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What Are Chargebacks & How Can I Reduce Them? ms payment logos

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What Are Chargebacks & How Can I Reduce Them?

A chargeback occurs when an issuing bank forcibly reverses a transaction, usually at the request of the customer who made the transaction.

Out of all the three most common types of payment reversals, chargebacks are the most costly for merchants. On average, merchants lose about two and a half times the transaction cost for every successful chargeback claim.

In this guide, we’ll tell you what you can do to reduce chargebacks in your business and how to dispute them when they happen.

Why do chargebacks occur?

A customer can claim a chargeback for a number of reasons. They could say that:

  • They didn’t authorise the transaction (e.g., someone stole and fraudulently used their credit card information, they don’t recognise the merchant name or location on the card statement, or they don’t recall making a specific purchase).
  • They didn’t receive the item ordered.
  • The product was damaged, defective, or didn’t arrive as described.
  • The merchant doesn’t have a refund policy or has refused to issue a refund.
  • The merchant billed them more than once.
  • They were charged for a subscription after it should have been cancelled (or they believe they should have received a reminder before each recurring charge but did not receive it).
  • The product was returned or cancelled, but they have not received a refund within an acceptable time frame.

What’s the difference between chargebacks and refunds?

Both chargebacks and refunds result in the customer getting their money back if approved. As a result, the two terms are sometimes used interchangeably, but they are actually quite different. The main difference is that the customer’s issuing bank handles chargebacks, whereas the merchant handles refunds.

With chargebacks, the customer contacts their issuing bank directly if they have a problem with a transaction. The credit or debit card issuer then refunds the money to the customer. On the other hand, refunds occur when merchants give a customer their money back either after returning a purchase or expressing dissatisfaction with a service.

Chargeback fees make chargebacks more expensive for the merchant, so refunds are always preferable.

What is Section 75?

Other than chargebacks and refunds, customers can also get their money back from your business by claiming Section 75 of the Consumer Credit Act 1974 (CCA).

Section 75 says that the card issuer is equally liable if something goes wrong with a customer’s purchase and is thus equally responsible for compensating them. However, it only applies to credit cards (unlike chargebacks, which apply to both credit cards and debit cards) and to customer transactions worth between £100 and £30,000.

Many cardholders might actually choose Section 75 instead of chargebacks for credit card purchases worth more than £100. One reason for this is that unlike chargebacks, which are not enshrined in law (but are part of Scheme Rules to which participating banks agree), Section 75 is a legal right granted by the law. When a customer files a Section 75 claim, the card issuer must deal with the claim, unlike a chargeback, which they can reject.

How many chargebacks are normal for most businesses?

A 1% chargeback-to-transaction ratio (the per cent of transactions that turn into chargebacks) is considered the maximum acceptable in the industry. If your business exceeds this 1% threshold for chargebacks, your payment processor may impose higher transaction fees and other penalties.

If you have a consistently high chargeback-to-transaction ratio of above 1%, your payment processor may want to build up a reserve account. This will be due to the added risk of customers requesting refunds or disputing charges.

It is worth noting that a study by Midigator found a typical chargeback-to-transaction ratio of 1.52% in 2021, a drop of 59.6% from 2017. They analysed 81 million transactions, 1.3 million chargebacks, 658,000 prevention alerts and 206,000 order validation cases.

What Are Chargebacks & How Can I Reduce Them? Chargeback to transaction ratio

The decrease from 2017 to 2021 was largely driven by significant decreases in Visa and Mastercard chargeback rates.

Chargeback to transaction ratio by card scheme

How do chargebacks harm your business?

Chargebacks hurt your business in several ways.

  • Revenue loss: A chargeback translates to lost revenue for the merchant as it involves giving money back to a customer.
  • Lost merchandise: If the customer doesn’t return the merchandise they paid for, it’s another loss for the business.
  • Chargeback fee: Your payment processor will charge you a fee for each chargeback that occurs. This fee is typically around £15-£25 but can reach £100 or higher.
  • Operational costs: As a merchant, you will have to process and respond to each chargeback, which can be time-consuming and costly.
  • Higher fees, fines, or account termination: A high chargeback rate can cause payment processors to label you as “high risk,” resulting in fines and higher card processing fees (increasing the cost of doing business). In the worst-case scenario, your acquirer may terminate your merchant account.
  • Reputational harm: A high chargeback rate can signal that something is wrong with your business and harm its reputation. This could reduce customer retention and revenue. Payment processors may blacklist you, and you could struggle to get payment processing services in the future.

