How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks Chargeback prevention has a direct impact on profitability in two different ways.

On the one hand, your processor charges How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks:

In addition, you will forfeit all shipping and handling charges and even the value of the item sold if it is returned to you in an unsaleable condition.

On the other hand, and in the high-risk world this is where it makes a real difference, your chargeback rate affects the terms your payment processor will offer you. These include your discount rate, reserve period and payout schedule.

Oh, and I haven’t even mentioned the industry rules that threaten to terminate your trading account once your chargeback rate exceeds one percent. In the real world, a mainstream processor will probably shut you down long before you get close to that limit, but let’s leave that aside. The point is that chargebacks are very costly and the important question is what to do to keep them at bay.

In a series of posts over the past few months, I’ve explored all of Visa’s chargeback reason codes and offered some suggestions on how to manage them. Today I’m going to take a closer look at the three most common types of chargebacks in the e-commerce world: “unauthorized use”, “authorization not obtained” and “recurring transaction”. If you can keep these three in check, you’ll be in good shape.

How to avoid these chargebacks How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks:

The 3 most common types of chargebacks

Here is the reason for these chargebacks:

1. Unauthorized use — these chargebacks are the result of transactions that cardholders claim were processed without their authorization. Unauthorized transactions are often fraudulent, but even more often they result from a family member using the card without the cardholder’s authorization How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

In either case, the issuer will usually replace the compromised card. As we’ll see in a minute, collecting card security information and implementing fraud prevention services at the checkout will help reduce this type of chargeback.

2. Authorization was not obtained – there are several possibilities as to why this could be. For example, a merchant could try to override a rejected authorization response (force a transaction, in industry parlance). Alternatively, after being declined, the merchant can obtain voice authorization or the key to enter transaction information.

This type of chargeback is often the result of several partial deposits made on the basis of a single authorization. As we will soon see, these chargebacks can be avoided by following good processing practices.

3. Recurring Transactions – Apparently applicable to a specific group of merchants, these chargebacks are usually the result of transactions processed after the cardholder has canceled – or claims to have canceled – a subscription, membership or some other service that is provided on an ongoing basis.

These chargebacks can also result from installment transactions, but this happens less often, since in such cases the number and amount of all payments are pre-defined. Honoring cancellation requests and immediate termination of payment plans will help prevent these chargebacks, as will using clear billing descriptors How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

 

Here are specific best practices you should follow—some of which can be used for one of the three types of chargebacks under consideration, while others have a broader impact:

 

1. Get authorization approval for each transaction.

2. The transaction amount must never exceed the authorized amount.

3. Avoid using voice authorizations unless absolutely necessary.

4. If the authorization approval is more than seven days old, you must re-authorize the transaction before settlement How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

5. Always use the Address Verification Service (AVS) and process the sale only after receiving a positive response from AVS.

6. Get a delivery confirmation for each shipment.

7. Consider using the association’s 3D Secure Services – Verified By Visa and MasterCard SecureCode as an additional layer of security for online credit and debit card transactions. 3D transaction confirmation proves card ownership and protects you from certain types of chargebacks How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

8. Always ask for card security codes: CVV2 Visa, CVC 2 MasterCard and CID Discover and American Express.

9. Process refunds as quickly as possible.

10. Notify your customers by email of refunds or membership cancellations. Inform them of the refund processing date and include the reference number.

 

11. Make sure your billing descriptor is set up correctly and shows your phone number so that if there is a problem your customer can contact you directly instead of calling the card issuer to dispute the transaction.

12. Make a customer support phone number and email address available on your website so customers can contact you directly. In fact, you can’t open a trading account without meeting these requirements first – and that’s a good thing How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

13. Make your terms and conditions clear on your website. It must also be on the same checkout screen that displays the total amount of the transaction or on one of the websites your customer accesses during the checkout process. Require customers to confirm acceptance by clicking an “I agree” or similar confirmation button.

