How to Reduce Your Chargeback Rate (to avoid card schemes monitoring programs)

Reducing your chargeback rate should be a vital KPI for your business in these peak seasons. A high chargeback rate means account limitations, penalties, excessive fees, and potential loss of payment processing.

Merchants set another sales record on Black Friday and Cyber Monday 2022 – with $7.5 billion in sales recorded on Shopify.

But, as always, some of those transactions are now turning into chargebacks. And each of those chargebacks can be costly to merchants.

Chargebacks occur when a customer disputes a charge on their credit or debit card and requests a refund from their bank. They often result in lost product and revenue, cannibalization of sales, and additional fees, like chargeback fees.

But what if I told you that you could effectively reduce your chargeback by up 40%?

Will that make sense to you?

As we gear up for the holiday season, understanding how to reduce your chargeback rate should be a vital aspect of your revenue goals.

How to Reduce Your Chargeback Rate (to avoid card schemes monitoring programs)

Before we dive into the good stuff, you should know why it’s crucial to reduce your chargeback rate.

For starters, reducing the number of chargebacks you get is not only vital for your business. It’s non-negotiable if you wish to stay in business for a long time.

Getting a chargeback now and then might not seem like a big deal. But chargebacks are not as simple as customers forcing refunds through their bank. As we stated earlier, with every chargeback, you:

• Lose revenue for the merchandise the buyer could have returned if they used the right channel to seek remediation;
• Incur management fees, such as chargeback fees and dispute resolution fees;
• Spend the ungodly amount of hours in back-and-forth paperwork;
• Incur the wrath of your processor if you exceed the threshold of 1%, which could result in account termination and placement in the industry blacklist.

But you should know that getting to 1% already puts you in a difficult position. Starting in 2019, Visa amended its chargeback threshold to 0.9%. Vendors that exceed the limit see their profits sucked away by hefty fines and charges, financial hold on their accounts, and incidental loss of processing privileges.

Visa imposes enormous penalties for every chargeback beyond the acceptable threshold (.i.e., $50 for every dispute you receive). If they enroll your account into their monitoring and enforcement programs, you could be paying review charges of up to $25,000 – $50,000.

Reduce Your Chargeback Rate in Five Steps

Reducing your chargeback rate requires that you’re crystal clear about industry best practices on chargeback remediation. You must know the ins and outs of how to prevent chargebacks and how to represent disputes.

You not only have the knowledge and tools to stop chargebacks from happening, but you can also contest false chargebacks successfully.

Here are easy-to-apply best practices to help you trim your chargeback rate this season.

1: Plug Any Vulnerability Holes

Did you know that research shows the average eCommerce vendor gets as many as 206 fraudulent chargebacks every month?

When you do the math on the direct costs, these vendors stand to lose at least $146 as chargeback costs – translating to roughly $30,000 in dispute losses monthly. That number does not include ancillary chargeback losses such as opportunity cost and insurance fees.

There’s more.

Research by LexisNexis indicates that merchants lose up to $3 for every dollar lost to fraud. The average industry cost per chargeback could reach $191 by 2023.

Hence, the first step in reducing your chargeback rate is knowing how porous your system is. And how much dollars you could lose to false chargebacks.

Once you’ve done your due diligence and understood what you’re dealing with, the next step to reduce the chargeback rate is to track down the chargeback triggers.

2: Understand The Sources and Causes of Your Chargebacks

Banks issue chargeback reason codes to help merchants understand why cardholders contest specific bills. Take, for example, that the customer said the order was undelivered. The issuing bank will include Merchandise/Services Not Received as the reason code (Reason Code 13.1 at Visa and Mastercard Reason Code 4853).

While these alphanumeric codes tell you how to respond to a dispute, they can be misleading because they don’t quite tell you the customer’s actual intent.

Anyone can lodge a claim under any reason code. But that might not reflect the real motive for filing the dispute.

Below are the three main reasons why chargebacks happen. Counter these, and you could reduce your chargeback rate effectively.

I. Genuine Criminal Activity

The first reason why cardholders file chargebacks is when someone hacks their account and makes an unauthorized transaction. Going by Juniper Research, online payment fraud losses could spike to $48 billion by 2023 if present trends continue.

How to Reduce Genuine Criminal Activity

To effectively reduce your chargeback rate, the first thing is to counter criminal fraud chargeback issuance. Without that, your efforts will yield negligible returns.

Chargebacks are interrelated. Allowing avoidable criminal fraud activities to slip through the cracks will fuel chargebacks in other issue areas -- because you'd be centering your decision process on bad data.

Here’s one more thing. Stopping criminal frauds helps you preempt other disputes as chargeback reason codes do not accurately reflect the true intent of the cardholder.

And where to start is not so complicated. Integrate multiple anti-fraud tools such as Geolocation, AVS, Fraud Blacklists, Device Fingerprinting, Velocity Limits, CVV Verification, and 3-D Secure Technology.

The caveat is that while you should aim to onboard as many tools as possible for better results, you should also ensure the service providers are reliable. That way, you can reduce your chargeback rate while making it easy for genuine buyers to access your platform.