How long do chargebacks take?

Once a client files a chargeback, the whole process up to resolution takes between 30 and 90 days on average. It can even take longer in some cases.

First, the cardholder contacts their issuing bank and disputes the transaction. Depending on the credit card scheme, cardholders have between 45 and 180 days (365 days in some cases) to dispute a transaction and claim a chargeback.

For example, VISA chargeback time limits in the UK range between 75 and 120 days, depending on the specific issue. MasterCard users get 120 days in most cases, though some authorisation-related chargebacks have a shorter deadline of 45 days.

The issuer then reviews the claim and determines if a refund is warranted. This process can take anywhere from two to six weeks. For example, VISA chargeback rules allow banks up to 30 days to review a claim.

If the issuer deems the claim valid, it notifies the merchant’s acquiring bank or payment processor, who pulls funds from the merchant’s account, including a chargeback fee. Simultaneously, or not long after, the merchant receives notification that a customer has disputed a transaction and that their acquirer has debited funds from their account to refund the customer and cover the costs of the chargeback investigation.

Every chargeback comes with a numerical reason code that explains why the customer is disputing the transaction.

As a merchant, you have 14-40 days (depending on your acquirer) to prepare and present a defence to the issuing bank. The issuing bank will then review your defence and decide whether or not to accept it. This can take another 4-6 weeks.

If the issuing bank accepts your defence, the acquiring bank will return the funds to your account. But if they determine that you’ve not provided compelling evidence, they will rule in favour of the cardholder and uphold the chargeback.

7 ways businesses can reduce chargebacks

The following practices can help reduce chargebacks in your business and protect you from the financial and reputation losses that come with them.

1. Use an accurate merchant or billing descriptor

The billing descriptor is the name that appears on a customer’s bank or credit card statement after they purchase something from a particular merchant. If a customer receives their credit card statement and does not recognise the merchant descriptor, their first instinct may be that the charge is fraudulent. They may claim a chargeback even without confirming.

To avoid that, make sure your merchant descriptor is one that customers can easily recognise. It can be something that the customer is familiar with, like your store’s name or website. If your payment processor allows it, you can also use dynamic billing descriptors to make transactions more identifiable and reduce the possibility of chargebacks.

2. Clearly communicate refund policies

Make your refund policy clear both on your website and at the point of sale — don’t make customers hunt for it. Ensure the terms are simple and understandable, so your customer doesn’t have to wonder whether a purchase or transaction is eligible for a refund.

Also, consider enacting a longer returns window. In a study by the UK Ecommerce Association (IMRG) and Justt, 60% of customers said that a generous refund policy would make them less likely to file a chargeback against a merchant. 

3. Respond promptly to customer complaints

Respond quickly and politely to any customer complaints. Chargeback requests often occur after the customer has tried and failed to get the business to engage with them about the issue. If the customer feels they are unable to get in touch with someone in your company to resolve the issue, they’re much more likely to request a chargeback.

Customers are less likely to file chargebacks if the merchant handles any issue or complaint they have about a transaction or purchase promptly and professionally. If you have the resources, it is worth considering having a dedicated team or an individual solely responsible for dealing with customer issues or complaints.

4. Keep records

Maintaining accurate records of transactions, customer information, and correspondence will be extremely helpful in case of a chargeback dispute. You can use these to prove that a transaction was legitimate and win the dispute.

5. Describe items accurately

Provide clear, accurate descriptions and photos in your item listings so that customers clearly understand what they are buying. Include photos of all blemishes or damage. This will reduce the number of customer complaints or help your defence if a customer claims that your item isn’t as described in the listing.

Where possible, include a “buyer’s remorse” clause in your listing and return policy. Such a clause will protect you from customers who want to return an item simply because they don’t like it or don’t want it anymore.

5. Have a clear shipping and delivery policy and timeframe

A lack of a clear shipping and delivery timeframe or policy can increase your chargeback rate. That’s because if it takes longer for a client to receive their product than they are expecting, they might become impatient and claim a chargeback.

