It’s disheartening to get a notification that a customer has filed a credit card dispute resulting in a chargeback, especially when the client didn’t reach out to you first to give you a chance to respond to the situation.
A chargeback is time-consuming to fight and eats into your profits. However, you can — and should — develop prevention methods. Learn how to avoid chargebacks by including the six tactics below in your strategy.
Overview: What are chargebacks?
A credit card chargeback is what happens after a customer disputes a charge on their card and wins. The payment gets reversed, and you don’t get paid. Plus, you’ll also incur a chargeback fee. In some cases, it’s a valid complaint. Other times, it’s fraud.
The chargeback protection process began with the Fair Credit Billing Act of 1974 (FCBA). It gives guidelines to protect consumers from fraud, such as inaccurate or unfair billing practices. Individual credit card companies set rules for investigation timelines and procedures, which banks and payment service providers must follow.
Furthermore, many payment services revoke merchant accounts if you exceed a specified chargeback-to-transaction ratio, usually around 1% of your sales. Banks use reason codes to categorize disputes, which vary by the credit card company. Categories typically include issues with fraud, authorization, or processing.
Chargeback rates vary by industry, dispute resolution strategies, billing models, and transaction volumes.
6 ways your business can avoid chargebacks
Although some reversals occur from merchant error, fraudulent chargebacks continue to increase. As “True Cost of Fraud Study” noted, “Retail fraud attempts have tripled since 2017,” with an average of $3.13 lost per $1 of fraud.
During and after a customer chargeback, businesses incur:
- Lost processing fees
- Chargeback investigation costs
- Merchandise redistribution expenses
- Management labor costs
- Chargeback fees
- Potential lost sales and customers
While it’s impossible to completely stop chargebacks, reducing payment reversals saves money and protects your business reputation. Use the best point of sale (POS) system and the following tactics to prevent credit card disputes.
1. Make your return and dispute process clear and easy
Many customers file a chargeback with a credit card company because it’s easy. By laying out your process from the get-go, you can show customers that it’s simpler and beneficial to contact you first.
Improve your return process by:
- Adding a return FAQ page: Review all returns and talk to your customer service teams to generate a list of frequently asked questions about your return process.
- Following up after purchases: Send a friendly email or text message post-purchase to verify receipt and satisfaction while asking customers if they have any questions or concerns.
- Automating your return process: Use a system where your customers can submit a return and track its progress online.
- Offering more ways to communicate: Provide 24/7 customer service via messaging, email, phone, and digital chatbots.
- Providing free return shipping: Although shipping is expensive, it may counter the fees incurred from chargebacks.
- Asking for reviews after a return: Share testimonials from buyers who have experienced your return process to encourage others to follow suit.
2. Use multi-layered payment protocols
A recent chargebacks report by found that Mastercard fraud disputes jumped by 9%, while Visa ones were up 5.4%. The majority of problems stem from card-not-present (CNP) transactions, which are common with online payments.
Prevent problems at checkout by taking a multilayer approach that uses:
- Chargeback prevention alerts
- Address verification services (AVS)
- Email verification methods
- Order validation tools, such as Shopify e-commerce plug-ins
- Phone number reverse lookups
- Shipping and billing address confirmations
- Device fingerprinting
- Buyer velocity limits for purchases
- Card security codes, also known as a card verification value (CVV)