What is Chargeback Management and Why Do You Need It?

Note: This is a three-series post. This first post addresses the question, “What Is Chargeback Management, and Why Do You Need It? Stay tuned for the next post: “The Debate of In-House, Outsourced, Automated Chargeback Management.”

A recent scientific discovery has revealed why chargeback fraud keeps increasing, as Mastercard expects global chargeback volume to reach 337 million by 2026. Stay with me as I explain. This phenomenal discovery will blow your mind!

The anterior mid-cingulate cortex (aMCC) is a vital network hub in the human brain. A breakthrough study published in the National Library of Medicine demonstrates that aMCC is the engine room for cost/benefit analysis of decision-making.

The study found that when people do things they don't want to do, their anterior mid-cingulate cortex grows. Like magnets with opposite poles, that induces the desire to repeat the act.

This explosive scientific discovery is in parallel with industry records on chargeback trends. Research shows that many chargeback fraudsters are indeed customers experiencing buyer’s remorse. Filing chargebacks, therefore, becomes their recourse to undo legitimate transactions. Guess what? 40% of these buyers who successfully chargeback a transaction will likely submit another dispute within 90 days.

Incidentally, you, the merchant, end up bearing the brunt.

This piece is the inaugural installment of a three-part series. It will take you on a transformative journey of crafting effective chargeback management. By the end of this trilogy, you will gain unparalleled expertise in navigating the intricacies of payment fraud. Let’s dig in!

What is Chargeback Management?

Chargeback management is the systematic measures a business puts in place to prevent, track, examine, and resolve chargeback requests from a buyer’s card issuer or financial institution.

Chargebacks are forced payment reversals by the customer’s bank. Hence, chargeback management does not only require investigating and addressing cases that have already happened. It also includes preventive measures a business installs to avoid payment disputes from occurring in the first place.

Chargeback procedures are intricate. They involve several parties, strict timelines, and ever-changing industry restrictions. Understanding these complexities helps you minimize losses in the gruesome chargeback management process.

Unveiling the Chargeback Process

Chargebacks are a Federal law that protects cardholders from unjust billings and unauthorized use of their cards. The process of resolving such cases looks like this:

1. The customer contacts their bank to dispute a specific transaction. Cardholders usually have 45-180 days to dispute charges.
2. After receiving a claim, the card issuer reviews its validity (this takes about six weeks or 30 days for Visa cards).
3. If they see merit in the case, the bank then initiates a chargeback on behalf of the customer, leading to temporary funds reversal to your merchant account.
4. You, in response, must investigate the dispute, gather relevant documentation as evidence of transaction legitimacy, and present an air-tight case to the payment processor or acquiring bank to challenge the chargeback.
5. If your case is compelling enough, the card issuer or financial institution will overturn the claim and return the charge to your account. But if not, the cardholder retains the provisional credit issued.

The chargeback process often takes up to 90 days.

Creating a robust chargeback management system may seem challenging. But it's non-negotiable, given the rising negative impact of chargeback losses on businesses.

Why You Need an Effective Chargeback Management System

Our internal research on chargeback trends indicates that chargebacks increase as digital transactions grow. The need for tools, processes, and best practices to combat the rising chargeback threat has become even more pronounced today. “The cost of chargebacks in 2023 reached more than $1 billion,” Mastercard says.

Here’s why you need a well-defined chargeback management system:

Closing fraud loopholes before transactions

De-risking transactions is a crucial aspect of chargeback management. This involves pre-transaction measures, such as tracking and verifying customers’ identities before they purchase to prevent fraud. For example, applying customer authentication and authorization holds prevents fraudsters from making transactions that will ultimately lead to chargebacks.

Minimizing errors and confusion after billings with a chargeback policy

Having a policy for how you plan to prevent and contest disputes ensures you’re not flushing hard-earned revenue down the pipe. That can include quality-assuring transaction records to avoid merchant errors like double billing and clerical mistakes.

Aside from limiting internal errors, having a well-defined chargeback policy makes it possible for customers to recognize bills, especially for subscription payments. For example, ensuring digital bank channels and issuer back-office teams have pertinent merchant information like name, logo, and receipt, helps minimize friendly fraud.

Efficient chargeback accounting and reporting

This is one of the most essential benefits of well-thought-out chargeback management. Accounting for chargebacks will no longer be a nightmare. Instead of adding chargeback losses into the cost of sales, you can better account for these distinct costs and make your books make sense. More so, having a streamlined chargeback management approach is fundamental for KPI monitoring and reporting. You can track issue areas and close loopholes by analyzing chargeback data.

Optimizing net win rate with automated chargeback management

The primary reason for most retailers’ disappointingly low chargeback win rate is the communication gap between issuers, merchants, and consumers. Chargeback processes, terminologies, and rules are not uniform among all the stakeholders. Understanding the timeframe for each dispute stage alone is a nightmare.

But imagine a tool that helps you stop chargebacks before they become chargebacks. At the same time, it also excavates evidence from over 50 data points to help you respond to false chargebacks without lifting a finger! That’s what Chargeflow’s automated chargeback solution provides.  

Chargeback automation minimizes chargebacks with data-driven measures. It challenges false disputes at a better win rate and keeps your chargeback ratio in check.

Conclusion

Chargeback management is about preventing financial losses, stopping fraud in its tracks, and having your buyers talk to you before talking to their bank. It is also about complying with industry regulations that could impact your payment processing privileges. And when disputes slip through the cracks, you know how to fight back and resolve them.

Having systematic measures and tools for limiting dispute exposure, excavating, and making sense of chargeback data for maximum net win rate is a competitive advantage. Instead of the “whack-a-mole” game many merchants play when disputing cases, you are intentionally enhancing customer experience while keeping chargeback fraudsters at bay.

Learn more about Chargeflow’s chargeback automation.