14. Email your customers the details of each transaction and state that their cards will be charged.

15. For monthly fees or other recurring payments, obtain written or electronic signatures from your customers giving you express permission to charge their cards on a regular basis.

16. Make it easy for your customers to end their membership or subscription and cancel a recurring plan – have a “no questions asked” policy How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Takeaway

These are all very basic rules that anyone should be able to master without too much trouble, yet they are routinely ignored by traders. There is no excuse for some of these, such as creating a clear return and cancellation policy and following that policy, but things are often more complicated than that.

For example, many merchants refuse to ask for security codes, believing that it might confuse or otherwise discourage some of their customers and lead to lost sales. More generally, some merchants try to minimize as much as possible the amount of information they collect at checkout, which they find increases their “conversion rates” and reduces “checkout abandonment.” That may be true, but such practices also inevitably lead to higher chargeback rates, which, as we’ve noted, can quickly get you into big trouble. Still, the decision is yours .

Learn what chargebacks are, how the process works, and how you can avoid them.

January 12, 20224 minutes

Chargebacks were introduced to offer consumers an easy way to dispute suspicious transactions and protect them from fraud. But for businesses, chargebacks can threaten revenue, especially as friendly fraud becomes more common.

Although chargebacks are a part of business (and a good sign that your risk management strategy isn’t too tight), there are ways to reduce them How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

This article will explore what chargebacks are, how the process works, and how you can prevent and respond to them.

What is a chargeback?

A chargeback occurs when a payment is reversed after a customer disputes the charge on their statement How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

For example:

The customer may have received a damaged product. Or maybe the merchant made a processing error and accidentally charged the customer twice. In these cases, the customer can file a chargeback with their bank for credit or debit card transactions.

After approval, the customer will receive the transaction amount back in full. However, if the merchant does not agree with the settlement claim, he has the option to defend himself against it How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Read how iconic footwear brand Hunter reduced chargeback fraud by 90%

Chargebacks vs. refund
Although chargebacks and refunds involve refunds, they are very different How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Customers can usually request a refund directly from the merchant as part of their refund policy. However, sometimes the merchant may reject the refund request How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Perhaps the merchant claims that the product was not damaged on arrival, or believes that the package was indeed delivered on time. If opinions differ, the customer can request a chargeback.

In the case of a chargeback, the customer contacts the bank (not the company) to cancel the payment. The chargeback process takes longer and involves several more stages than a refund. And any chargeback fees are significantly higher than a refund How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

How does chargeback work?
The chargeback process varies depending on the payment provider. At the basic level, the customer requests a chargeback and the bank confirms it. The funds are debited from the merchant’s account and then returned to the customer. The merchant can then object to the chargeback.

In a little more detail, it usually looks like this How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks:

what the chargeback process looks like
The cardholder requests a chargeback through his bank. They usually have up to 120 days after purchase to dispute the charge, although some card schemes allow up to 365 days.
The issuer reviews the case, assigns a reason code, and initiates billing.
The card scheme receives the chargeback and forwards it to the acquirer.
The acquirer receives a chargeback and debits the funds from the merchant’s account. The acquirer also charges the merchant a fee ranging from $5-$100.
The merchant will review the chargeback and provide a defense document if they decide to dispute it. They must defend the chargeback within 14-40 days (see specific time frames according to the scheme here). The acquirer passes the trader’s decision through the scheme to the issuer.
The issuer reviews the defense document and decides to accept or reject it.
If the issuer accepts the defense, the acquirer will return the funds to the merchant.
If the publisher rejects the merchant’s defense, it can argue against it. This is called a second chargeback, which is usually denied How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

If the issuer refuses the second chargeback, you can go through a third round, called arbitration. Arbitration is often not recommended because the fees are particularly high (up to $500 in addition to the amount in dispute) How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

For more information on the procedure and dispute process, please visit our documents page.

Reasons for chargebacks
When the issuer approves a chargeback from the cardholder, it assigns a reason code. Each card scheme has a different set of reason codes, but they all fall into one of the following groups:

Fraud
The cardholder claims that he did not make or authorize the transaction.

