eCommerce Chargebacks: Read This Guide to Stop Fraud and Win Disputes With Ease

eCommerce is a brilliant concept that leveled the business terrain for the little guys to participate in global commerce. And the metrics for success aren’t farfetched: create a product people love, craft skillful marketing strategies, and a frictionless distribution funnel to get your offering to those who need it.

But it’s not enough to have an optimum checkout experience. You must prevent and avoid chargebacks by ensuring your customers are happy with their purchases.

This article will help you uncover insider secrets to build a formidable business that serves large clientele and avoid pitfalls of revenue loss due to customer disputes and excessive chargebacks.

First, here are some numbers that might be of relevance as you work on optimizing your business processes for the coming year:

• Mobile commerce will account for 62% of all eCommerce transactions in the U.S. by 2027 (Statista).
• The global social commerce market share could reach $2. 9 trillion by 2026 (Global Industry Analysts).
• Open Banking recorded a 24.4% growth in 2021, and the market value will reach over $43 billion by 2026 (Allied Market Research)

That said, let's get back to our topic of the day.

What is an eCommerce Chargeback?

An eCommerce chargeback is when a cardholder disputes a specific transaction to their bank, requesting payment reversal due to a transaction issue. When a cardholder files a chargeback, the bank or credit card issuer will reverse the transaction (after some due diligence to establish case merit) and deduct the funds from your merchant account.

Each chargeback attracts a definite fee. It also attracts other complications like limitations in payment processing. We shall discuss those complications in detail in a subsequent section.

Fundamentally, eCommerce chargebacks involve four parties: the cardholder, merchant, card issuer or bank, and merchant acquirer. The loop starts like this:

1. A cardholder disputes the bill to their bank,
2. The bank reverses the payment after some due diligence, at which point you get the notice of the deduction including a chargeback processing fee with an accompanying chargeback reason code.
3. They’ll then require you to submit order documents that prove the chargeback is meritless and the refund unnecessary. That must happen within a definite period known as the chargeback response time limit.
4. If your documentation proves your case, the transaction fund will be credited back to your account.

Unfortunately, the cardholder or their bank might not send the correct reason for the chargeback, making it impossible for you to win. Also, the very nature of chargeback processing, and the disconnections among the various parties involved, make it easy for cardholders to manipulate the system. As a merchant, the best chance you have is about 12% – unless you have an extra layer of dispute mitigation framework that Chargeflow provides.

Why do eCommerce Chargebacks Happen?

eCommerce chargebacks happen for various reasons. It might be that someone used a stolen card to make a transaction, there are significant issues with the order fulfillment or return processes, or customers couldn’t get the help they needed on time. Some eCommerce chargebacks are also a result of merchant errors, such as double billing. Here are some stats on chargeback reasons:

• 30% - the number of chargebacks that result from transactions made with a stolen card.
• 26% - the number of chargebacks that result from undelivered orders.
• 15% - the number of chargebacks initiated by cardholders due to retailers shipping the wrong product.
• 8% - the number of chargebacks that result from orders significantly not as described.

Whatever the case, keep in mind that industry analysis shows up to 80% of all chargebacks are meritless. There’s more. 40% of consumers who file a chargeback will do it again in less than 9 weeks. And 81% of cardholders have filed a chargeback out of convenience.

What is the Actual Cost of eCommerce Chargebacks?

At this point, I assume you’d be wondering: if chargebacks are this horrible, why haven’t "the powers that be" banned the mechanism to save everyone the headache?

Well, the thing is, chargebacks weren’t designed to be the burden it is today.

The original principle behind eCommerce chargeback is to serve as an accountability measure, ensuring safe and transparent business practices across the board. When a transaction issue arises, as you should anticipate once in a while, there’d be a channel for the cardholder to seek remediation. There will be established rules for participation in the process as well.

Unfortunately, as the digital landscape evolved and eCommerce transactions required more parties, the rules of chargeback mediation didn’t develop at par. And fraudsters know this. Today, chargeback has become a $200 billion problem for the entire eCommerce industry. Every $1 chargeback fraud costs the average eCommerce merchant at least $3.

So, if you’re like some merchants who think their loss due to chargebacks is limited to the transaction charge, you’re wrong. The actual cost of chargeback goes beyond the transaction cost.

Here are some specifics of the actual cost of eCommerce chargeback:

‍Card transaction charges

eCommerce merchants are charged a specific percentage for every card transaction a cardholder makes. And if the cardholder goes on to charge back the transaction, the merchant does not get a refund on the card processing fee – they lose that money with the cost of the merchandise.

‍Chargeback fees

The merchant acquirer includes additional charges for their involvement in the chargeback mediation processes. The fee could be in the range of $15 to $100 and calculated based on the level of associated risks, i.e., the number of chargebacks the merchant received in a given period. Chargeback fees are non-negotiable for the most part, whether you win the dispute or lose.

