There are several important factors to consider when trying to prevent, recover from, or manage chargebacks. This includes knowing the current process in place (and what’s lacking), identifying high-risk flags, the number of disputes and the costs of responding, and the likelihood of winning a dispute. This is especially crucial for recurring merchants to understand when assessing how chargebacks affect their profits.

Recurring merchants are businesses that offer goods or services through a subscription or regular transaction model (like Dollar Shave Club, Stitch Fix, gym memberships, lawn care services, SaaS, etc.). In these transactions, the cardholder allows the merchant to automatically charge their account on a regular schedule. While this method provides speed and convenience, it can also lead to more chargebacks. In fact, chargebacks cost recurring merchants millions of dollars each year1, making it essential for these companies to actively seek the recovery of funds lost to chargebacks as quickly and efficiently as they can.

Chargebacks occur when a cardholder disputes a merchant charge and a debit is made to the retailer’s account. The issuing bank charges merchants a fee for every chargeback received. Merchants with a high ratio of chargebacks may also receive additional fines and or run the risk of losing their payment processing privileges altogether.

While the chargebacks mechanism was created to protect consumers against fraudulent behavior, some consumers have found it easy to dispute legitimate charges—this form of friendly fraud creates a significant financial burden for recurring merchants. So, while recovery from chargebacks is a necessity for merchants, identifying and resolving disputes before they become chargebacks is critical. Chargebacks are in fact avoidable with the right tools and systems in place, and prevention through an information-sharing platform that clears up billing confusion and validates the sale is in the best interest of both the merchant and issuer, and makes for a positive cardholder experience.

Why do Credit Card Chargebacks Happen?

Credit card charges are disputed for a number of reasons. When it comes to subscription models, a cardholder might claim he or she didn’t know it was a recurring transaction or automatic renewal, or they thought they cancelled their subscription/membership, etc. Maybe they simply don’t recognize the charge on their statement. Billing descriptors on credit card statements can be limited to a handful of characters, which opens the door wide open for confusion. To dispute a transaction, the cardholder simply contacts the credit card company and says; “I didn’t do it.” This type of friendly fraud puts the burden of proof on the merchant to show that the debit or credit card was used in good faith and authorized by the cardholder. While the chargeback mechanism was created to protect consumers against fraudulent behavior, some consumers have found that it is easy to dispute legitimate charges.

The most common reasons for chargebacks for recurring merchants include2:

  • Criminal fraud
  • Friendly fraud
  • Credit not processed
  • Cancelled recurring transaction
  • Items not received
  • Fraudulent multiple transactions
  • Counterfeit transactions
  • Technical problems
  • Not as described or defective merchandise

The burden of proof is expensive. There are many costs associated with chargebacks. In fact, a recent LexisNexis report estimates merchants incur a $308 loss for every $100 in fraud losses.3 The total losses for the business are based on a number of factors:

  • INEFFICIENT USE OF RESOURCES AND STAFF The dispute resolution process is complex, time-consuming and labor intensive, and it requires an expert understanding of payment network rules. From manual processing, reconciliation and reporting to interacting with various issuing banks, inefficiency takes many forms and is not always evident on the balance sheet.
  • LACK OF RELEVANT INFORMATION When a cardholder decides to dispute a charge, more often than not they will call their issuing bank. The issuer might have no more information than what appears on the cardholder’s statement, and, in an effort to keep the customer happy, the issuer will initiate the chargeback process. This lack of information is damaging to merchants who might not know about the dispute until far too late in the process—or sometimes not at all—which doesn’t allow them to correct the problems going forward.

