Unfortunately, chargebacks are a major threat to businesses. If your business gets hit with one, you’ll have to pay chargeback fees, which typically range from $20-$100. Your chargeback ratio will also rise, and if it gets too high, you might get hit with higher processing costs. Some payment processors may simply decline to work with you outright, which could obviously put a crimp on business. Given the risks, we’re going to cover the top reasons cardholders file chargebacks.
Once you know why you’re getting hit with chargebacks, you can develop a plan to prevent and combat them. Of course, the specific steps you’ll need to take will depend on why they’re occurring. That said, merchants should develop a holistic approach to combating chargebacks and fraud in general. Even if a specific reason isn’t drumming up chargebacks right now, it could cause problems later on.
We’re going to cover the most common reasons why cardholders file chargebacks. However, before doing that, it’s important to understand the true costs of chargebacks and why they’re such a grave threat to merchants.
The True Costs of Chargebacks
With chargebacks, costs quickly add up. It’s tempting to focus on the chargeback fees themselves, but that’s only one cost. A merchant also stands to lose inventory costs, transaction fees, marketing and acquisition costs, wasted labor, money spent on shipping, and more.
Let’s say you sell a $60 product and then get hit with a chargeback over the transaction (we’ll assume that shipping is included). A pair of shoes, a sweater, whatever, for right now it doesn’t matter. First, you’ll lose the $60 from the transaction. You’ll also lose whatever was paid in processing fees, which typically range from 2 to 4 percent of the transaction.
Next, you’ll likely lose the inventory, meaning the shoes, sweater, or whatever else. On top of that, you could lose any money spent on marketing or acquisition (for example, PPC ad spending). Money spent on shipping (including packaging and labor costs) will also go to waste. Total all this up and then you can tack on the chargeback fees.
At the end of the day, the full costs associated with chargebacks can add up to double or more than the original transaction ($60). This doesn’t even factor in rising fees that could result from a high chargeback ratio. Thus, it is incredibly important that responsible businesses ensure they are breaking down the true costs of chargebacks.
First-Party Fraud is a Major Threat
Often referred to as “friendly fraud,” first-party fraud is a serious scourge for merchants. With first-party fraud, the legitimate cardholder uses their card illicitly to secure a chargeback. This often allows them to score free goods and services. Unfortunately, the merchant will typically end up paying for those goods. On top of that, they’ll be hit with chargeback fees and their chargeback ratio will rise.
A cardholder might visit AcmeGadgetElectronics.com and buy a gadget, such as a smartphone or a video game console. They plug in their payment details, then make a payment. Everything checks out, so the merchant ships the gadget to their customer. Only, after the product arrives, the customer claims that they never received it, or that it was damaged or the wrong good. Then they file a chargeback. With first-party fraud, nothing was actually wrong with the product. The customer simply wanted free stuff.
“Friendly” fraud is a major threat to businesses and seems to be on the rise. One study found that over the last three years, 28 percent of merchants reported an increase in friendly fraud, with respondents believing that friendly fraud accounted for a whopping 42 percent of chargebacks.
Ultimately, the decision to approve or reject a chargeback is made by the cardholder’s bank. To keep their client happy, the bank may simply approve the chargeback. After all, the bank won’t pay for the lost goods, but instead, the merchant will.
Fortunately, there are steps merchants can take to protect themselves. Requiring signed shipping receipts, for example, will help prove that orders were delivered. Should the customer file a chargeback, you can dispute the chargeback, and the right tools make it easy to track and manage such disputes.
Third-Party Fraud With Payment Credentials
Many chargebacks are the result of criminal fraud carried out by a third party. A thief might use a skimmer placed on a gas station card reader to steal credit card numbers, for example. Or perhaps a pickpocket got hold of someone’s wallet, and thus, their credit cards. Whatever the case, once they have the payment information, they can use it to make unauthorized purchases.
Most likely, the merchant played no role in the theft. Yet when the cardholder recognizes the unauthorized purchases, they can file for a chargeback, and they’ll likely win the dispute, pushing the costs onto the retailer. That’s why prevention is key with third-party fraud.
