What are chargebacks and why are they a problem for merchants?

Chargebacks are an important consumer protection mechanism. If a supplier fails to deliver, a shopper can instigate a chargeback. Their payment card provider issues a refund, reversing the payment to the retailer.

Chargebacks protect customers against fraud, merchant errors or where the cancellation and return procedure breaks down. However, chargebacks are a significant headache for retailers. Scammers will often trigger chargebacks to defraud ecommerce businesses. And, sometimes, shoppers will lodge an illegitimate chargeback request after experiencing buyer’s remorse.

Retailers must strive to reduce chargebacks. There is an administrative overhead associated with managing chargebacks, wasting resources and eating into profits. Payment providers may also levy financial penalties – or even terminate merchant accounts – which are subject to 'too many' chargebacks.

Legitimate or not, chargeback prevention is an essential strategy for retailers.

When can a customer request a chargeback?

Consumers do have the legal right to request a chargeback:

To recoup unauthorized transactions (usually when a payment card has been stolen or cloned)

When a supplier fails to deliver goods or services

When products do not match the retailer’s description

Rules regarding claims will differ between providers.

How do chargebacks work and why do they happen?

Chargeback prevention begins by understanding how the process works. You can then begin building an effective strategy to prevent chargebacks.

A chargeback dispute typically follows this process:

The consumer registers a dispute with their card provider

The provider requests additional evidence and sends it to the merchant

The merchant must accept the chargeback or raise a dispute

In the event of a dispute, the merchant must supply evidence supporting their case to the payment provider for consideration

The card provider assesses the evidence and decides in favor of the merchant or the customer

If the customer wins the dispute, they receive a full refund at the merchant’s expense

Legitimate or fraudulent, most chargebacks happen when customers dispute a transaction with their bank. Unfortunately, many disputes are avoidable, arising from merchant errors. Unclear return policies, shipping issues and incomplete product descriptions can lead to disappointment – and a request for a refund.

Another increasingly common source of chargebacks is ‘friendly fraud’. This occurs when a shopper experiences 'buyer’s remorse', regretting a legitimate purchase. They lodge a chargeback request to circumvent the retailer’s returns policies.

Finally, the chargeback process may be initiated when shoppers fall victim to scammers. The chargeback mechanism protects against fraudulent transactions made with cloned or stolen cards. Unauthorized purchases are often very high value, leading to costly disputes – and significant losses for retailers.

7 proven strategies to prevent chargebacks

In practice, you want to prevent all chargebacks, not just fraudulent refunds. Here are our top 7 chargeback prevention tips:

1: Implement clear and transparent policies

Customers must understand your terms and conditions of sale – particularly relating to returns and refunds. Ensure policies are easy to find on your website. Follow this up with training for your employees. They must be able to explain the returns process to customers in person or via email, social media or live chat.

It is strongly advisable to avoid legal speak for customer-facing policies. Choose simple, everyday English to make policies easy to read and understand. Clarity and transparency prevent confusion and help to reduce disputes after purchase.

2: Use strong fraud detection tools

Payment card providers offer several built-in fraud prevention solutions to protect your business.

The AVS (Address Verification Service) ensures that mailing addresses match those registered by the cardholder. If a customer makes a purchase from another address, the transaction may be flagged as suspicious.

The 3-digit CVV (Card Verification Value) number printed on the rear of every credit card provides some additional proof that the customer owns the card in question when making a card-not-present (CNP) payment.

3D Secure is a two-factor authentication (2FA) technology requiring customers to input a secure PIN number whenever they make a transaction. The transaction will not be processed without the correct PIN.

These security protections can be enhanced with real-time transaction monitoring. Systems like Worldpay’s dispute management solutions monitor transactions for suspicious activity, providing real-time alerts and allowing your business to act before a fraudulent payment takes place. These tools are faster and more accurate than manual transaction monitoring.

3: Offer excellent customer service

Angry customers may overreact, raising a chargeback request when they feel they have received poor service. Respond quickly and proactively to customer queries to resolve issues before they escalate into disputes.

Delivery disputes can be prevented by providing order tracking and delivery updates. Simply keeping customers informed about deliveries can help prevent chargebacks caused by impatience or unrealistic expectations.

You should also ensure you have internal resources available to handle disputes. Taking ownership and solving problems in-house will help deter customers from requesting chargebacks prematurely.

