerful resource. Be sure that your company chooses a secure high-risk merchant account to deflect many of these stressors and for all your payment processing needs.

If you're unsure whether or not your company has been categorized as a high-risk merchant, be sure to check out our list of high-risk processing industries.

Visa Claims Resolution (VCR) Initiative

As credit card transaction disputes, or chargebacks, rise and processing costs increase, Visa has launched the Visa Claims Resolution (VCR) initiative, effective April 2018. This initiative automates and simplifies chargeback protection to enhance the efficiency of handling disputes.

Retailers aim to create refund policies that protect purchases, often requiring at least a 30-day unconditional refund period. Some payment processors are now asking merchants to issue refunds without requiring the return of unused merchandise. This long-term strategy helps prevent customers from contacting their banks to initiate chargebacks.

Understanding Visa's Chargeback Protection Service for Merchants

Visa's process aims to reduce invalid chargeback disputes, saving retailers time and money. Key features include:

• Upfront Information: Issuers must provide detailed information before a chargeback dispute is initiated, including a completed questionnaire.
• Faster Response Times: Chargeback timeframes will be reduced from 45 days to 30 days.
• Updated Chargeback Reason Codes: Visa’s 22 reason codes will be streamlined into categories like fraud, authorization, and processing errors, allowing merchants to respond quickly.
• Elimination of False Claims: Visa will use merchant and customer data to dismiss invalid chargeback claims.

Preparing for the VCR Process

To effectively navigate the VCR process, consider the following preparations:

1. Detailed Record Keeping: Maintain comprehensive records for quick access to evidence needed during disputes.
2. Monitor Chargebacks: Stay vigilant about chargeback alerts and address issues promptly to reduce the likelihood of disputes.
3. Use Chargeback Protection Programs: Employ tools and services designed to mitigate chargebacks and protect your business's financial health.

Advantages of VCR

The VCR initiative aims to reduce invalid chargeback disputes while meeting payment market needs. Benefits include:

• Lower Chargeback Volume: VCR can reduce the number of bogus chargeback disputes through automated checks.
• Proactive Settlement: Merchants can use new tools to proactively resolve disputes and identify transaction issues.
• Enhanced Tracking and Monitoring: Improved mechanisms help identify training needs and misuse, leading to quicker resolutions.
• Better Customer Support: Reduced timelines improve customer experience and resolution speed, cutting down the typical chargeback dispute resolution time significantly.

Navigating chargeback disputes can be complex, but partnering with companies like PayKings can simplify your payment processing and chargeback management.

Final Thoughts On The Chargeback Process

Understanding what is a chargeback and implementing strategies to prevent and respond to them is crucial for maintaining a healthy business. By proactively managing refunds, enhancing customer service, and utilizing fraud prevention tools, merchants can significantly reduce the incidence of chargebacks. Additionally, staying informed about initiatives like Visa’s VCR can help businesses streamline their operations and improve customer satisfaction.

If you have questions about chargebacks or need assistance setting up a merchant account, contact us today for expert guidance.