Andrew Reszka, Regional Head APAC, Verifi
It’s the giving season and merchant revenues are rising. But just as thunderstorms follow hot summer days, chargeback spikes follow sales peaks. In fact, card-not-present (CNP) chargebacks can spike as much as 50 per cent over this period. While chargebacks are often mistakenly viewed as a cost of doing business, nothing could be further from the truth. In the same way that the Grinch ‘stole’ Christmas, this rapid rise in preventable costs can rob merchants of revenue. So, how can you reduce your share of the chargeback pie?
Chargebacks occur when a cardholder disputes a merchant charge and a debit is made to the retailer’s account. The issuing bank charges merchants a fee for every chargeback received, and those with a high chargeback ratio may also receive fines or risk losing their payment processing privileges altogether.
While the chargebacks mechanism was created to protect consumers against fraudulent behaviour, some consumers have found that it is easy to dispute legitimate charges: this form of ‘friendly fraud’ creates a significant financial burden for merchants. To combat these chargebacks, it’s good to know why they happen in the first place.
Why do chargebacks happen?
Customers may dispute a credit card charge for a number of reasons. For example, they may claim that they didn’t make the purchase or that they weren’t satisfied with the it. Disputing a transaction is as easy as contacting the credit card company and stating they didn’t make the purchase. This type of friendly fraud puts the burden of proof on the merchant to show that the debit or credit card was used in good faith and authorised by the cardholder.
Unfortunately for the merchant, holding the burden of proof is an expensive exercise. This is because the dispute resolution process is complex, time-consuming, and labour intensive, as well as requiring an expert understanding of payment network rules, meaning that the dedication of resources and staff to the activity is incredibly inefficient. In addition, chargeback fees and penalties are inevitably incurred, the loss of merchandise or services is rarely recouped, and excessive refunding is often difficult to avoid.
Recovering these lost funds can only be done when contesting a chargeback by providing the bank evidence that proves the transaction was authorised and that the cardholder received value from the purchase. It’s no secret that resolving these disputes takes time – and during this time, the sale revenue is withheld from the merchant’s account.
How can merchants prevent chargebacks?
The outlook appears quite dire at this point, but luckily, taking action to prevent chargebacks and recover the funds lost in the process doesn’t have to be quite so painful. There are a number of helpful integrated strategies that merchants can employ:
- Improve the process – The time and resources required to process a chargeback can be significantly reduced by streamlining workflow and eliminating human error. Automation allows for merchants to remain up-to-date on credit card processing rules and simplifies the dispute process.
- Prioritise – Building a ‘fight or flight’ policy into the chargeback process can be useful in ensuring you don’t spend more time disputing a chargeback than you would incur in chargeback fees.
- Data control – Collecting information from chargebacks allows the merchant to adjust business practices, if necessary, and identify internal issues.
- Clear billing – The inclusion of a URL or contact number in the descriptor field on bills makes it easier for customers to recognise purchases made with their credit card and reduces the chance of a mistaken chargeback by a customer.
- Fix operations – Excessive chargebacks may indicate operational issues within the business. Whether it’s a quality control issue with merchandise, ineffective or misleading product marketing, or something else, addressing these issues can significantly reduce the occurrence of chargebacks.
- Outsource – Bringing in a third party to assist with all or some of the business’ chargebacks helps to free up resources and valuable time that can be better spent on running a successful enterprise.
Regardless of whether or not you choose to implement some or all of these overlapping strategies, seeking new ways to minimise chargebacks will almost certainly pay off in the long run.
Chargebacks are often viewed as a cost of doing business, and many merchants believe there is nothing they can do about chargebacks. However, with the holiday season in full swing, aggressively preventing chargebacks and recovering funds lost to chargebacks should be a priority for every merchant.