By raising the quality of service offered, issues can be resolved before they escalate into a full-blown dispute. Using disputes solutions elevates your offering, potentially converting a disappointed buyer into a loyal repeat customer.

4: Maintain accurate records and documentation

The chargeback dispute resolution process requires your business to defend its position with evidence. Detailed transaction records – particularly receipts and shipping information – is essential.

Similarly, you must be able to prove goods were delivered to, and received by, the customer. Photographing the item being delivered and the condition it was received in is powerful proof that your business has met its obligations.

Finally, keep a record of every customer interaction. A customer relationship management (CRM) system can assist, allowing you to note details that may prove useful in defending chargebacks. You can learn more about recording transactions in our merchant support resources.

5: Implement proper billing descriptors

When reviewing account statements at the end of the billing period, customers can easily forget specific transactions. If they see any transactions with unfamiliar billing descriptors, they can quickly overreact, assuming they have been defrauded. A chargeback claim usually follows.

To avoid confusion, your business name and charge descriptions should be easily recognizable, preferably matching your brand. If this is not the case, specify this at the point of purchase so customers – and you – don’t get a surprise at billing time. This simple step will reduce instances of 'no authorization' chargebacks due to unclear billing details.

You can find more tips in Worldpay’s best practices guide.

6: Use recurring payment best practices

Recurring payments can become a point of contention, particularly when clients feel they have lost control of the agreement. Dissatisfaction with enrolment or termination process can lead to costly chargebacks.

When offering subscription-based services, always obtain explicit consent before enrolling customers in a recurring billing program. Outline terms, costs and payments dates to ensure transparency and prevent nasty shocks.

Keep customers updated throughout the lifespan of your agreement. Send billing reminders before each recurring payment, giving them the option to cancel the agreement according to your terms and conditions. This is especially important when approaching a renewal date.

Finally, make the cancellation process as simple as possible. Recurring payments are an important revenue stream – but chargebacks and damage to your corporate reputation may cost more in the long term.

7: Leverage chargeback alerts and response services

The speed at which your business responds to disputes and chargebacks will affect the overall cost of each incident. As well as avoiding costs, you want to prevent resources and time being diverted away from revenue-creating activities.

Signing up for Worldpay’s Chargeback Alerts service helps you regain control of disputes. You receive an automated notification every time a customer registers a dispute, allowing you to respond and recover situations before they escalate into formal chargebacks.

Catching a complaint quickly at the dispute registration stage allows you to resolve issues faster, avoiding fraudulent chargeback costs and resource wastage.

Chargeback prevention alerts are not the whole solution. Partnering with a chargeback management company will give you access to industry specialists who can navigate the complexities of the dispute process. A service like Worldpay fraud prevention can help you get through the chargeback steps as quickly and cost-effectively as possible.

The consequences of ignoring chargeback prevention

Chargeback prevention is a strategic necessity to protect your profits. Neglecting it can have serious, long-term consequences including financial penalties.

A successful chargeback costs more than just the invoiced amount. Payment providers and banks add extra fees and fines to cover the dispute resolution costs. These charges can add up, compounding your losses.

Chargeback fraud prevention is extremely important. If scammers identify your business as a 'soft target' that fails to challenge chargeback requests, they will continue to attack. Also, payment providers actively monitor chargeback requests. If the ratio of disputes reaches a certain level, your merchant account may be terminated.

Excessive chargebacks create reputation problems. Chargebacks resulting from negative shopping experiences hurt your credibility, damaging customer trust. At the same time, resolving disputes quickly and effectively builds credibility, establishing your brand as a trusted provider.

Conclusion

There are many good reasons to strengthen your chargeback prevention strategy, not least to protect profits. The costs of chargebacks extend far beyond the transaction value – there’s fees, fines, resource usage and reputation damage to consider as well.

This issue is more than simply chargeback fraud prevention. Your goal should be to resolve disputes with all unhappy customers before they escalate into full claims. Taking a holistic view of chargeback prevention will ensure you’re not losing cash through poor customer service, for instance.

The strategies will help you protect revenue, maintain your merchant accounts and build stronger customer relationships, laying a foundation for future success.

Worldpay offers a comprehensive suite of tools to help your business streamline payment processing, protecting you and your customers against fraud. Start taking payments now and prepare yourself for a more profitable future.