eCommerce Chargeback Management: Best Practices and Legal Strategies for Protecting Your Business

In the bygone era of brick-and-mortar retail, shopkeepers could place a simple sign at the front register: All sales final. Today’s eCommerce merchants don’t have the same luxury. Consumers expect to be able to return, exchange, or refund any product that doesn’t suit their tastes. Imposing an “all sales final” policy might jeopardize your reputation, or send more business to your eCommerce competitors.

That said, dealing with frequent chargebacks is costly to your business, leading to diminished cash flow and operational headaches. Thankfully, you can take practical and legal steps to minimize the burden of frequent chargebacks.

Understanding the Causes of Chargebacks

First and foremost, it’s helpful to know a little bit more about why eCommerce chargebacks happen in the first place. While there are many potential causes for chargebacks, some of the most common include:

• Fraud and cybersecurity issues. For one thing, chargeback requests can come because purchases were made with stolen credit cards or pilfered credentials.
• Shipping errors. Chargebacks can also happen when there are shipping or logistics issues, resulting in consumers not receiving their purchases promptly (or at all).
• Inaccurate orders. If an issue results in the customer receiving the wrong product or a product that’s not quite as advertised, that can also force chargebacks.
• Technical glitches. An issue with your order processing system may result in customers being charged multiple times, which requires a chargeback.
• Customer dissatisfaction. Sometimes, customers may not like the product they received, prompting them to request their money back.

These are just a few of the most common issues that can result in a high frequency of chargeback requests.

Tips for Mitigating Chargeback Requests

In some situations, these issues may be unavoidable. Having said that, below are steps eCommerce retailers can take to reduce the number of chargeback requests they receive.

Providing Clear Communication

Simply shooting straight with customers, and providing them with ample data for making an informed purchase decision, can go a long way toward preventing chargebacks. Some specific tips:

• Be sure you provide clear product details, including dimensions and other technical spec, as well as clear product images.
• Also, be transparent about pricing and shipping times. Avoid any situation in which your buyers feel caught off guard or surprised.

Step up Your Customer Service

Another way to reduce chargeback requests is by ensuring there is robust customer service, allowing your customers to have any questions answered and any concerns addressed without having to refund the purchase entirely.

Ideally, you’ll want to set up multiple touchpoints for customer service, including email, phone, and a live chat or AI chatbot option. If you have a live customer support staff, ensure sufficient training to promptly and satisfactorily address common inquiries.

Clarify Your Refund Policies

It’s always wise to have clear-cut policies about product returns, refunds, and exchanges. Those policies should be highlighted on your website, and you should draw attention to them at some point during the consumer checkout process.

By making these policies clear and accessible, you can hopefully reduce frivolous or inappropriate chargeback requests.

Invest in Fraud Prevention

Hacked logins and stolen credit cards can result in fraudulent purchases, which almost always entail chargebacks. To avoid these outcomes, eCommerce retailers will want to invest in address verification systems, CVV verification, and other tools that can prevent theft.

Machine learning tools can also be deployed to detect behavioral patterns that suggest fraud.

Monitor Transactions

Routine monitoring is also important. Analyze all chargeback activity to identify patterns, and potentially discover some recurring issues you might be able to address (such as logistical concerns or unclear policies).

Also be sure you are attentive to high-risk transactions, taking additional preventative measures as necessary.

Legal Strategies to Consider

In addition to these practical tips and guidelines, some legal strategies can help eCommerce merchants to reduce chargeback requests. Consider a few of the top legal strategies to incorporate into your online retail business.

Understand the Most Common Chargeback Reasons

As noted earlier, it helps to understand why chargeback requests happen in the first place, particularly focusing on things like fraud, to ensure the most robust and effective legal defense.

Prepare a Defense

It may also be helpful to create a standardized template for responding to chargeback requests, presenting your defense as well as a reiteration of your policies. Leave some room to add some of the specific details that may be salient for particular cases.

‍

Speak with an Attorney

If your company is frequently beset by chargeback requests, or if your chargebacks are financially devastating to your business, then it may be wise to meet with a legal expert in order to better understand your rights and responsibilities.

Choosing the Right Legal Structure

Another important step your eCommerce business can take is to select the right legal structure. The legal structure you choose for your company can have many ramifications, from how you report to the IRS to how you administer payroll. For our purposes, it’s worth noting that your legal structure can have a direct effect on your personal liability protections, which means the right structure may help to shield you from significant financial loss.

So which legal structure should you choose for your eCommerce business? There isn’t necessarily one right answer, but for many small and mid-sized companies, the best bet is the Limited Liability Company, or LLC.

What is an LLC?

Normally, when you start generating revenues from self-employed activity, the government defaults you into the Sole Proprietor category. A Sole Proprietorship is a business in which one person makes all the decisions, and gets to claim all the profits. The business owner is also solely responsible for any losses or liabilities, whether due to a lawsuit or significant financial problems (like major chargebacks).

When you register your business as an LLC, you establish it as its legal entity. This allows you to keep personal assets and liabilities distinct from your business ones, and it will help you to keep a level of separation from any major losses your company takes on. Simply put, it gives you some assurance that, even if your business takes a big financial hit or is beset by a lawsuit, you don’t have to worry about your personal nest egg or family savings being seized.

What are the Benefits of an LLC?

There are several specific benefits to the LLC format, including pass-through taxation, ease of administration, and the ability to transfer operations to a business partner or successor.

When it comes to chargeback management, though, the biggest advantage that the LLC offers is personal liability protection, which can help you to significantly mediate any peril you face due to chargeback issues.

What are the Steps for Forming an LLC?

While the specific steps for registering an LLC vary by state, the process usually looks a bit like this.

• Choose the state where you want to register. Legally, you may elect to register your LLC in the state of your choosing. To simplify your taxes and to reduce LLC fees, it’s almost always best for eCommerce merchants to register in the state where they are based and make money.
• Select a Registered Agent. For LLCs, having a Registered Agent is a legal imperative. This may be a person or an organization with a mailing address in your state of registration, tasked with receiving tax and legal correspondence on your business’s behalf.
• File Articles of Organization. This is the document you must file with your Secretary of State to officially register your LLC. Note that there will also be a filing fee, which can vary quite a bit by state; forming an LLC in New York may be more expensive than forming one in Wyoming, for instance.
• Create an Operating Agreement. While it isn’t legally mandatory to have an Operating Agreement, this document can help you avoid legal tension with your business partners. As such, it can be another important form of protection.

The bottom line: Registering your eCommerce company as an LLC is one of several strategies you can employ to limit your chargeback risks.

Make Chargeback Management a Top Priority

For online retailers, chargebacks can be significant points of concern. Follow the guidelines laid out here to mitigate your risk, and to ensure that you have the right level of legal fortification in place. See how to recover and prevent chargebacks on autopilot.