Chargebacks were originally introduced as a means to reassure customers when making card payments. But they have become time-consuming and costly for businesses to deal with.
Fortunately, there are ways to reduce the likelihood of receiving chargebacks, as well as minimising the time, effort and cost of handling the chargebacks your business does receive.
Read on for seven useful ways to safeguard against chargebacks.
What are chargebacks?
Chargebacks were designed to add protection for debit and credit card users, allowing them to easily get their money back if something was never delivered, if they weren’t refunded promptly, or unexpected charges were added to the transaction.
They were intended to encourage consumers to use cards when card payments were a new payment method, and incentivise card acquirers to onboard reputable merchants.
Specifically, a chargeback is the reversal of a debit or credit card payment. Unlike with normal refunds, where the customer is the party requesting a refund, in the case of a chargeback, it’s the customer’s bank that takes the money on the customer’s behalf.
For example, a customer might receive faulty goods from a merchant. If they are unable to get a prompt refund from that merchant, they can raise a chargeback dispute with their bank or card issuer, who can then reverse the charge at the merchant’s expense.
Reasons that a customer may request a chargeback include:
card processing errors, such as being charged multiple times for the same purchase
the cardholder doesn’t recognise the transaction
merchandise or service differs from the description
received goods are defective
ordered goods aren’t received
agreed upon services did not take place
the seller has gone out of business, and so the customer cannot request a refund
There’s also the possibility that some chargebacks aren’t made in good faith, where a customer has no legitimate reason for a chargeback but requests one anyway. This is often known as friendly fraud.
Typically, the bank/card issuer will side with the customer. The merchant must pay the original transaction cost as a refund, in addition to a chargeback fee typically ranging from £10 to £20.
To put those fees into perspective, MasterCard estimates that there will be 615 million chargebacks requested in 2021. Chargebacks have become such a problem for businesses, payment processors have begun offering chargeback protection and insurance.
Aside from the financial hit, repeat chargebacks can damage a brand’s reputation. Businesses can dispute chargebacks, but this process can take up to 120 days to resolve, leading to loss of revenue while the matter is investigated.
A high volume of disputes, legitimate or not, could even lead the bank to shut down your merchant account or cause card acquirers to cancel contracts. This is why it’s so important to prevent chargebacks before they occur.
How does the chargeback process work?
The chargeback process involves multiple steps:
Step 1: A customer experiences a problem with their order, or sees an unknown transaction on their card statement and files a chargeback. They get in touch with their bank to dispute the transaction stating one of the reasons mentioned above.
Step 2: The issuing bank vets the complaint. With an initial investigation, the issuing bank determines whether there’s validity to the dispute. If there is, they’ll notify the merchant’s bank.
Step 3: The customer receives a conditional refund. The money is withdrawn from the merchant’s bank and transferred back to the customer’s account. A chargeback reason code is given.
Step 4: The merchant bank launches an investigation based on the reason code and accompanying data. This step can involve multiple, lengthy steps depending on how complex the dispute is. At this stage, the merchant’s bank will notify the retailer and ask for evidence. It’s your job, as the merchant, to provide all required evidence, such as receipts, delivery confirmation, and customer service records.
Step 5: The customer’s bank determines the final outcome. With evidence in hand, the issuer’s bank will determine whether the chargeback is justified. If so, the merchant must pay the claim value plus associated fees.
If a merchant ignores a dispute or request for evidence, the funds are automatically returned to the customer’s account, and the merchant is charged all fees.
Top ways to reduce chargebacks
As chargebacks are built to protect consumers, it may be impossible for your business to eliminate them entirely. However, there are ways to reduce them.
1. Be available to respond to customer complaints
Chargeback reduction starts with customer service. Before a customer turns to the bank to file a chargeback, they’ll often try to get in touch with a business directly. Be available with clear contact details, even if it’s just an email address. Deal with issues in a timely manner to resolve disputes before they turn into chargebacks.
2. Ensure you respond to chargeback requests
During the chargeback investigative stage, you have the opportunity to respond if you think the chargeback is not legitimate. Banks typically allow 45 days to respond to each stage of the process. Include relevant supporting information, including proof of authorisation, signed receipts and proof of delivery, all of which will support your case that the chargeback should not be upheld.
3. Ensure product descriptions are relevant and detailed
Inaccurate product descriptions can lead to confusion or complaints. Ensure your website is up to date, with clear photos of merchandise and extensive product details. When items are out of stock, disable purchasing until they’re replenished. The same attention to detail applies to billing descriptors, which is what appears on your customer’s credit card bill. The descriptor should always match your business name.
4. Send an automatic confirmation email for each purchase
Give your customers advance notification of billing details before they appear on the bank statement by sending an automatic confirmation email for each purchase. Include your contact information on the invoice, giving the customer a chance to get in touch with queries. This also creates a paper trail for any potential chargeback investigations.
5. Be transparent with the shipping times and costs
If a customer grows impatient waiting for a delivery, they may file a chargeback. Be sure that shipping details are clearly stated on your website at the checkout stage. Display delivery timelines, as well as shipping costs to manage expectations. Provide real-time tracking information to keep customers in the loop.
6. Ensure you have a clear returns process
Returns and exchange policies should also be clearly visible for all customers. It’s better for a customer to contact you directly for a refund rather than begin a chargeback claim. You’ll avoid paying chargeback costs and spending valuable time on a subsequent investigation. Your returns policy should include a step-by-step process for how to request a refund.
7. Consider instant bank transfers as a checkout option
Offer additional options at checkout like instant bank transfers — powered by open banking — to prevent chargebacks. Instant bank transfers are instant, cost-effective and secure. Funds are transferred directly from one bank account to another, without the need for cards. This means chargebacks aren’t a part of the purchase journey. Customers still benefit from relevant consumer rights and protections to make sure their purchases are safe and secure.
Move beyond card purchases and chargebacks with TrueLayer
The above advice can help protect your business from unwanted chargebacks and processing fees.
Open banking payments — or instant bank transfers as they’re often called at checkout — are also a great way to eliminate chargebacks altogether by avoiding credit card processing entirely. Our Payments API is tailor-made for ecommerce businesses, enabling shoppers to pay instantly in a few clicks. As there’s no card network involved, there is no chargeback process to deal with.
The consumer benefits because if something goes wrong, only three parties (the customer, the merchant, and the open banking payment provider), all with direct relationships, are involved in the resolution.
With instant bank transfer powered by a secure open banking platform, like TrueLayer, customers and businesses enjoy instant, secure transactions.