Have a clear shipping and delivery schedule and provide a way for customers to track their shipments. You can also use text or email alerts to keep your customers updated on any changes in their shipment status.

6. Implement fraud prevention tools and techniques

Card-not-present or CNP transactions enable customers to shop and pay for goods and services remotely using their credit card. Unfortunately, they are one of the leading sources of customer chargeback claims. This happens when fraudsters steal a customer’s credit card information and use it to make a purchase remotely.

You can lower CNP fraud chargebacks in your business by implementing security tools and measures such as the address verification service (AVS), card security codes (CVV) and 3-D Secure.

When is it worth disputing a chargeback?

Not all chargebacks are created equal, and as a business, it pays to know which ones are worth disputing and which are not.

To determine if a chargeback is worth fighting, start by looking at the reason for the reversal. Chargebacks fall into three main categories; legitimate, true fraud, and friendly fraud.

  1. Legitimate chargeback: This is when the customer has a legitimate reason for filing a chargeback. For example, it could be that they did not receive their product, the product was not in the described shape or state, or the merchant charged them twice. If a chargeback is legitimate, there is no reason to fight it.
  2. Actual fraud: This type of fraud occurs when a criminal steals a customer’s information, like their credit card info, and then purchases items or services without the cardholder’s consent or knowledge. You shouldn’t fight a chargeback resulting from actual fraud.
  3. Friendly fraud: This is when a customer files a chargeback without a legitimate reason. Friendly fraud can take two forms:
    • When a customer unintentionally commits fraud by filing a chargeback for a legitimate transaction. This could be due to a misunderstanding or confusion on the part of the client. One example is a customer who files a chargeback after seeing an unrecognisable trading name or billing descriptor on their credit card or bank statement.
  • When a customer has no legitimate reason to file a chargeback but does so anyway. A buyer, for example, can claim that they didn’t receive an item to get out of paying for something they actually received.

A friendly fraud chargeback may be worth fighting for or not, depending on several factors.

  • Sum of money at stake. Fighting a chargeback takes time, energy, and money. Assess whether the amount in dispute is worth the time and resources it will take to fight it. If the revenue you would recover is minimal, it might not be worth the hassle. If a lot of money is at stake, fighting a chargeback may be worth it to reduce the loss potential.
  • Evidence. Once a client files for a chargeback, the burden is on you as the merchant to prove that they are wrong and you’re right. Before committing time, money, and energy to fighting a chargeback, consider whether you can find or have sufficient evidence to convince and sway the card issuer to your side. The more evidence you have, the more likely you are to win the case.
  • Availability of other dispute resolution methods: Consider whether there are other diplomatic ways to settle the dispute. Sometimes, a chargeback may be the result of a simple misunderstanding between a customer and a merchant. When your acquirer or payment processor notifies you of a client’s chargeback claim, you can contact the customer and try to find a solution. Many customers are usually willing to accept a refund or product replacement. As part of the resolution, ask them to contact the credit card company to end the investigation.

Ultimately, whether or not to dispute a chargeback is a decision you should make depending on the specific circumstances. Use the table below to guide you.

Dispute if Don’t dispute if
You’re sure the transaction is legitimate If the customer’s complaint is valid (e.g, the product didn’t arrive, the customer was a victim of card fraud)
There is a lot of money at stake The transaction amount is low
You have sufficient evidence to convince the card issuer that you’re right If you do not have adequate evidence to support your case
There’s no other way to settle the dispute There are other diplomatic ways to settle the dispute

How to dispute a chargeback

Unfortunately, you can’t totally protect yourself against all chargebacks, even after taking precautions. If you receive a chargeback and decide to dispute it, there are two main things to keep in mind.

Gather as much evidence as possible. To successfully dispute a chargeback, you’ll need to provide compelling evidence to support your case. This includes items like invoices, copies of receipts, shipping records, correspondence with the client, and more. Include in your defence every document or information you believe will help your case and prove that the transaction was legal.

Respond quickly. You’ll have a limited time to gather evidence and prepare your defence, so start working as soon as you receive a chargeback notice. Check the time limits given by the card provider and send all documentation before the deadline. Follow up by phone or email to ensure they have everything they need.

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