The Importance of Reducing Chargebacks

Best Tips to Reduce Chargebacks

Chargebacks are a blessing for credit card users; they allow cardholders to dispute unrecognised transactions and be protected from possible repercussions related to fraud. For business owners, however, chargebacks can be an inconvenience at best, and a catastrophe at worst.

While some chargebacks are an inevitable part of doing business, merchants who receives too many chargebacks can end up in trouble with their bank and credit card network. For this reason, it is important to reduce chargebacks whenever possible.

Why Reduce Chargebacks?

The number one reason to reduce chargebacks is because it makes economic sense to do so. Whenever a customer files a chargeback, the amount in dispute is automatically withdrawn from the merchant’s account and given to the cardholder. In addition, the merchant’s acquiring bank will withdraw fees that can range from €20 to €100 per chargeback.

While business owners do have the opportunity to dispute chargebacks and have the disputed funds returned to their merchant account, the dispute process is costly, time-consuming, and wastes energy that could instead be used to grow the business.

Even if a merchant successfully disputes a chargeback, the fees assessed by the bank are irreversible. To make matters worse, the business loses the inventory that led to the chargeback being filed.

Having an occasional chargeback once in a great while won’t ruin a business. However, if a business has an excessive level of chargebacks, the merchant will be hit with additional fees. If the merchant is unable to lower their chargeback levels by the following month, they run the risk of having their account terminated.

Terminated accounts are bad news for merchants because:

  1. The merchant loses the privilege of being able to accept credit cards as a form of payment. This is especially detrimental to businesses that conduct business primarily online.
  2. The merchant will almost certainly end up on the MATCH list. Merchants who are on the MATCH list are barred from opening a traditional merchant account with another bank. Instead, MATCH listed merchants must use high-risk accounts that charge exorbitant, profit-eating fees.

While chargebacks can be successfully disputed, it is clearly in a business owner’s best interest to focus on reducing chargebacks in the first place instead of fighting them after they happen.

What Causes Chargebacks?

While it is great to understand the importance of why business owners should spend time focusing on how to reduce chargebacks, a preventative strategy cannot be formulated without a solid understanding of what causes chargebacks in the first place. Most chargebacks are caused by one of three triggers:

1. Criminal Fraud

Criminal fraud is one of the reasons why chargebacks were created in the first place. For example, if an identity thief steals a cardholder’s credit card information and then goes on a shopping spree, the cardholder is able to file a chargeback on the illicit spending. Thus, the thief gets to keep his or her purchases and the cardholder gets all the money back.

The real victim in this situation is the merchant, who loses out on both inventory and revenue. In fact, in 2013, the financial damage caused by credit card fraud reached over €100 billion.

2. Merchant Error

Chargebacks are also intended to protect cardholders from merchant error. This means that if a business makes a mistake during a transaction, the customer is able to get all of his or her money back. Mistakes do happen, and while the occasional oversight might be relatively insignificant, chargebacks filed for merchant error can lead to disproportionate profit losses in the form of chargebacks.

3. Friendly Fraud

Lastly, there is an increasing trend of shoppers filing chargebacks instead of asking for a traditional refund. Some shoppers may not realise that this behaviour is actually a type of fraud, while others are intentionally abusing the system to get something for free.

As in the case of criminal fraud, the merchant is the ultimate victim of friendly fraud. What’s worse is that shoppers who successfully commit friendly fraud once are nine times more likely to do it again. This type of repeat-offending behaviour can quickly escalate and cause problems for merchants.

Ways to Reduce Chargebacks

Fortunately, merchants are not helpless in the face of chargebacks. While there is no way that it can be guaranteed that merchants will never receive a chargeback again, there are many strategies merchants can employ to significantly reduce the possibility that chargebacks will be filed on future transactions.

Some ways to reduce chargebacks include:

Review the business’s refund policy.

Since some customers use chargebacks as a way to get a refund, merchants can reduce chargebacks by making refunds easier to get through their business than through the bank. Refund policy rules should be clear, fair, and easily understood at the point of sale.

Check the billing descriptor.

Billing descriptors are shown on customer’s credit card bills. Chargebacks caused by customers not recognising the business name can be nearly eliminated by using a recognisable billing descriptor. Businesses with official names that differ from the name used while doing business should use the name with which customers are familiar.

Accurately describe products.

Chargebacks can legitimately be filed in cases of false advertising. As such, businesses should take care to describe all products and services in a flattering but honest way. Customers who do not receive what they expect are more likely to file a chargeback.

More Ways to Reduce Chargebacks

While the above ideas are a great way to start reducing chargebacks, there are many other options out there. Contact us today for a more detailed chargeback prevention strategy, one that is customised for your business.