II. Internal Errors

Negligible merchant errors – such as substandard customer service, poorly-crafted return and fulfillment policies, and transaction processing missteps – are one culprit you must deal with to reduce your chargeback rate.

It’s crucial to note that this category of chargeback causes, and sources is subjective. Yet estimates show that eliminating merchant errors can give you as much as a 20-40% chance of dealing with your chargeback issues.

How to Counter Merchant Missteps that Result into Chargebacks

As we noted above, many chargebacks result from merchant errors.

We’ve researched and whittled down the major rookie merchant mistakes that could lead to higher chargeback rates. Use the actionable tips to circumvent them.

Ensure your buyers can quickly see your contact details at relevant touchpoints of your eCommerce site.

Use AI-assisted chatbots to provide 24/7 quality customer service to your prospects. Merchants in chargeback-prone verticals, such as the hospitality industry, are seeing reduced chargebacks because these tools help them provide better support in different languages, across various communication channels, without pressuring their staff, especially during peak seasons.

Make sure that customers get timely responses to their emails, Social Media direct messages, and app reviews. Resolve any issues on the same platform they reached out to you. You should only migrate the conversation to a different channel if you wish to escalate the case for a better outcome.

Ensure your business practices align with your acquirer's policies. And do the same due diligence with your policies and service terms.

If you offer subscription services, ensure customers can easily opt-out when they change their minds. And if you provide a free trial, notify the subscriber before billing starts.

The holiday season could lead to delayed shipment and other order fulfillment challenges. Communicate expectations adequately to your buyers, and ship your orders with tracking. Also, fulfill any cancellation requests accordingly.

Obtain order delivery confirmation for substantial orders.

Ensure your product descriptions are not letting you down. Add pictures from multiple angles.

Make your business easy to identify in your billing notifications by including your business name, website, and contact number.

III. Friendly Fraud

Friendly frauds represent all false chargebacks or chargeback frauds. It’s either the cardholder is looking to get something for nothing or mistakenly filed a chargeback instead of contacting the merchant to remediate the dispute.

It’s a growing challenge for merchants. Estimates show that over 70% of all chargebacks are friendly fraud.

While you should ALWAYS fight these meritless chargebacks, the challenge is that the chance of winning is often 12% for most merchants. The reason? For one, they don’t have enough data to pierce through the corporate veil and show the buyers actual intent beyond whatever reason code they stated.

And two is that the chargeback mediation process is extremely intricate. They might not have the specialized knowledge and resources required to gain the upper hand at chargeback representment.

But not to worry, we’re here to help.

How to Fight Back and Win Friendly Fraud Disputes

To successfully stamp out friendly fraud, you need to rethink your strategy.

You can’t simply copy and paste the same strategies you use for merchant error and criminal activity chargebacks and expect commensurate results in reducing your chargeback rate.

You should know that friendly fraud chargebacks are post-purchase fraud. Hence, you can’t honestly know if the transaction will result in a dispute until the customer files a chargeback -- unless you have order insight such as Chargeflow provides.

Chargeflow’s fully automated chargeback solution helps you stay on top of your chargeback situation.

• You’ll have insight from over 50 data points to uncover unusual buyer behaviors and thwart disputes;
• The intuitive dashboard gives you crucial AI-generated best practices to optimize transaction process and avoid customer confusion leading to unintentional friendly fraud;
• You’ll get above the industry average ROI – with a success-based pricing option, zero contracts, and much more.

The peak (chargeback) season is upon us. And you don’t want to be caught unprepared.

When to Automate Your Chargebacks

Chargeback automation is the most-reliable way to ensure you can stop disputes before they happen. And recover eCommerce chargebacks by autopilot when con artists use friendly frauds to attempt online shoplifting.

If you’re wondering whether chargeback automation is right for you, here are questions to ask yourself:

1. Do you get 10-20 disputes each month?

If you get up to 20 disputes every month, it’s either you don’t haven’t plugged your dispute exposure, your business model creates the opportunity for chargeback fraud, or you serve a region or an industry that is prone to chargebacks. You should be using an automated dispute management system.

2. Do you lose way too many disputes?

For the majority of e-commerce entrepreneurs, chargebacks have become a cost of doing business. Even after going the extra mile to resolve a dispute, these vendors still lose. And they bear the brunt of wasted time, a double tragedy of revenue loss and ancillary expenses. Chargeflow will help you fix that by taking your win rate to 75% and giving you tons of data to stop any fraud attempt in its tracks. You can also tell which transactions can turn into disputes and forecast your revenue with data from over 50 essential points!

3. Do you waste too much time fighting chargebacks?

An average eCommerce merchant spends at least 17 hours each month fighting to recover $1,350 in chargeback losses. Instead of working your fingers to the bone in the uphill battle of chargeback mitigation, Chargeflow’s automated chargeback management gives more free time to focus on building your brand, serving your customers, and building better products.

4. Do you sell intangible merchandise?

Per the service terms of most PSPs such as PayPal, in every instance that you do not provide proof of delivery for an item, the buyer wins the dispute. As you’d guess, online shoplifters capitalize on that knowledge to get the best of merchants on items delivered virtually. But with chargeback automation, you don't have to worry about a thing. You can be sure that the data review options and fraud scoring techniques will catch trickier cases.