What are chargebacks?

A chargeback occurs when a cardholder asks their bank to reverse a charge. This could be because the transaction is fraudulent, unauthorized, or due to an unsatisfactory shopping experience with a merchant. If the bank approves the request, it’s forwarded to the merchant who is legally required to reimburse the payment.

Explore our Guide to Chargeback Management below

How chargebacks affect your e-commerce business

imageThe most obvious impact of chargebacks on merchants is revenue loss. However, it cuts much deeper, especially considering the competitive nature of the current ecommerce landscape.

Fraud loss and Revenue loss are like two opposing weights on a scale. When Fraud loss goes down, Revenue loss often goes up. Legacy rule-based systems perform the worst in this area. In fact, the average merchant loses 13x more to false positives than to direct fraud loss. Good customers are getting frustrated and looking for somewhere else to shop.

The cost of fraud control efforts has grown 6% year over year to the point where the average ecommerce merchant spends $3.48 fighting fraud for every $1 of direct fraud loss. Wrapped up in that number are the cost of static tools (email address, device ID, address lookup), manual review systems and salaries, risk scoring services, IT, risk, and engineering systems, staff, and overhead. Fighting fraud is complex and expensive - and each year, the problem continues to grow.

The safeguards implemented by ecommerce merchants typically cost them more than the chargeback problem they set out to solve. $300 billion in revenue is lost annually due to false declines. In fact, global card not present (CNP) approval rates average only 83% vs. 98% for retail sales. Around the world, ecommerce merchants are leaving 10% or more revenue on the table. The odds are that your business is missing out on lost revenue too.

Why Chargebacks Happen

checkoutThese are several legitimate and justified reasons for chargebacks.

In 1974, Congress amended the Truth in Lending Act which gave birth to the Fair Credit Billing Act. This was arguably the first law that enabled credit card holders to dispute charges. The FCBA allowed cardholders to dispute charges that were at least $50 and met the following conditions:

  •         Unauthorized charges
  •         The amount charged was incorrect
  •         Charges for goods that the customers did not receive or accept
  •         The charge reflects a wrong date
  •         Calculation errors
  •         The goods were not as described or damaged

 

The 5 most common reasons for chargebacks are:

  1.   The customer believes that they have been the target of fraud
  2.   The customer didn’t receive their order
  3.   The customer didn’t receive what they ordered
  4.   The item received by the customer didn’t match the description
  5.   The customer was billed incorrectly

 

Unfortunately, chargebacks can also be used fraudulently.

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Types of Chargeback Fraud

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What is Chargeback Fraud?

Chargeback fraud involves customers trying to use their right to file chargebacks to avoid paying for goods they purchased.

What is True Fraud?

True fraud is the most legitimate reason for chargebacks and exactly why chargeback related laws were created in the first place. True fraud occurs when a customer’s credit card account is stolen and used by a criminal to make unauthorized purchases.

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chargeback-fraud

What is Friendly Fraud?

Friendly fraud involves chargebacks filed because of honest mistakes from customers (i.e. they didn’t recognize a specific legitimate charge on their credit card).

 How to Stop Chargeback Fraud

   1.  Know your rights as a merchant
   2. Strengthen your fraud protection
   3. Collect data for all disputes
   4. Invest in fraud-related chargeback guarantees
   5.  Choose your chargeback battles wisely

 

How to dispute a chargeback the right way

Merchants are not taking chargebacks lying down. In fact, 80% of merchants dispute chargebacks they believe are illegitimate.

However, only 18% of online retailers are winning more than 60% of their chargeback disputes. This means that most of the time, the majority of merchants are losing and are bearing the high costs involved in the chargeback dispute process.

All merchants have the right to chargeback representment or to dispute chargebacks using all legal means You shouldn’t be shy in exercising these rights to protect your business from chargebacks, especially if you have compelling evidence to prove that a chargeback was lodged against you incorrectly.

Data is the biggest ally of merchants in disputing wrongfully filed chargebacks against them. The only way to win chargeback disputes is to gather compelling evidence that you held up your end of the bargain. Here are the important data that you need to collect:

  • Proof of delivery Signed delivery receipts to prove that your customers received the goods you shipped
  • Communications log Documented communications between you and your customers pertaining to the disputed transaction
  •  Address matches Proof of a matching addresses bolster your chance that the transaction was legitimately made (customer name matches billing address, customer name matches shipping address, shipping address matches billing address).

  •  Purchase history If a customer has purchased an item from you before, especially if the customer has purchased a similar item involved in the transaction in dispute

  • Email Should match with the email provided by the customer during the time of the transaction
  •  Successful payment results The billing/shipping address of the transaction matches the billing address of the cardholder in the issuing bank’s records. This also refers to previous transactions made by the same cardholder using the same identity and card information that didn’t result in a chargeback.
  • Browsing data The transaction was made using devices used by the cardholder in other transactions

6 Steps to Prevent Chargebacks

1. Strengthen your fraud protection

2. Use a clear payment descriptor

 3. Provide accurate product descriptions

 4. Deliver on time

 5. Communicate a clear refund and return policy

 6. Provide five-star customer service

Our Products Include Chargeback Management

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Payment Protect

Payment Protect offers a risk assessment score for all transactions, allowing you to protect payments from fraud and raise approval rates.

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Payment Guarantee

Payment Guarantee builds upon Payment Protect’s fraud detection with an end-to-end solution to reduce your risk of revenue leakage from fraud to zero.

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Account Protect

Account Protect uses Vesta’s advanced machine learning models and big data resources to protect customer accounts from takeover—preventing unauthorized purchases.

Taking charge of chargebacks:

Chargebacks are crushing your bottom line. Sure, they give shoppers a way of fighting fraud, but the revenue lost on these reversed transactions can be a huge drain on your business. Vesta's fraud detection and prevention solutions help approve more legitimate transactions—protecting your business, your customers and your bottom line.

Explore our Free Guide to start taking charge of chargebacks today!