What no one has told you about chargebacks and how to prevent them

Written by PayShield

March 5, 2021

A recent report puts the global average cost of chargebacks each year at approximately 0.47% of total merchant revenue.

Several studies show that global eCommerce sales are at an all-time high after the pandemic accelerated years of growth in just weeks. One such research conducted by Shopify indicates that although the pandemic sparked a ten-year growth in only three months, digital commerce had been picking up pace well-before Sars-Cov-2 was announced.

Look at the numbers. Retail eCommerce sales compound annual growth rate (CAGR) forecast from 2020–2024 in India is 13.1%, Turkey 20.2%, Indonesia 15.4%, the U.S 6.2%, China 8.6%, and the U.K places at 4.7%.

But the eCommerce boom isn’t without a significant downside. Even as digital transactions are rising and many DTC merchants are going digital-first, chargebacks have become an existential threat to these businesses. Industry records show that “the global average cost of chargebacks each year is approximately 0.47% of total merchant revenue.” If that didn’t get your attention, there’s more. Statistically, 86% of all chargebacks are probable cases of friendly fraud.

If you’re an eCommerce merchant wondering how to navigate these threats, you are in luck. This article shares with you insider secrets to help you fight and win chargebacks with ease.

Here’s how it works:

First, you must understand why chargebacks happen.

U.S lawmakers designed chargebacks years ago as a consumer protection tool. And as an instrument of digital commerce, chargebacks were supposed to ensure fair play and accountability across-the-board. In other words, merchants wouldn’t have the occasion to take advantage of consumers by inflating their costs or issuing multiple bills for the same transaction. And consumers can hold their banks accountable for reversing transactions performed without the cardholder’s authorization.

It makes absolute business sense in principle. But in practice, the processes of administering chargebacks have given consumers an unfair advantage. The merchant is guilty of whatever crime the cardholder reported and punished accordingly by autopilot. Apart from forced payment reversal, merchants pay non-negotiable chargeback fees with every case.

That dispute process has created room for cardholders to commit fraud by intentionally disputing legitimate transactions known as friendly fraud. And as Juniper highlighted, the amount of friendly fraud across all verticals has increased by at least 41% through the last few years. Go ahead and google it. The numbers will make your head hurt. 81% of customers freely admit to filing a chargeback out of simple convenience. And about 40% of those cardholders who commit friendly fraud will do it again within two months.

But why does a chargeback happen?

Speaking of legitimate cases below is a quick breakdown of the significant reasons why consumers file a chargeback:

  • 30% of chargebacks result from unauthorized transactions. According to financial analysts, that could be due to account takeover fraud, which increased by 250 percent in 2020 compared to 2019.
  • 26% of chargeback incidents happened because a cardholder paid for an order but never received the order.
  • 23% of credit/debit card chargeback results from the merchant shipping products or delivering services significantly different from what the cardholder saw when placing an order.
  • 3% of all recorded chargebacks result from clerical errors or double billing.

How to fight chargebacks and win as a merchant

The risk of losing your merchant account due to excessive chargebacks hasn’t been higher than it is nowadays.

Carriers such as Shopify and PayPal are constantly tightening their policies to prevent digital fraud, which often puts merchants in unfavorable positions. For instance, PayPal recently switched their policy protocols by replacing chargeback fees with a dispute fee for transactions processed through a buyer’s PayPal account or a PayPal guest checkout. Although this might seem like a beautiful move at first blush, it further adds to the responsibility of mitigating chargebacks that’s already on merchants’ shoulders. It also reduces their margin of error significantly. Merchants who have historically relied on PayPal to solve disputes and not engaged directly with their consumers to resolve disputes will see an increase in fees.

Hence, those merchants that haven’t had to deal with chargebacks previously are now having to quickly figure out what to do or risk losing their merchant account or paying higher card processing fees. Losing your merchant account due to excessive chargebacks means that you are screwed. If you can’t process any more transactions, what other purpose does your business serve? And finding a new carrier isn’t easy at all. Even when you manage to find another vendor, you will have to pay ungodly processing fees for each transaction because they perceive you to be high risk.

To help you mitigate these threats, here’s how to fight chargebacks effectively. First, ensure you understood the chargeback reason code, that is, the issuing bank’s alphanumeric code that specifies the reason for the dispute. Even if the chargeback reason code is wrongly labeled, it often happens to be, ensuring you structure your representment according to what they issued.

Second, ensure you have all the documentation on the disputed transaction. Ideally, you should ship your orders with tracking; you should obtain order delivery confirmation and have authorization authentication protocols for all Card-Not-Present transactions. More so, if you sold digital merchandise, you must store computer logs, timestamps, and other such relevant evidence to show that the user accessed the goods.

Other documents that make a piece of compelling evidence for fighting a chargeback include your terms and conditions, order return policy, order invoice, and your checkout page details indicating the customer agreed to your terms of service. Gather all these for your representment.

Third, submit your compelling evidence with a rebuttal letter. Ensure your rebuttal is brief and details the circumstances of the dispute. It’s your cover letter, so make it count and only include relevant information that can help you win the dispute.

Don’t aim to fight chargebacks; with PayShield, you can stop chargebacks before they happen.

With the quantum of resources lost to chargeback mitigation these days, every eCommerce entrepreneur ought to have realized that chargebacks are NOT a cost of doing business. They represent an existential threat.

And although the rule of thumb is to fight EVERY chargeback, the uphill battle of fighting chargebacks leaves merchants with minimal success chances.

Now, instead of facing that hurdle and hoping the banks and card networks would see a reason to side with you, which rarely happens, you can play smarter. You can partner with PayShield and get a chargeback protection guarantee. That is the most seamless and hassle-free way of keeping chargebacks under control.

See, you don’t need to know how to write 20,000 lines of code to mitigate chargebacks effectively. Nor do you have to dabble with time-wasting case-by-case evidence gathering and representment. What you should do is outsource the entire process to experts like PayShield. Another fantastic thing about this approach is that Chargeback Protection Guarantee moves the liability for fraudulent chargebacks from you to the Chargeback Management Provider.

And PayShield is known for working closely with merchants to develop customized disputes, fraud, and chargeback mitigation strategies that are most suited to their needs. Sign up to PayShield today and maximize your approvals while reducing credit card fraud with an innovative solution fully customized to your business.

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Reduce your chargebacks and increase revenue.

Get started

Reduce your chargebacks and increase revenue.