The number of annual chargebacks is rising as consumers (and fraudsters) gain greater awareness of their rights and digital payments become more common. That's bad news for merchants that run honest operations yet find themselves losing significant sums to unjustified chargebacks every year.
Contrary to popular belief, retailers don't just lose out on the value of the sale itself—they also lose the money they've spent on marketing, producing, and shipping the item. Then there are chargeback fees, which can come to around 40% of the transaction's value (although there's some variation between banks). This can result in a total loss worth two and a half times more than the original value of an item.
Some retailers might be happy to accept the cost of chargebacks themselves as an inevitable "cost of doing business," but there's an even bigger problem at play. Payment processors also track how many chargebacks their account holders receive, and if they reach a certain threshold, there's a risk of being penalized or even blacklisted for years. Every payment processor has a different threshold, but typically, merchants run into problems once they hit the point of receiving one chargeback per 100 transactions.
Clearly, although chargebacks can seem like a small issue at first, they often end up making the difference between a merchant staying afloat and going under. When it comes to volatile, risky sectors, or retailers that have to manage numerous merchant accounts, failing to pay enough attention to chargebacks can be enough to bring about a company's failure. To avoid this fatal outcome, retailers must have a comprehensive strategy that minimizes how many chargebacks they receive and protects them from the potential damage they can cause.
The approach merchants should take varies depending on a few factors, such as the nature of the company's business operations and its size, but some basic principles remain the same. Let's take a deep dive into the building blocks of chargeback mitigation.
It's impossible to prevent chargebacks without having an in-depth understanding of what they actually are. One crucial detail is that there are actually three principal kinds of disputes:
True fraud chargebacks: Made because the consumer has a fraudulent or illegitimate charge that they shouldn't have to pay.
Friendly fraud chargebacks: Made when consumers file a dispute despite knowingly making a purchase, instead of requesting a refund.
Merchant error chargebacks: Made because the retailer processed a payment incorrectly or made another mistake, resulting in an unfair charge to the consumer.
Since there are different types of chargebacks, it's only natural that there are various solutions. One merchant might be plagued with friendly fraud chargebacks, while another has more of an issue with true fraud—even if both companies appear very similar on the surface
So, how can retailers make sure they're taking the right approach? By finding the root causes of their chargebacks. This is easier than many retailers realize—every dispute has a reason code that outlines what caused it—whether that's payment processing problems, fraud or authentication errors.
Once a retailer knows which type of chargeback they're dealing with, it's time for them to put some chargeback mitigation strategies into place.
For true fraud, key mitigation methods include:
Using Address Verification System (AVS)
Using Credit Verification Value (CVV)
Screening orders for potential problems (e.g., address mismatches)
Contacting consumers when they identify potential problems to verify purchase
As for friendly fraud, great customer service can go a long way. If the retailer manages to resolve its customers' queries swiftly and effectively, it may prevent them from filing disputes in the first place. Yet when consumers fail to get the answers or help they want, they often turn to the bank instead, knowing they'll get a quicker response.
Plus, here are some more specific measures for merchants to carry out:
Describing products and services as clearly and accurately as possible
Outlining a transparent refund process
Carrying out orders smoothly and communicating any delays
Using descriptors in transactions so consumers know what they've paid for
Finally, merchant errors can be minimized by improving business operations to avoid the most common problems. Steps for retailers to take include:
Using a good Customer Relationship Management (CRM) system
Checking for common issues in orders, such as duplicates
Issuing refunds quickly when errors are made
Contacting customers when there's doubt over the validity of an order (instead of making a charge)
For merchants who want to go one step further in mitigating chargebacks, using third-party services can provide extra protection.
Ethoca and Verifi both offer chargeback alerts, which give merchants an automatic warning as soon as they receive a chargeback, allowing them to take action immediately. Some chargeback management companies also include alerts as part of a bundle.
It's often a better strategy to give the customer an immediate refund rather than fighting the dispute—although this still results in some lost revenue, it will have a lower impact than a chargeback itself. Even more importantly, a refund doesn't carry additional fees or the potential of being blacklisted.
Merchants can also tackle fraudulent activity by using 3D Secure technology, which verifies the identity of customers as they go through the checkout process.
Following the three steps outlined above may be enough for some merchants, but for those experiencing a significant number of chargebacks and losing lots of revenue, it can be worth enlisting experts to avoid reaching (or exceeding) the threshold.
Chargeback management companies have the skill and experience to tackle chargebacks that most companies lack, allowing them to be far more effective.
This level of expertise comes at a cost, but worth paying if the merchants know they can save as much money as they spend by preventing the fees and losses they'd face otherwise. Still, it's good to know there's a final option out there.
To do chargeback mitigation right, you need the right services, real time visibility into what's going on with your chargeback activity, and a way to measure how well your chargeback solutions are working. You'll know your chargeback mitigation strategy is working when your chargeback rate is going down and your merchant accounts are well clear of any dangerous thresholds.
MidMetrics provides all of this: a full suite of our own proprietary chargeback management tools (including Management Dashboards, In-Depth Analytics Tools, and On-Demand Reports). This gives you a comprehensive platform for reducing your chargeback rate and monitoring the health of all your merchant accounts for one all-inclusive price.
Instead of trying to put together a patchwork of chargeback services from various providers—or trying to build your own setup from scratch—you can purchase them all together in one seamlessly integrated package.
MidMetrics is expertly designed to be easy to use, and it requires minimal IT effort for merchants to implement. It integrates with payment processors, gateways, CRMs, and service providers via API, and uses secure credentials to establish direct connections with card networks and banks. On the user end, MidMetrics automatically gathers and aggregates relevant data from all available sources, normalizing and presenting it in readable reports that present clear and actionable insights to merchants.
Putting together a chargeback prevention strategy that affords sufficient protection can be daunting, as many different issues can lead to chargebacks. Not sure where to begin? We've got answers for you in this helpful guide, Chargeback Prevention: A Recipe for Healthy Merchant Accounts.