The Chargeback Process is Complex and Time-Consuming

  • CHARGEBACK FEES: Regardless of whether the chargeback stands or is successfully disputed, merchants are charged fees for the process. Essentially, you pay for the time the card companies spend investigating the credit card chargeback.
  • PENALTIES: Businesses that exceed a chargeback rate of 1-1.5 percent (depending on the card association regulations) for several consecutive months may incur penalties. To protect customers’ best interests, credit card companies often charge fees and penalties to merchants who exceed chargeback rates and may even disqualify these merchants from payment processing in the future. These rates increase if the merchant continues to realize chargeback rates of 1-1.5 percent or higher. Additionally, some credit card companies may charge “review fees” or other fines for merchants who do not have a chargeback reduction plan in place. These can quickly add up to many thousands of dollars.
  • MERCHANDISE: For many merchants, there is the very real cost of merchandise not returned. However, the matter is complicated with SaaS businesses or those selling subscription or membership services. In these cases, the goods are non-tangible, leaving nothing to return. This means the costs associated with rendering the service have been lost, or that basically the software provided by a SaaS company has been delivered for free.
  • EXCESSIVE REFUNDING: In some cases, merchants provide a customer the same refund more than once. The fact that a refund has already been provided does not guarantee that a chargeback won’t be initiated. It also means that a customer that has already filed a chargeback won’t try to seek a refund directly.

To recover funds lost from the chargeback process, the best way for a recurring merchant to contest a credit card chargeback is to give the bank evidence that proves the transaction was authorized and that the cardholder was aware or received value from the purchase. This is done by providing evidence usually captured in a merchant’s CRM such as:

  • Customer identity (PII data-email, address, physical address, name, DOB, etc.)
  • Purchase history and usage information
  • Shipping details where applicable
  • Contact history

This is no easy task. Resolving these disputes takes time, and during this time, the revenue from the sale is withheld from the merchant’s account. Unfortunately, time spent on these tasks is time away from making sales and supporting customers.

Credit card chargebacks are often viewed as a cost of doing business, and many recurring merchants believe there is nothing they can do. Nothing could be further from the truth. Aggressively preventing chargebacks from occurring and recovering funds lost to chargebacks should be a priority for every merchant.

Winning the Battle

So how should a recurring merchant prevent chargebacks from occurring and also recover funds lost to chargebacks?

According to Matthew Katz, founder and CEO of Verifi, Inc., there are overlapping strategies a recurring merchant can employ to reduce and recover the costs of chargebacks:

  • IMPROVE THE PROCESS Streamlining workflow and eliminating human error reduces the time and resources needed to process a chargeback. Automation allows for merchants to remain current on credit card processing rules and make the dispute process much simpler.
  • PRIORITIZE Businesses should have a fight-or-flight policy built into the chargeback process. It makes no sense to spend more time disputing a chargeback than one would incur in chargeback fees.
  • DATA CONTROL Collecting information from chargebacks allows the merchant to adjust business practices if necessary and identify internal issues.
  • CLEAR BILLING By including a URL or contact number in the descriptor field on bills, it makes it easier for customers to recognize purchases made with their credit cards and reduces the chance of a mistaken chargeback by a customer that thinks he or she has been incorrectly charged.
  • FIX OPERATIONS Excessive chargebacks might be an indication of problems in operations, but this can be fixed. Whether it is a quality control issue with merchandise, ineffective or misleading product marketing or another root cause, identifying and addressing these issues can significantly reduce the occurrence of chargebacks and recover funds lost to chargebacks. But it doesn’t have to be so complicated. For example, one area to consider is the way cardholders are billed. Might this be why you’ve seen an increase in credit card chargebacks? Some recurring merchants use negative option billing. Negative option billing is a model that includes goods or services that are provided automatically wherein the customer must pay for the service or specifically decline it in advance of billing. This method can create friction between the cardholder and recurring merchant. Merchants who do choose to employ this billing system should carefully follow industry standards and be as clear as possible about the timing of charges and the merchandise/services the cardholder is being charged for. But there are solutions to address this friction and reduce chargebacks.
  • OUTSOURCE Managing chargebacks can be a complicated task during the entire transaction lifecycle. From preventing chargebacks, resolving disputes, fighting chargebacks to recovering chargeback losses, without a third-party partner, tackling all of the chargeback process can take up significant time, resources and money. Bringing on a strategic outside company to help manage the process, however, can easily free up those valuable resources in order to spend more time on running their business.

