As an eCommerce business owner, you know that chargebacks can be a real pain. Not only are they a hassle to deal with, but they also risk damaging your business’ reputation. In this blog post, we will discuss what chargebacks are, the risks associated with them, and how to prevent them from occurring in the first place. Following these tips will help your eCommerce business thrive.
What Are Chargebacks?
A chargeback is a refund requested by a customer through their credit card issuer. This can happen for various reasons, but customers are often unhappy with their product or service. Chargebacks are also common in fraud cases, where customers claim they did not make the purchase. Another thing you have to be aware of is friendly fraud chargebacks where a customer will claim they are unaware of a charge, but they did do it, or another family member. Chargebacks often happen in card-not-present transactions, which is more prevalent in an online ordering system.
What Are the Risks of Chargebacks?
As an eCommerce business owner, you should be aware of a few risks associated with chargeback fraud:
- First, you will likely lose the sale with customer disputes. If you are in a cost-per-action or subscription-based model, you must factor this against your initial investment. It is essential to run retention reports to factor in your initial cost to acquire leads and then your chargeback and bill-through rates to identify your cashflows and when you generate ROI on your campaign.
- Second, you may also be charged chargeback fees by your credit card processor. Typically a chargeback fee is about $35, but it can vary with your merchant account. This is another factor when determining the profitability of your sales campaign.
- Lastly, if you have too many chargebacks, you may be flagged as a high-risk merchant, resulting in higher fees and difficulty obtaining merchant services in the future. Visa and Mastercard have different thresholds for their chargeback rate per specific merchant accounts, but it is imperative to run reports a few times a week to make sure your business is in not in jeopardy of obtaining more customers.
How to Prevent Chargebacks?
You can do a few things regarding chargeback prevention that you can implement. It is vital to create a standard operating procedure and make sure you have dedicated team members in your business to manage the chargeback process. Collaboration software can help a great deal with this workflow.
- After your merchant account approval, you will obtain a merchant descriptor. This shows up on the customer’s credit card statement after they make a purchase. It is crucial to test this merchant descriptor to ensure it matches what is on your website. The best way to do this is to go to your gateway backend and run a test transaction from your CRM. An example of a CRM provider that can manage this is Sticky.io. You can learn more about other CRM providers here. Once this happens, you can look at what shows up on your credit card bill as a pending transaction. This must match what the merchant processor assigned you. Another tip is to ensure the descriptor has your phone number and business name describing the product they are purchasing. It will reduce chargeback disputes when customers make online payments that match the website.
- Make sure you have clear and concise terms and conditions that your customers must agree to before making a purchase. On the T&C, include verbiage that lets the customer know how the credit card company will display their transaction on their billing statement. This will help to prevent any misunderstandings down the road.
- Inform your customer service partner to offer any incentives to unhappy customers to avoid chargebacks. For example, they can extend their billing date or even provide more products at no extra cost. You can also expedite the shipping process to demonstrate to the customer that you are doing everything to address their concerns. Training customer reps to respond quickly and set realistic expectations is important.
- Have your shipping company thoroughly review CRM notes on a customer. This may include shipping details and delivery dates that the customer will receive products. In some cases, to protect yourself, pay extra for delivery confirmation to prove to the card issuer or bank that you followed protocol to appease the customer. Most shipping companies will have address verification services to double-check the inputted address that the customer provides.
- On your checkout page, you can also offer shipping insurance to the customer. This will serve two benefits. It will create another transaction in your merchant account, which can help reduce your chargeback ratios and give the customer peace of mind that they will receive the product by the stated timeframe on the website. This will be tracked and can give you more evidence when faced with a chargeback dispute. Make sure you do not make the shipping insurance price too high, which can lead to more chargeback alerts. This will require split testing and further internal discussion.
- This step will require further backend analysis in your CRM. Check the customer’s IP address and ensure it is not a questionable location. This can lead to additional fraud and chargebacks. If it is, there usually is a blacklist function on that specific customer or a method to restrict that IP from purchasing your product.
- It may be wise to limit prepaid cards from buying on your website. Often, these are less credit-worthy customers that may have issues down the road and increase the chances of fraudulent chargebacks.
- Initially, you can do this on your own, but as your business grows, it may be wise to hire a chargeback company to fight chargebacks. They will put together all paperwork to respond accordingly based on the dispute code to get a reversal or even accept the chargeback. You will need to pay them per dispute, but this is something you will want to factor into your cost analysis and what the potential ROI is.
- There are also automated chargeback prevention tools you can opt into. Examples are Ethoca and Kount. Essentially, you load your descriptors onto their system, and they can give you a pre-indicator when a chargeback is coming in for that specific transaction. You can decide to cancel and refund the cost and prevent the chargeback fees from coming in. The key is a fee for each alert you receive. This is another cost/benefit analysis you will need to run in your business to see if it is worth it. It may also be worth split testing to see what happens when you have the alerts running, and you don’t. Does it benefit you?
- A final method to prevent chargebacks is to do a BIN analysis on your backend CRM. Find out which BIN (Bank Identification Number) has the highest amount of chargebacks. This is grouped by the credit card issuer’s first 4 to 6 digits. You can then blacklist this BIN on your backend to reject customers with that payment method. It is a double-edged sword if you want lots of transactions and, simultaneously, could introduce additional risk. Your business will need to identify the risk versus reward in this scenario.
Ecommerce businesses deal with a lot of upfront capital outlay, so it’s important to be hedged correctly through appropriate business lines of credit and credit cards. Chargebacks are common in e-commerce businesses and can affect your overall bottom line. By following the steps above, you can help to prevent chargebacks and keep your business thriving. Creating a process and learning to tweak it as necessary is crucial.