What Are Chargeback Risk Factors?

Table of Contents

• Overview
• Sources of Chargebacks
• Insufficient Customer Service
• Unclear Billing Descriptors
• Unclear Product Descriptions
• Affiliate Fraud
• Subscription Billing Problems
• Insufficiently Forgiving Refund Policies
• Confusing Contact Information
• Poor Recordkeeping Practices
• Poor Customer Identification Policies
• Delivery Issues
• Operating In a High Risk Industry
• Selling Goods Online
• Conclusion

Overview

Chargebacks do not simply, randomly appear out of nowhere. They always have underlying causes. While it may not be possible to predict every source of chargebacks, an understanding of chargeback risk factors can be a valuable aspect of chargeback prevention. Some chargeback risk factors come from ill-advised policies that should be revised or merchant mistakes that should be prevented in the future. Other chargeback risk factors are less easily avoided because they relate directly to fundamental aspects of a particular merchant business. But even those unfortunate, unavoidable risk factors can be mitigated somewhat.

Sources of Chargebacks

Before delving into specific risk factors, it’s useful to briefly review the general sources of chargebacks. Chargebacks can result from genuine merchant errors or from three different categories of fraud:

• True Fraud is when a credit card is stolen and used to make a purchase. True fraud usually results in the customer reporting the fraud to their bank, the bank closing the account, and the bank issuing a new card to the customer.
• Friendly Fraud is when a customer mistakenly disputes a charge for a relatively innocuous reason, such as a family member making a purchase without the customer realizing, the customer genuinely forgetting that they had made a purchase, or some mistake relating to the customer not understanding something such as a return policy. The key distinction is that the customer is not knowingly, intentionally committing fraud.
• Chargeback Fraud is when a customer requests a chargeback knowing that they have no valid claim to one. While friendly fraud results from an honest mistake, chargeback fraud is an intentional misuse of consumer protection mechanisms to get something for free. It is often used as a form of digital shoplifting.

Insufficient Customer Service

Poor customer service can make a merchant more susceptible to chargebacks from merchant error or friendly fraud. Rather than allowing a good faith mistake (by either party) being resolved through the chargeback system, good customer service can persuade the cardholder to accept a refund or even avert the return of payment entirely. Poor customer service prevents merchants from taking advantage of this essential chargeback prevention method.

Mitigating Practice: Emphasize Good Customer Service

It is always in the merchant’s best interest to emphasize good customer service. This includes making sure that customer service is easily accessible, well trained, and able to resolve disputes. A refund is always preferable to a chargeback and good customer service can sometimes even resolve disputes without having to return payment at all.

Unclear Billing Descriptors

Billing descriptors are important because it is how consumers will be able to identify their purchases when they review billing statements. Unclear, inaccurate, or misleading billing descriptors are a notable and avoidable source of confusion for cardholders, who often will call their bank to question the charge, ultimately resulting in a chargeback for the merchant.

Mitigating Practice: Engage In Good Descriptor Hygiene

Proper descriptor hygiene can prevent confusion and reduce chargebacks. Merchants should be sure to use a billing descriptor that cardholders will recognize as belonging to the business from whom they had made their purchase. If the business name cannot fit within the 22 character limit, merchants should use abbreviations carefully and deliberately to avoid confusion. Some payment processors allow for dynamic billing descriptors, which can be advantageous for these purposes.

Unclear Product Descriptions

Similar to unclear billing descriptors, unclear product descriptions can lead to consumer confusion which can lead to chargebacks. But, rather than the cardholder filing a chargeback because they don’t recognize a charge on their billing statement, they file a chargeback because they are confused or disappointed with the product or service they ordered because it does not match their expectations.

Mitigating Practice: Write Clearer Descriptions

Managing customer expectations is a significant facet of preventing chargebacks. Sometimes this can be done after a purchase through the use of good customer service. But it can also be achieved by setting realistic consumer expectations before any purchases are made. Merchants can reduce chargebacks by making sure that their products and services are accurately described on their website, reducing the likelihood that a customer is unhappily surprised by the product that they receive.

Affiliate Fraud

Affiliate marketing can be a valuable way to acquire new customers. But unscrupulous or shady affiliates can send merchants a bevy of new leads and customers that later turn out to be fraudulent, leading to increased chargebacks.

Mitigating Practice: Affiliate Monitoring

Practicing affiliate monitoring can be a valuable way for merchants to reduce the risks and reap the rewards of affiliate networks.

Subscription Billing Problems

Subscription billing as a model of payment stretches back at least to the sale of periodicals in the 17th century. It has a number of benefits for merchants and consumers alike. But it also has a pronounced tendency toward chargebacks. This could be due to fairly innocuous reasons such as a subscriber forgetting about a recurring charge from a subscription and filing a chargeback or more unscrupulous reasons such as a consumer strategically employing chargebacks after receiving a “trial offer” or “starter pack” as a way to get something for free.