Facilitating Collaboration

Regardless of what strategies are chosen, it is important to seek new ways to minimize credit card chargebacks and increase the availability of data. The most cost-effective way to do so is to ensure a steady stream of data is available to enable all parties involved to have the same information needed and at the time they need it most. Traditionally, purchasing data is left in merchants’ systems, leaving the issuer little choice other than to issue a consumer’s inquire about an item on a billing statement chargeback or file the inquiry as fraud. Because there often isn’t the enough data sharing between the merchant, issuer and the cardholder, the process becomes more confusion and convoluted. That creates extra friction, and plenty of pain for those involved in the process.

Beyond that, as many as 86 percent of cardholders will call the issuer and bypass the merchant entirely to dispute a charge.4 This leaves the resolution left in the issuer’s hands and leaves little for the merchant to do. What this then leads to, by default, is lost revenue and lost customers, which can hurt brand reputation.

Merchants don’t have the opportunity to address cardholder issues directly and issuers don’t have the information they need to resolve confusion, so the merchant is stuck in a race to the refund. When merchants receive a chargeback notice, it is often too late to salvage the customer or resolve the issue. Less-than-efficient dispute resolution procedures can hurt cardholder satisfaction, damaging the merchant’s brand and contributing to lost customers and profit leakage. This has a trickle-down effect on merchants, who typically do not come out on top of disputes.

Instead, what solves those pain points is these data-sharing platforms that can provide merchants and issuers with the specific order details they need to help resolve disputes before they become costly chargebacks (device used to make the purchase, a complete description of the product/service, location of the purchase, prior dispute history, etc.), generate compelling evidence to support the legitimacy of the sale and reduce profit leakage and “double dipping,” or acquiring a second refund from the merchant who might not have otherwise known any better. With real-time visibility on the customer outcome, this can help resolve disputes faster and prevent further chargebacks from occurring. This also enables real-time collaboration between merchants, and issuers to manage the chargeback process. With the proper data available, those pain points and friction between parties can be avoided, leaving less chance that a purchase is flagged as fraud when it fact it was a legitimate purchase.

By facilitating collaboration amongst the customer, merchant and issuer, the major pain points on each side of the transaction lifecycle can be better addressed in a way that benefits each party involved – faster, cheaper and more effectively. By providing the cardholder and issuer with more detailed purchasing information from the merchant it decreases the chance a customer would file an accidental chargeback – which is one of the major reasons fraudulent chargebacks (friendly fraud) are filed. With better ability to identify and reduce fraud, friendly fraud and chargebacks, cardholder, merchant and issuer collaboration is enhanced and enables purchase details to be shared with the cardholder upon inquiry.

And the benefits trickle down from there, which include: avoiding unnecessary chargeback fees, fines and operational drain researching/resolving disputes that could have been addressed without escalation; compelling evidence requirements with the issuer to prevent disputes from becoming a chargeback; removes cardholder confusion by validating the purchase with details designed to increase customer awareness of the purchase.

Other benefits include5:

  • Faster dispute resolution
  • Increased interchange revenue
  • Reduced chargeback inventory
  • Fewer resources devoted to dispute management
  • Less exposure to regulatory compliance issues and legal risks
  • Increased cardholder satisfaction

It’s also important to analyze data for chargeback risks, which means identifying the high-value items that are frequently targeted by fraudsters (gift cards, electronics, etc.) and determining what sort of processes need to be in place to spot and mitigate those fraud risks. This also means being able to identify data in order to better understands fraud patterns so your full risk can be fully assessed and prevented in the future.

After all, fraud and risk management should be a priority for every merchant. Luckily, today, a business can implement all of the best practices mentioned above and have a full-strength chargeback recovery program. Protecting against thieves or unscrupulous customers requires a solid strategy for recovering funds lost to the chargeback process and preventing them from occurring in the future.

Citations

1 http://www.lexisnexis.com/risk/newsevents/press-release.aspx?id=1379105834100604

2 https://www.quora.com/How-do-you-prevent-people-from-using-chargebacks-as-a-method-for-refunds

3 https://www.lexisnexis.com/risk/downloads/assets/true-cost-of-fraud-2015-study.pdf

4 http://aitegroup.com/press-release-chargebacks-and-false-declines-cards%E2%80%99-ugly-underbelly

5 http://aitegroup.com/press-release-chargebacks-and-false-declines-cards%E2%80%99-ugly-underbelly