Consumer disputes
The goods did not correspond to the description or did not arrive on the expected delivery date. Or the cardholder has been notified that the payment has not been processed How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Processing errors
Some payment information was incorrect. This may include information such as amount, currency or account number.

Authorization
The payment could not be authorized or the authorization was refused.

Read the full list of chargeback reason codes by card issuer How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

How to prevent chargebacks
Billing can cost businesses both the purchase amount and other fees. Banks and card networks can also penalize you if your chargeback ratio (the percentage of your transactions charged back) is too high.

Preventing chargebacks is more important than preventing them. Even if you win the chargeback defense, it will still count toward your chargeback ratio.

While you can’t completely avoid chargebacks, there are ways to reduce the amount. Here’s what to focus on:

Make returns easier
Refunds as quickly as possible when requested by the customer
Have a clear return policy
Include your email address and phone number on your website and emails so that the customer can easily contact you
Get the goods to the customer on time
Set a realistic delivery date. If there is a delay, inform the customer as soon as possible.
Proactively refund customers if you cannot provide goods/services by the expected delivery date
Track your goods and track their delivery date. Ask the customer to sign for the package upon delivery for extra security.
Avoid any misunderstanding
Make sure your bank account payment description is clear and accurate
Respond quickly to any customer questions
Notify your customers as soon as possible if a product is out of stock
Provide detailed product descriptions on your website
Prevent fraud
Use verification tools such as Address Verification Service (AVS), Card Security Codes (CVV) and 3D Secure 2
Make sure your risk system can identify customers who regularly file chargebacks and could be committing friendly fraud
Learn more about fighting payment fraud

How to dispute chargebacks
Once the chargeback has started, you will receive a Notice of Chargeback (NoC). From that point on, you can choose to resist the chargeback within 14-40 days (see the exact time frame for each card).

Start by reviewing the case and reason code to understand why you received a chargeback and whether it’s worth disputing How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

When is it worth challenging a settlement?

Controversy Don’t dispute
You think the transaction is legitimate You know the transaction is fraudulent
The transaction amount is large The transaction amount is low How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks
Build a case with as much evidence as possible. Try to gather all your interactions with the customer to help disprove the chargeback claim How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Losing money due to customer credit card disputes? Learn how to avoid chargebacks, increase profits and save time using six simple methods How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.
It’s disheartening when you receive notification that a customer has filed a credit card dispute that results in a chargeback, especially when the customer didn’t contact you first to give you a chance to respond to the situation.

Chargebacks are time consuming to fight and eat into your profits. However, you can – and should – develop methods of prevention. Learn how to avoid chargebacks by incorporating the six tactics below into your strategy.

Overview: What are chargebacks How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks?
A credit card chargeback is what happens after a customer disputes a charge on their card and wins. The payment will be reversed and you will not be paid. Additionally, you will be charged a chargeback fee. In some cases, this is a valid complaint. Other times it’s a scam.

The process of chargeback protection began with the Fair Credit Billing Act of 1974 (FCBA). Provides guidance to protect consumers from fraud such as inaccurate or unfair billing practices. Individual credit card companies set rules for investigation deadlines and procedures that banks and payment service providers must follow.

In addition, many payment services will cancel merchant accounts if you exceed a set chargeback-to-transaction ratio, usually around 1% of your sales. Banks use reason codes to categorize disputes, which vary by credit card company. Categories typically include fraud, authorization, or processing issues.

Chargeback rates vary by industry, dispute resolution strategies, billing models, and transaction volumes .

