Chargebacks, a significant concern for businesses, can adversely impact customer satisfaction, revenue, and overall business liability. Although there’s no magic formula for minimizing chargeback entirely, understanding their intricacies and adopting preventative measures can make them more manageable. This article delves into everything you need to know about reducing chargebacks affecting your business.
Understanding Chargebacks
Chargebacks, in essence, are the reversal of a credit or debit card transaction initiated by the cardholder’s bank following a dispute. Unlike a refund, where the business initiates the reversal of funds, chargeback involve the bank withdrawing funds from the business’s account during the investigation period. If the customer’s claim is justified, the funds are returned to them.
Reasons for Chargebacks
Chargebacks were conceived over four decades ago as a protective measure against credit card fraud, bolstering consumer confidence in credit cards by providing recourse against fraudulent purchases. However, in reality, customers use chargeback not only to rectify cases of genuine fraud but also to bypass traditional return processes for unsatisfactory goods or unfulfilled orders. Chargeback may occur due to:
- Unauthorized charges (genuine fraud)
- Non-receipt of ordered items
- Receipt of wrong item(s)
- Delayed refund processes
- Dissatisfaction with the quality of the item(s)
- Discrepancy between the product and its online description
- Clerical errors (e.g., multiple charges)
Chargebacks requested for reasons other than legitimate fraud are termed “friendly fraud”—these instances constitute up to 86% of all chargeback.
Negative Impact on Businesses
Chargebacks hurt businesses in more ways than one. Beyond the lost revenue from a reversed transaction, chargeback incur additional costs such as the time spent processing a chargeback, lost inventory, and fees charged by payment processing providers. According to a LexisNexis study, for every $1.00 of fraud, US retail and ecommerce businesses bear a cost of $3.75 — a 19.80% increase from 2019’s cost of $3.13 per $1.00 of fraud.
Furthermore, chargebacks often indicate lower customer satisfaction levels and, in cases of genuine fraud, a problem with security. If your business is experiencing a high number of chargebacks, it’s likely indicative of systemic issues that need to be addressed.
Normal Chargeback Rates for Businesses
While the number of chargebacks businesses experience generally decreases year over year, the associated lost revenue is substantial. In 2020, businesses lost $17.5 billion due to chargeback and fraud, as per a Juniper Research study.
Different card networks and acquirers have varying standards about the acceptable number of chargeback for a business. Generally, a 1% chargeback-to-transaction ratio is considered the highest acceptable figure. Exceeding this threshold can result in higher transaction fees, other penalties, and potentially account suspension or closure.
Strategies for Minimizing Chargebacks
Preventing chargeback involves ensuring customer satisfaction, meeting expectations, and being easily accessible to address any issues. Here are eight strategies businesses can adopt to reduce their number of chargebacks:
1. Prioritize Payment Security
Since chargebacks commonly occur due to credit card fraud, prioritizing security can significantly reduce chargeback. This involves consulting your payment provider, regularly updating your POS software, opting for secure card transactions, and requiring customer signatures and PIN number usage.
2. Implement Clear Return and Refund Policies
Clear, easy-to-understand return and refund policies encourage customers to follow proper channels for returning unwanted products instead of disputing a charge with their bank.
3. Maintain Updated Online Inventory
Keeping your online inventory up-to-date prevents situations where a customer completes a transaction for a product that is out of stock, potentially leading to a chargeback.
4. Provide Accurate Product Descriptions
Clear, accurate product descriptions, along with true-to-life photos or videos, can ensure customers receive what they expect, thereby reducing chargebacks.
5. Manage Shipping Expectations
Providing customers with clear shipping details, including the shipping carrier used, confirmation and tracking numbers, expected delivery time, and contact information for any issues, can prevent chargeback due to lost or delayed shipments.
6. Be Easily Accessible
If customers can easily reach your business to resolve issues, they’re less likely to request a chargeback. Establishing a comprehensive, multi-channel customer service function is crucial in preventing chargeback.
7. Ensure Free Trials Are Truly Free
If your business offers a free trial, avoid ending the trial period with automatic billing. Although this may reduce retention, it can also prevent chargebacks and refund requests, saving you the associated costs.
8. Use Your Real Company Name on Credit Card Statements
If customers don’t recognize the business name on their credit card statement, they may dispute the charge. Ensuring your business’s name appears clearly on your customers’ statements can prevent this issue.
Conclusion
While chargebacks can’t be completely eradicated, they can be successfully managed. By reducing the number of chargebacks, you’ll be in a stronger position to dispute any unwarranted chargeback that come your way and effectively process any cases of legitimate fraud.