There are some steps merchants can take to reduce the risk of third-party fraud. First, they should require Card Security Codes, which are typically found on the back or front of a card. If a merchant doesn’t get the Card Security Code, they’ll likely lose any chargeback dispute. Card skimmers and the like typically don’t pick up these codes, so unless the thief has the physical credit card, they probably won’t have the Card Security Code.
It’s also smart to pay attention to addresses. If a cardholder’s address is listed as New Orleans, but they’re shipping goods to Chicago, it may be because a fraudster in Chicago is trying to get the goods sent to an address they can access.
Account Take Overs and Third-Party Fraud
Another type of third-party fraud, account takeovers are a common problem for merchants big and small. With account takeovers, the criminal doesn’t steal credit card credentials but rather gains access to a user’s account, where payment information is often saved. Even if the hacker doesn’t know the specific credit card numbers, if the payment information is saved in the account, they may be able to use that to make a purchase.
Banks will typically grant their cardholder’s chargeback requests In these situations. As a result, the merchant may end up footing the bill even if customer negligence (say falling for a phishing attack) enabled the account takeover. Thus, prevention is the best course of action.
As with stolen card credentials, the fraudsters that perpetuated the account takeover may try to ship goods to an address they control, making it especially important to watch for suspicious addresses. It’s also smart to have customers use Two-Factor Identification and the like.
Retailers should also keep an eye on IP addresses, which may show the user’s general location. For example, let’s say a customer’s billing address is in Atlanta, Georgia, but the IP address suggests that they are located outside of not just Georgia, but the United States as a whole (e.g. they’re based in India). This is a major red flag.
Some Chargebacks Stem from Unclear Billing Descriptors
Not all chargebacks are the result of criminal activities. In some cases, honest misunderstandings come into play. A cardholder may be reviewing their monthly credit and debit card purchases when they see a charge they don’t recognize. If so, they’ll likely file a chargeback.
In some cases, that charge might be unauthorized. However, it’s also possible that the cardholder forgot about the purchase or the billing descriptors might be vague or confusing. For example, let’s assume that through a holding company John A. Doe owns AcmeGadgetElectronics.com, and the billing descriptor lists John A. Doe Holdings rather than AcmeGadgetElectronics.com.
The customer probably won’t recognize John A. Doe holdings, and so they assume that the purchase was fraudulent.
Some dispute management platforms like ChargebackHelp will automatically update banks with details regarding a transaction. In the above case, further details that clarify that the purchase was legitimate could prevent a chargeback in the first place. It’s also smart to use clear, recognizable (from the customer’s point-of-view) billing descriptors. It’s especially wise to include your business’s phone number and URL in the description.
The Merchant Doesn’t Offer an Easy-to-Use Return Process
From the cardholder’s point-of-view, chargebacks function like a return process, meaning they can get their money back. From the merchant’s POV, of course, a chargeback is no mere return as it’ll rack up additional fees and penalties. On top of that, the merchant may not get the goods delivered back either. Yet if customers can’t simply return a product, they may file a chargeback.
Given the threat of chargebacks, it’s wise to offer a simple, free return process. You could let customers manage the return process on their end, or you might set it up so your customer service department has to first authorize the returns. If you go with the latter, however, you need to have a responsive customer service department. Otherwise, customers will be more likely to file a chargeback.
Unresponsive Customer Service Departments Fuel Some Chargebacks
Unresponsive customer service departments can feed into the other reasons we’ve outlined, such as the merchant’s return process, lost shipments, and more. There are other ways unresponsive can result in chargebacks as well.
Let’s say somebody orders four sweaters. The retailer provides a tracking number and the order is signed for upon delivery. However, when the customer opens the package, they find that only three of the sweaters were delivered. It could have been a simple mishap, say human error on the part of the warehouse crew that packed the shipment. Or maybe one sweater needed to be sent in a different package, perhaps coming from a different warehouse. The sweater might simply have been out of stock, as well.
If the customer contacts customer service and they’re responsive, the mishap or miscommunicate may get cleared up quickly. However, if customer service is unresponsive, perhaps forcing the customer to play phone tag, the customer may simply file for a chargeback.
Ultimately, having a responsive customer service department is one of the best ways to keep customers happy and deflect chargebacks before they even get filed.
