What Is a Chargeback?

Chargebacks Explained

A chargeback is a transaction reversal initiated by a cardholder’s bank to refund money to the customer after they dispute a charge on their credit or debit card. Unlike a standard refund, which is processed directly between the merchant and the customer, a chargeback involves the payment processor and financial institutions, often bypassing the merchant’s ability to resolve the issue amicably. Chargebacks were originally designed as a consumer protection measure against fraud, unauthorized transactions, or billing errors, ensuring that cardholders are not unfairly charged for purchases they did not authorize or receive. However, chargebacks have also become a challenge for businesses, as they can result in financial losses, additional processing fees, and potential penalties if a company experiences a high volume of disputes.

Speaking about the reasons for chargebacks, the most common ones include fraudulent transactions, delivery failures, product dissatisfaction, or customers simply forgetting about a purchase. Interestingly enough (and not surprising at all), around 60%-80% of all chargebacks are friendly fraud, where customers dispute legitimate transactions to get a refund and keep the product or service. Regardless of the reason, chargebacks can be costly and time-consuming for merchants, making it essential for businesses to implement preventive measures, such as clear billing descriptors, robust customer service, and secure payment verification processes, to minimize disputes and maintain a positive relationship with financial institutions.

Why Chargebacks Aren’t a Good Thing for Any Business

As we have already mentioned above, chargebacks are not a good thing for any online business and can have serious consequences, affecting financial stability and operational efficiency. So, let’s see exactly how chargebacks impact companies.

• Revenue loss. When a chargeback occurs, the business not only loses the original transaction amount but may also forfeit the product or service provided, resulting in a direct financial setback.
• Chargeback fees. Payment processors impose additional fees for each chargeback, increasing operational costs and reducing overall profitability.
• Increased payment processing costs. A high chargeback rate can lead to higher transaction fees from payment providers, making it more expensive for businesses to process card payments.
• Risk of account termination. Excessive chargebacks can label a business as high-risk, potentially leading to the suspension or termination of its merchant account, which can disrupt operations and limit payment processing options.
• Damage to reputation. Frequent chargebacks may indicate poor customer satisfaction or fraudulent activity, harming the company’s credibility and making it harder to build trust with new customers.
• Operational burden. Managing chargebacks requires time and resources to gather evidence, respond to disputes, and communicate with financial institutions, diverting attention from core business activities.
• Increased fraud exposure. Chargebacks can encourage friendly fraud, where customers dispute legitimate purchases to obtain refunds while retaining the goods or services, leading to further financial losses.
• Regulatory consequences. Businesses with consistently high chargeback rates may face stricter monitoring from financial institutions and regulatory bodies, potentially resulting in additional compliance requirements or penalties.

To minimize these risks, businesses must implement proactive strategies, such as clear transaction policies, robust fraud prevention measures, and exceptional customer service, so let’s talk about them in a little more detail.

How to Prevent Chargebacks

Preventing chargebacks requires a strategic approach that focuses on fraud prevention, clear communication, and customer satisfaction. The following measures can help businesses minimize chargebacks and protect their financial stability.

• Use clear and accurate billing descriptors. Ensure that the business name appearing on customers’ bank statements matches the name they recognize to prevent disputes caused by unidentifiable charges.
• Try chargeback prevention services. Implement modern chargeback protection services like Ethoca and Verifi (both available within MidArmor) on your website. These alerts will help significantly decrease the number of chargebacks and fraud and, therefore, safeguard your revenue.
• Provide detailed product and service descriptions. Clearly outline product specifications, pricing, refund policies, and terms of service to manage customer expectations and reduce dissatisfaction.
• Improve your customer service and support. Make sure you have accessible customer support service, so that in case of any problems with orders or transactions, customers will reach out to you instead of opening a payment dispute.
• Implement robust fraud prevention measures. Utilize advanced security tools such as address verification systems (AVS), card verification values (CVV), and multi-factor authentication to detect and prevent unauthorized transactions.
• Obtain proof of delivery and order fulfillment. Require signature confirmation for high-value shipments and maintain tracking records to dispute fraudulent claims of non-receipt.
• Establish clear refund and return policies. Communicate transparent refund and return procedures, making it easier for customers to resolve issues directly rather than initiating chargebacks.
• Keep detailed transaction records. Maintain thorough documentation, including invoices, order confirmations, customer communications, and proof of service delivery, to support chargeback disputes effectively.
• Train employees on fraud and dispute management. Educate staff on best practices for verifying transactions, handling disputes, and recognizing signs of fraudulent activity.

Certainly, implementing all these measures takes time and requires financial investments. At the same time, investing time and money in chargeback prevention is essential, and it will no doubt pay off.