Crafting Clear Terms: How Digital Contract Management Reduces Chargeback Risks

Chargebacks are an unfortunate but unavoidable part of doing business. While there is no way to prevent them entirely, you can manage the risks by taking proactive measures. These include maintaining high customer satisfaction standards such as accurate product descriptions online, implementing an easy returns process, and ensuring secure payment options.

What’s more? Having an up-to-date sales contract can help reduce the risks. In this article, we’ll look at how digital contract management can reduce the risks of chargebacks. But first, let’s explore what chargebacks are and why you want to avoid them.

What are Chargebacks?

Chargebacks are a way for customers to get their money back from a purchase directly from their credit card company. This mechanism was introduced over 40 years ago to combat credit card fraud and enhance consumer confidence in credit card use.

While your customer initiates a chargeback, the credit card company takes the funds directly from the business’s bank account. The credit card company then holds the funds until the customer dispute is settled. The reasons people use chargebacks are for things like:

• Fraud (genuine and unauthorized)
• Faulty/defective goods
• Goods not delivered
• Issues with refunds on returned goods
• Merchant errors (such as being double charged)
• Product not as described
• Incorrect items delivered
• ‘Friendly fraud’ where a customer indirectly claims a transaction was fraudulent

‍According to Chargeflow's State of Chargebacks report, nearly 8 out of 10 chargebacks are attributed to friendly fraud, underscoring the prevalence of chargebacks stemming from customer disputes.

‍Why are Chargebacks Such a Problem?

Chargebacks are a huge problem for businesses. They result in revenue loss, hefty legal fees, and significant time lost in handling disputes. The costs are disproportionate too, with every dollar lost to a chargeback costing businesses an average of  $3.75

While chargeback trends differ by industry, they are a growing problem for most businesses. Card payment processing firms may even charge higher processing fees to companies with poor chargeback rates. There is also a risk of product loss that can increase costs.

However, it isn’t just the cost of dealing with chargebacks that’s the problem, they can also affect a business’s reputation by giving the impression of poor customer service or inadequte security measures.

Business leaders must address this issue promptly, as this can deter loyal customers away and prevent new ones.

What is Digital Contract Management?

A robust contract management system handles the creation, tracking, negotiation, signing, and storage of electronic contracts.

Traditional methods of hefty paper files stored in dusty cabinets pose risks such as loss, damage, fraud, and errors. Managing contracts with digital systems means documents are easier to locate and update. They can then be sent to clients and signed quickly.

There are several steps you can take to digitize your contract management process:

• Use automated contract templates. These can prevent problems such as staff using old agreement templates from the shared drive. They’re also brilliant for businesses needing to send out bulk contracts to multiple clients.
• Leverage AI. Improve the drafting and review of agreements, enhance efficiency, and reduce errors.
• Have clear objectives. If the intention is partly to reduce chargebacks, mitigate the reasons they happen in your clauses.
• Integrate software tools such as e-signing, automated workflow, and real-time notifications to ensure efficiency.
• Review and optimize regularly.

Effective digital contract management not only simplifies the administrative aspects of contracts but also enhances the security and accuracy of your business transactions, leading to fewer chargebacks.

How Digital Contract Management Helps Reduce Chargebacks

Digital contract management can help reduce the risks of some common chargebacks. You’ll find below six ways to minimize chargeback fraud with digital contract management.

#1. Gather proof of customer transactions

In the case of customer error, friendly fraud, or genuine fraud, having proof of the customer's transaction can help reduce chargebacks. This may involve storing order history or using software that gives you the best digital signature options so that customers have to sign to prove they’ve placed the order. Having a digital contract in the form of a signed sales receipt means you may be able to prove a transaction was genuine.

#2. Have a clear cancellation policy for subscriptions

In the case of incorrect subscription charges, many customers will initiate a chargeback if they cancel a subscription and don’t receive a refund fast enough. An effective cancellation policy with a notice period built in can help manage customer expectations concerning refunds due. This could reduce their need to file subscription chargebacks.

#3. Free up staff from mundane tasks

Giving staff mundane, repetitive contract management tasks can demotivate great people and even lead to errors in filing or the contracts themselves. It can also mean you’re directing your staff resources away from customer services. Digital contract management can help streamline processes and help you use key people to work directly with customers. Great customer relations can reduce chargebacks through better communication and advice such as manning the virtual telephone system for example.

#4. Have a clear refund policy

Ensuring you have clear terms in your refund policy and keeping customers informed throughout the process can reduce the need for chargebacks. Important things to include would be:

• Conditions for returns.
• Expected timelines for processing account credits/refunds
• Order cancellation timeframe

As part of offering great customer service, it’s also good practice to send an email to confirm returns have been received so that customers are aware of what is happening. Poor communication can increase chargeback requests because customers can feel like they’re being ignored if they’re not kept in the loop.

#5. Include compliance terms in staff contracts

Some chargebacks are actioned because of merchant error, such as overcharging for a product or putting a payment through twice. Compliance coupled with correct customer journey and sales protocols can help minimize the risk of chargebacks caused by staff fault.

#6. Rigorous record keeping

Holding detailed records on customer transactions, communication, and delivery information can prove helpful if a chargeback is activated, especially if you want to dispute it. If you have digital contract management in place and agreements in place can also be linked to the customer record and easily located.Digital record keeping also means chargeback reason codes can be analyzed and patterns stopped. This may help business leaders identify the root cause of the problem so that improvements can be made.

How to Craft Clear Terms

The terms of a contract must be easy to read and understand to minimize confusion. When putting together a contract of sale, you can improve the clarity by:

• Using titles and subtitles (terms of sale, refund policy, etc)
• Using clear, consistent formatting
• Mitigating potential misunderstandings
• Numbering paragraphs
• Using bullet points

Contracts will vary greatly depending on what you offer as a business. Selling products online will have a different sales agreement from a B2B company selling plant machinery, for example. It’s important to have all the industry knowledge needed to make your contracts not only legally binding but enforceable.

Final Thoughts

Chargebacks are now a huge problem for eCommerce businesses. They drain resources and damage business reputations. By improving contract clarity and customer communication, and ensuring secure transaction processes, you can reduce chargeback incidents without losing genuine customers

A well-implemented digital contract management system offers better security, accuracy, and efficiency, making it an essential tool for modern businesses aiming to minimize chargeback risks.

Digital contracts protect businesses, manage client expectations, and help alleviate disputes when crafted well. Poor contract management can lead to risks like poor customer satisfaction, increased costs, and chargebacks. Click here to learn more about chargeback automation.