Rethinking Chargeback Misconceptions

The world of payments processing is vast, complex, and ever-shifting. This environment is ripe for the development and propagation of misconceptions that can mislead even the most diligent and well-informed merchant professionals. Let’s examine some of the most notable chargeback misconceptions.

Merchants Should Fight Every Chargeback

It is a natural instinct for merchants to be competitive and want to dispute every single chargeback. There is also an approach to fighting chargebacks that works on the theory that, if the merchant fights every chargeback, they will win more chargebacks and recover more revenue. But the reality of the situation is that not every chargeback can be successfully disputed and the best approach is a more strategic one that prioritizes fighting the chargebacks that are worth fighting. It’s worth noting that, due to the operational costs and time required to fight chargebacks, not every chargeback that can be successfully disputed should be fought.

Merchants Shouldn’t Bother to Fight Any Chargebacks

This is the flip side of the previous misconception. The logic of it is something along the lines of, “Fighting chargebacks is too expensive and time consuming to be worth it.” But this is just as incorrect as the assumption that all chargebacks should be disputed. The reality is that some chargebacks are worth fighting and some aren’t. But there is no reason for a merchant to simply accept the loss of revenues, fees, and potential long term consequences of every single chargeback.

A Successful Representment Won’t Count Against a Merchant’s Chargeback Ratio

It may seem unfair, but chargeback ratio is calculated regardless of the outcome of any representments. A successful representment allows the merchant to recover the initial transaction amount but does not eliminate the chargeback for purposes of calculating chargeback ratio. A merchant could theoretically (if not realistically) fight every chargeback they receive, have a 100% win rate on those disputes, and still have a chargeback ratio above 1%.

If My Chargeback Ratio Is Low, It Doesn’t Matter If the Total Number of Chargebacks Is High (And Vice Versa)

Merchants face additional costs for excessive chargebacks, including being put into chargeback monitoring programs or even being placed on the MATCH List. There are two monthly thresholds for incurring these consequences: a rate-based one and one based on total chargebacks. If a merchant exceeds either a 1% chargeback ratio or 100 chargebacks in a month, they risk severe consequences for their merchant ID (MID). Fewer than 100 chargebacks isn’t sufficient if the ratio still exceeds 1% and vice versa.

Only Sloppy or Dishonest Businesses Have to Worry About Chargebacks

Chargebacks are inevitable. Every merchant must contend with them sometimes. It is not an indictment of the merchant’s business practices that they receive chargebacks. But it may be one if the merchant does not take adequate steps to manage and prevent future chargebacks.

RDR Doesn’t Work

Verifi’s Rapid Dispute Resolution (RDR) is a relatively new chargeback prevention tool. RDR is a solution that allows merchants to set rules and parameters for automatically resolving payment disputes without allowing them to become chargebacks. There is a misperception among merchants that it doesn’t work. But that is largely due to a lack of proper analytics to show which disputes are resolved through RDR. For merchants with insufficient analytics, those successfully resolved transactions are completely invisible. Despite not being fully implemented until April of last year, more than 500,000 disputes totaling more than $20.5 million in pre-dispute liability were auto-accepted through RDR last year according to Verifi.

Alerts Stop Chargebacks

Alerts warn a merchant that a chargeback is incoming, giving the merchant an opportunity to respond as they see fit. But unlike RDR, alerts do not resolve chargebacks automatically. In order for an alert to play a role in preventing a chargeback from being filed, the merchant needs to act on it.

The Only Metric That Matters for Chargebacks Is Win Rate

It is important to have a good win rate. Chargebacks are expensive and so is fighting chargebacks. Spending the time and resources to fight chargebacks without achieving an acceptable rate of successful representments would be disastrous. But win rate is only one of many important chargeback metrics. Win rate just relates to how often representments succeed, with no calculation for dollar amounts or operational costs. For example, a merchant could have an extremely high win rate but be losing money overall in their chargeback management efforts because the covered costs of those successful representments is less than the operational costs associated with them. Or perhaps the merchant could have a high win rate in which the successful representments are mostly for small transactions and the failed representments are for larger, more expensive transactions. Just as a holistic approach is necessary for successful chargeback prevention and management, useful statistical analysis of chargebacks requires a comprehensive set of stats, metrics, and analytics.

I Can Reduce My Chargebacks By More Aggressively and Effectively Fighting Them

Fighting chargebacks is important. But even a successful representment strategy doesn’t necessarily translate to a reduction in the number of chargebacks received. Preventing chargebacks is its own complex endeavor, related to but independent from fighting chargebacks. Success in one area is no guarantee of success in the other.

I Can Cancel Chargebacks By Simply Issuing Refunds

Issuing refunds can be a useful tactic for averting chargebacks. But it needs to happen at a particular point in the process, often in conjunction with some chargeback prevention tool such as alerts or RDR. After the chargeback has been filed, it is too late to prevent it.

Fighting Chargebacks Is Poor Customer Service

Some merchants may be wary about fighting chargebacks out of a desire not to offend customers and potentially scare them away from returning. But merchants need to protect themselves and recover whatever revenue they deserve to recoup from illegitimate or erroneous chargebacks. Good customer service is important and so is fighting chargebacks.

Some Reason Codes Should Always Be Fought (And Vice Versa)

Reason codes provide valuable information to merchants in terms of which chargebacks can best be disputed and what compelling evidence should be presented to do so. Some reason codes are easier to rebut and some are nearly impossible, but nothing in chargeback management is absolute. The specific circumstances and parameters of each individual chargeback should be considered rather than adhering to hard-and-fast rules about how to respond to specific reason codes.

If I Fight and Win Chargeback Representment, My Fees Will Also Be Recouped

This is simply untrue. Even successful representments do not result in chargeback fees being refunded. This is one of the reasons why chargeback prevention is so important.

Chargebacks Don’t Affect Operating Costs

Chargebacks are expensive in multiple ways. They involve lost revenue and require time and operational costs, both in terms of fighting and preventing chargebacks. Some estimates put the operational costs at somewhere between $20 and $100 per chargeback. A poorly conceived chargeback management program can easily allow these costs to spiral out of control.

Conclusion

Some chargeback misperceptions spring from merchants underestimating the risks of chargebacks. Others are born out of a fear of chargebacks that goes beyond what is necessary. And some come from merchant service providers trying to juice the market for their products and services. The truth about chargebacks is they are dangerous but they can easily be controlled with the right combination of tools, knowledge, and intelligently designed policies and procedures.