What Ecommerce Stores Should Know about Chargebacks
What is a chargeback?
When a customer recalls a payment, it is called a chargeback. The reason chargebacks exist is because they offer consumers protection for purchases made on their accounts, but when they are abused they can be extremely costly for retailers.
The Fair Credit Billing Act of 1974 provides protections and rules such as:
- The consumer has 60 days to dispute an unauthorized charge, a charge for the wrong amount, or for a purchase that was never delivered to them.
- Consumers can instruct their credit card issuer to withhold a payment during a dispute.
- The amount of time to acknowledge a dispute and investigate it is limited.
- Unless the card is stolen, a written notification is required for a credit card dispute.
Chargebacks are the result of protections like this.
Chargebacks can occur for transactions on credit and debit cards, as well as bank payments, and there are several reasons a chargeback can be initiated and approved. They are different from voided charges because a voided charge is one that has not been processed in full. A chargeback, on the other hand, is a charge that has been fully processed and settled. Chargebacks must be processed through several different entities and so often they require several business days to complete.
Who is involved in chargebacks?
- The Cardholder, which is the person disputing the charge.
- The Merchant, which is the store that sold the product or service to the customer.
- The Issuer, the bank that issued the card used in the purchase being disputed.
- The Acquirer, which is the financial company that handled the transaction for the merchant.
Why might chargebacks occur?
Chargebacks can occur for several reasons. Consumers may dispute charges and issue a chargeback for the following reasons:
- Fraudulent transactions.
- The customer did not receive the products or services that they purchased.
- The goods arrived to the customer and were defective or not as described.
- The customer has buyer’s remorse because the product was not what they expected, or they regret making the purchase.
If an item is returned to a merchant within the allowable return period, the merchant can initiate the chargeback as a simple refund. Other types of chargebacks are much more complex.
What is the chargeback process?
The process for chargebacks is always the same, no matter if the consumer is having the charges reversed due to not receiving their order, receiving damaged goods, or fraudulent purchase. Here are the key steps that are involved in the chargeback process:
- Submit the dispute: this is when the consumer files the complaint with their credit card issuer or bank.
- Vet: the issuing bank determines if the consumer's complaint is valid and if so, they will initiate the chargeback process by notifying the merchant’s bank.
- The Investigation: during the investigation, the merchant’s bank will research the purchase in question and notify the retailer. The bank will also speak with the merchant and ask for transactional evidence that will validate the purchase.
- The Decision: After the investigation is over, and if the chargeback is justified, the Ecommerce store is responsible for the entire amount of the claim, in addition to associated chargeback fees can vary anywhere from $50 to $75 or more, depending on the bank. However, if the merchant can provide evidence of a valid transaction, no chargeback will be issued. In almost all cases, the chargeback is final.
What are the stakes of chargebacks for Ecommerce merchants?
Payment processors will excise higher fees on merchants that have too many chargebacks, and sometimes they will drop merchants altogether. However, if a company has good fraud prevention tools and clean records, they are more likely to have fewer chargebacks filed in general and are more likely to win disputes.
What can Ecommerce merchants do to prevent and limit chargebacks?
There are several ways to limit chargebacks and prevent the unauthorized use of cards. It’s important to watch for red flags such as:
- Orders that seem to be outside of normal order quantities.
- Orders for an item (or items) of a significant dollar value from new customers.
- Multiple orders from one customer in a short time frame.
- Orders that have been placed using a different billing and shipping address. While this may be valid, it does warrant further review to ensure card authorization
- New customers ordering big-ticket items and having them delivered overnight or with a rush delivery. A further review can ensure the validity of card usage.
- Purchases made with numerous attempts on the credit card number or expiration date may signify that the card is not on hand and could indicate fraudulent activity.
Besides watching out for the red flags listed above, there are some other ways merchants can reduce chargebacks:
- Have a clear contact phone number on the website so that customers can easily reach you. If the customer has buyer’s remorse or isn’t sure if they made the correct purchase, they may want to reach out to the store and find out what their purchase included. If the retailer is able to resolve the issue ahead of time, it may lead to the chargeback not even being issued.
- Respond to chargebacks as quickly as possible – this will add a lot of value to the overall customer experience.
- Ensure you receive full authorization for an order by verifying you have received the proper dollar amount for the order. Online merchants should get an authorization for every package they ship from their warehouse to prevent improper authorization chargebacks. If you receive authorization for an order but don’t ship it out within seven days, you’ll need to get the authorization again before shipping the order out to the customer.
- Wait to charge the customer until the items have shipped or services have been provided.
- Refund information should be put on the receipts or packing slips that are included in every shipment. Refund information should also be easy for customers to locate online.
- When a chargeback is received, the merchant should verify the customer’s address, name on file, and phone number.
- Merchants should make sure they receive a signed proof of delivery for every package that is shipped and collect tracking numbers to show tracking from the warehouse to the customer.
- Clearly describe your products and services. Make sure you have a “Contact Us” section in case a customer would like to reach out and learn more prior to making a purchase.
- Notify your customers of anything that’s unusual. If charges show up on a bill as anything other than your company name, if there are long delays or variations for certain products, or if products have reoccurring charges, make sure you tell your customers in advance.
All in all, keeping an eye out for red flags and having good records are the keys to fighting chargebacks. Make sure you keep well-organized records of transactions and tracking numbers.
The chargeback process can be long and complicated, so having a good understanding and using the right methods for fraud preventing can help your Ecommerce store avoid disputes and the costly fees that come with them. Take some time to research the process for your payment provider to make sure you have the tools to keep the chargeback numbers as low as possible. Taking the steps to reduce chargebacks not only benefits the retailer, but also the overall customer experience as well.
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