Mitigating Practice: Communication

Some subscription billing chargebacks can be prevented through well-designed communication practices. Merchants can reduce the likelihood of confusion by making sure subscribers know what to expect, both in terms of services/goods provided and billing procedures, by promptly informing subscribers of changes to delivery schedules or billing procedures, and by being clear about opt-out and cancellation procedures. These may not stop the cardholders who use trial offers and chargebacks as a form of digital shoplifting but they can reduce instances of friendly fraud.

Insufficiently Forgiving Refund Policies

Merchants that make it difficult for cardholders to receive a refund are creating a chargeback risk by giving them no recourse other than requesting a chargeback. This dynamic persists whether the refund request is genuine or a pretext for fraud. But while fraudulent actors may simply file a chargeback regardless, consumers with a legitimate complaint may prefer a refund to a chargeback.

Mitigating Practice: Reconfigure Refund Policies

It can often be in a merchant’s best interest to freely offer refunds when they are requested. Most refund requests are genuine and not pretext for fraud. And the ones that are fraudulent may not always be worth contesting. The time, effort, and costs spent fighting refund requests can outweigh whatever revenue may be recouped from the ones that are disingenuous.

Confusing Contact Information

This relates to many of the preceding entries. Merchants that make themselves difficult to contact are essentially inviting cardholders to file chargebacks whenever they may have an issue with the product, service, billing schedule, etc. Customer service is not useful for preventing chargebacks if consumers can’t figure out how to contact customer service.

Mitigating Practice: Make Contact Information Easily Available

Merchants should put their customer service contact information in as many places as possible—on their websites, on receipts and invoices, in deliver receipts, in confirmation emails, sometimes even in billing descriptors—so that cardholders with genuine, good faith issues can resolve those issues by means other than filing chargebacks.

Poor Recordkeeping Practices

Poor recordkeeping is not necessarily a risk factor for increased chargebacks but it is an enormous risk factor for worse chargeback outcomes. Fighting chargebacks without the proper compelling evidence is a fool’s errand.

Mitigating Practice: Get Organized

Having a system for cataloging consumer interactions—receipts, IP addresses, delivery confirmations, emails and other communications, etc.—in a way that is organized and easily accessible is extremely valuable when pursuing representment for illegitimate chargebacks.

Poor Customer Identification Policies

Merchants that do not properly ensure that their customers are who they say they are put themselves in a position to be used in fraud schemes by criminals with stolen payment credentials. These sorts of fraudulent charges can lead to chargebacks and negative consequences for merchants and cardholders alike.

Mitigating Practice: Customer Authentication Software

There are tools and software that merchants can employ to verify and authenticate customer IDs, reducing the likelihood of fraud. One such tool is Visa’s 3-D Secure. Other less specific, non-proprietary ID fraud prevention techniques such as requiring two-factor authentication and secure password policies could be useful, as well.

Delivery Issues

If customers do not receive the goods that they ordered, or receive them extremely late or in damaged condition, due to poor service from the package delivery company, that can result in chargebacks.

Mitigating Practice: Vet Delivery Options

There are a variety of package delivery providers and merchants would be well served to consider all their options when choosing delivery partners.

Operating in a High Risk Industry

Certain industries are invariably at higher risk for chargebacks due to specific elements of those industries. Examples include gaming, gambling, adult entertainment, and cannabis. These sorts of industries are often assigned high-risk merchant category codes (MCC).

Mitigating Practice: Use a High-Risk Merchant Account

There are merchant account providers that specialize in high-risk businesses and can help businesses in these industries navigate these risks.

Selling Goods Online

E-commerce is in itself a chargeback risk, unfortunately. Many of the causes of chargebacks—whether from merchant error as well as friendly fraud, chargeback fraud, and true fraud—are exacerbated by the intricacies of buying and selling goods online. Studies such as LexisNexis’s annual State of Fraud report consistently show a correlation between increased online and mobile commerce and increased rates of fraud.

Mitigating Practice: Implement Solid Chargeback Prevention Policies

Online commerce is an unavoidable aspect of 21st century merchant businesses. Indeed, for many merchants, it is the entirety of their business. As a result, dealing with the chargeback risks of e-commerce is simply the price of doing business. As this risk is fundamental to the nature of business, there isn’t a single, silver bullet mitigating practice. But the whole bevy of chargeback prevention tools, techniques, strategies, and practices should help manage these risks.

Conclusion

Every sort of business has some elements that activate chargeback risks. It is up to the merchant to determine how to best manage these risks without harming their business. Thankfully, each source of risk has its own possible solutions. Some chargeback risk factors require specific abatement actions from merchants. Others suggest useful techniques. And some are simply unavoidable and require more general chargeback prevention strategies.