Excessive chargeback penalties

Banks and card networks pay keen attention to merchants’ chargeback rates to ensure they don’t cross established thresholds. We discussed the consequences of breaching the chargeback ratio in this article. Examine those consequences for yourself.

‍High cost of operation and brand damage

Chargebacks don’t just take money away from your pocket. They also cost online merchants time, human resources, and brand equity. These are, perhaps, the most expensive aspects of dealing with eCommerce chargebacks. No one will do business with you if you cannot maintain a reasonable fidelity as a formidable brand in the industry. Banks can’t work with you because they’ll see your brand as high risk. Even if they happen to onboard your business, they’ll make you pay excessive fees to cushion their risks and future reputational crisis.

What is a Chargeback Ratio, and How do You Calculate it?

eCommerce chargeback ratio, also known as a chargeback-to-transaction ratio, is an aggregate of your sales compared to the number of chargebacks you received in a given month multiplied by 100. That gives you the percentage of transaction chargebacks you received in the period in focus.

Each credit card company has a unique way of determining a merchant’s chargeback ratio, but the formula is the same. The difference is in the source of the data for the computation. 

Mastercard gets your chargeback rate by dividing the total transactions processed in a given month by chargebacks filed in the previous month. Visa calculates it by dividing the transactions a merchant processed in a particular month by the number of chargebacks filed in the same month.

Discover and AmEx uses the same method as Visa. However, because each card brand only uses transactions processed through their network for the computation, you’ll get a different chargeback ratio for each network.

How can You Prevent eCommerce Chargebacks Effectively?

Chargebacks are unavoidable but preventable. But, you must know the best practices to stop flushing your earnings down the pipe. That’s crucial because your business will suffer if you don’t maintain a low chargeback rate.

Here are some ideas on how to prevent eCommerce chargebacks effectively:

‍Have an Explicit Order Cancellation and Return Policy

Ensure your customers know how to cancel or return their orders if they choose to do so. It will enhance the customer experience as well. Some eCommerce chargebacks result from ambiguity when buyers can’t opt out of their subscriptions. 80% of such cardholders file a chargeback because they don't have time to deal with the merchant.

‍Make Your Billing Statement Easy to Recognize

Some unauthorized transaction chargebacks happen when cardholders don't recognize the merchant’s bill on their statement. Other times, they could forget specific subscription packages, especially those that last for a long time. Make it easy for your users to track your deductions in their billing records.

‍Stop Fraudulent Transactions with Authentications

Establish protocols to ensure you got customer signatures, PINs, or CVV codes for CNP transactions to minimize the risk of fraudulent activities. A recent survey shows that Card-Not-Present fraud could reach $130 billion by 2023. More so, industry analysis shows the cost of false declines to businesses ranges from $118 to $331 billion in the U.S. alone.

‍Be Compliant with Payment Processing Rules

Use standard security protocols for card transactions and keep detailed transaction data. Be sure to collect comprehensive data on each order to prove each transaction’s authenticity and have sufficient compelling evidence in case of a chargeback.

Ship on Time, Track Shipments, and Add Insurance Coverage

When shipping orders of high value, be sure to ship them with insurance, tracking, and proof of delivery. The tracking function gives your customers sufficient information on the status of their shipment. When you’ve fulfilled the order, keep a delivery confirmation in case of disputes.

Automate Your Chargeback

Research shows that about 40% of chargebacks stem from internal issues you can prevent. But without adequate tools and resources to effectively track and address the problems, how can you mitigate them? With Chargeflow's AI and Machine Learning framework, you can quickly integrate your merchant account with our industry-first chargeback and transaction dispute monitoring software.

That gives you a just-in-time eCommerce chargeback alert and email before a chargeback becomes a chargeback. Our system has adequate data on each transaction to help you prevent fraudulent chargebacks and address disputes on your behalf. You don’t need to lift a finger as we automate the entire chargeback process.

Conclusion

eCommerce chargebacks are a growing business challenge for all online retailers. Our data shows the program is even getting worse. The tips we share in this article are proven dispute prevention guides that, if applied, will save you a lot of money and time. Merchants using Chargeflow's chargeback automation have reported tremendous benefits beyond the superior win rates.

Chargeflow was designed to address the challenges of dispute mitigation we experienced as eCommerce entrepreneurs for revenue recovery. Chargeflow uses years of eCommerce chargeback handling experience to perfect the dispute cycle and deploy it at scale. That makes it easy for the average retailer to reduce fraud, approve more valid orders, and enhance their checkout process.

Start your trial today with our 100% chargeback coverage and fully automated dispute mitigation solution. The setup takes only a few seconds, so you have nothing to lose!