6 ways your business can avoid chargebacks
Although some chargebacks are due to merchant error, fraudulent chargebacks are still on the rise. As LexisNexis Risk Solutions’ “True Cost of Fraud Study” noted, “Retail fraud attempts have tripled since 2017,” with an average loss of $3.13 per $1 of fraud How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

During and after the chargeback by the customer, businesses incur:

Lost processing fees
Chargeback investigation costs
Costs of redistribution of goods
Management of labor costs
Chargeback fees
Potential loss of sales and customers
While it’s impossible to completely stop chargebacks, reducing chargebacks saves money and protects your business’s reputation. Use the best point-of-sale (POS) system and the following tactics to avoid credit card disputes .

1. Make the return and dispute process clear and easy
Many customers request a chargeback from their credit card company because it’s easy. By planning your process from the start, you can show customers that it’s easier and more convenient to contact you first.

Improve your returns process:

Adding a returns FAQ page: Review all returns and talk to your customer service teams to generate a list of frequently asked questions about your returns process.
Post-Purchase Follow-Up: After a purchase, send a friendly email or text message to verify receipt and satisfaction, and ask customers if they have any questions or concerns.
Automate the return process: Use a system where your customers can submit a return and track its progress online.
It offers multiple ways to communicate: Provide 24/7 customer service via messaging, email, phone and digital chatbots How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.
Providing free return shipping: Although shipping is expensive, it can offset the fees incurred at checkout.
Ask for reviews after returns: Share testimonials from buyers who have experienced your return process to encourage others to follow suit How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.
2. Use multi-layered payment protocols
A recent report by Midagator on chargebacks found that Mastercard fraud disputes were up 9%, compared to 5.4% for Visa. Most of the problems stem from Card Not Present (CNP) transactions, which are common in online payments.

As fraud increases, so does the need for preventative measures, with 88% of businesses surveyed “using three or more anti-fraud features or technologies,” according to a Kount and Chargebacks911 survey.

Avoid payment hassles with a multi-layered approach that uses:

Chargeback Prevention Notice
Address Verification Services (AVS)
Email verification methods
Order verification tools such as Shopify eCommerce plugins
Reverse phone number lookup
Confirmation of delivery and billing address
Device fingerprinting
Buyer speed limit for purchases
Card Security Codes, also known as Card Verification Value (CVV)
The back of a Visa or Mastercard card and the front of an American Express card showing the location of the security codes.
Show consumers and employees where to find credit card CVV codes for purchases. Image source: Author

Your POS terminal can also deploy various anti-fraud methods while keeping your business in line with the payment card industry How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

A LexisNexis report said that of those who started using a multi-faceted approach, 36% had to perform fewer manual checks and 76% saw a reduction in fraud attempts How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

3. Train staff in best practices
Your employees are the key to preventing credit card disputes. Every employee who works with customer transactions or handles customer service should receive training to help your company avoid chargebacks.

Implement an ongoing training program covering Automated Clearing House (ACH) payment processing best practices, such as teaching teams how to spot suspicious transactions and verify signatures How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

It is vital to gather evidence to prepare for disputes, so create protocols for both CNP and card situations. You may need to set standards for obtaining signatures on various contracts or sales orders used in your business.

Many credit card processors provide alerts when customers dispute a charge. Set protocols for your customer service teams to ensure quick response How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks. Contact unsatisfied buyers as soon as possible to stop chargebacks.

4. Analyze chargeback data
Collecting, evaluating and acting on data is critical to all aspects of business, including preventing chargebacks. Your POS system plays a big role here and must integrate with your payment solutions.

Explore your POS reporting options and learn insights about your transaction data. Use your reports to identify trends that indicate customer or employee fraud. For example, POS software like Square offers advanced features, including fraud prevention and monitoring tools How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

Square application reporting screen showing sales, disputes and current socket data.
Track transaction and dispute data from anywhere with mobile POS reporting capabilities. Image source: Author

You may also want to use a chargeback management platform with real-time reporting. The software provides alerts to alert you to potential  How to Raise Profits by Preventing the 3 Most Common Types of Chargebacksissues and reviews transaction data to gain deeper insight. Some integrate with other business software to provide a deep view of your POS data How to Raise Profits by Preventing the 3 Most Common Types of Chargebacks.

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