Chargebacks 101: What E-Commerce merchants should know
Credit card chargebacks are a costly reality for online merchants. Chargebacks occur when customers contact their credit card issuers to dispute charges. If an issuer deems a dispute valid, the e-commerce merchant is required to pay the amount owed for the transaction plus a chargeback fee from the processer – which can range from $15 to $100.
Chargebacks represent a loss to retailers’ bottom line, especially if they occur on a consistent basis. For that reason alone, it’s critical to keep chargebacks to a minimum. However, it is not just about the chargeback itself and the monetary consequences that can occur. Retailers must also consider the negative impact on the customer experience and how chargebacks can impact their relationship with credit card processing companies. For instance, too many chargebacks can affect retailers’ ability to work with credit card processing companies, thus affecting the payment options in place for customers. Therefore, it’s important to understand what chargebacks are, why they occur, how to manage them, and most importantly, ways to reduce them.
What is a Chargeback and Why Does it Occur?
E-commerce merchants can face chargebacks for many reasons, initiated by the merchant, bank or by the cardholder. One of the most frequent examples of chargebacks is when a purchase has supposedly been made by a customer, but is actually a criminal who has entered another person’s payment credentials. In this case, the victim whose bank card has been used for the fraudulent payments will file a claim to have the illegally withdrawn funds returned. When this happens, the bank initiates chargebacks to retailers after receiving documentation from cardholders that the specific transactions were fraudulent. In addition to the reversal of fraudulent payments, online merchants are assessed an additional fee by their own processing banks.
Aside from fraudulent transactions, customers may also dispute charges – issuing a chargeback – in any of the following ways:
• The customer did not receive the goods or services purchased
• The goods were defective or arrived not as described
• Buyer’s remorse – such as a product not arriving as expected or the buyer regretting making a purchase
How to manage chargebacks
The best way to manage chargebacks is through a case management system. Each chargeback that is received has a unique case number whether it is from PayPal, Visa, MasterCard, Discover, or American Express. Each of these providers has its own case management system, but there are also all-in-one case management solutions if one finds it tedious to check each tender. During particularly busy retail seasons, such as the holiday season, it’s important for retailers to ensure they have a trained and dedicated team to handle and expedite disputes. By focusing on recovering lost funds, retailers can ensure they don’t lose excessive funds from chargebacks.
How to lower chargebacks?
Once a chargeback has been initiated, it’s the retailer’s responsibility to respond to the chargeback notice. This process can be cumbersome, so retailers should reference the following ways to help lower chargebacks:
• As mentioned earlier, one of the primary causes for chargebacks is buyer’s remorse, so it is important retailers have a clear contact phone number on the website for customers to call. If customers are not sure if they made a purchase, they may reach out to the store or customer service team to find out more information on what the purchase included. This can lead to a chargeback not being issued if the retailer can solve the cardholder’s problem ahead of time.
• Retailers must respond to chargebacks as quickly as possible. This adds a lot of value and is part of the overall customer service experience any business should offer.
• Retailers should always ensure they receive full authorization for an order. This can be done by verifying you have received authorization for the proper dollar value of the order. To prevent improper authorization chargebacks, which are initiated by banks, an online merchant should get authorization for each package they ship out from their store/warehouse. If you receive authorization for an order and do not ship it out within seven days you need to get authorization again before shipping out the order.
• It’s vital not to charge the customer until the items are shipped. There is a difference between an authorization hold and the customer being charged. The customer should not be charged until the goods leave the warehouse, or the services have been provided.
• Refund information on receipts or packing slips should be included in every shipment. Retailers should make it easy for customers to find the refund policy and procedures online. Being able to return an item is less costly and time consuming for customers than retailers having to file a chargeback. This also creates a better customer experience by making it simple and easy for customers.
• When the chargeback is received, verify the customer’s address by calling the Voice Authorization Center for the specific tender. Retailers also should verify the customer’s name on file, their address, and the phone number.
• Retailers should receive a signed proof of delivery for each package that is shipped. Also, collect and keep a record of the tracking number used for each package to show the specific tracking from warehouse to the customer’s door.
• If providing goods or services online, retailers should clearly and accurately describe the products or services. Also, a customer testimonial section or a “Contact Us” section for a potential customer to reach out and learn more prior to a purchase can help to lower chargebacks. Examples of services that are sold online are remote computer diagnostics, online consulting, website purchases, digital products, and website memberships.
Chargebacks can be a costly nuisance retailers operating in the card not present space. While chargeback cases can be won, it’s important that retailers understand the many ways chargebacks can occur and the detrimental cost incurred by frequent disputes. Thankfully, there are preventative measures to reduce chargebacks, benefiting not just the retailer’s bottom line but the overall customer experience.
Michael Estabrooks is a financial recovery and reporting analyst at Radial (formerly eBay Enterprise), where he runs financial and chargeback analysis reports for the department and also assists in the recovery of outstanding chargebacks. He works chargebacks for multiple tenders for more than 100 clients in a wide array of verticals, including apparel, electronics, sporting goods, and jewelry.