Eight ways to reduce chargebacks for your business

Chargeback prevention and friendly fraud are a challenge, but you can lower your risk through chargeback protection. Here's how to mitigate chargebacks.


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  1. Introduction
  2. What are chargebacks?
  3. Why do chargebacks happen?
  4. Why chargebacks are bad for businesses
  5. How many chargebacks are normal for businesses?
  6. Eight ways businesses can reduce their number of chargebacks
    1. Prioritise security for online and in-person payments
    2. Have clear return and refund policies
    3. Keep online inventory up to date
    4. Be clear with product descriptions
    5. Manage delivery expectations
    6. Be accessible
    7. Provide free trials, with no hidden costs
    8. Make sure that your real company name is displayed on credit card statements

The challenge of reducing chargebacks is directly connected to everything that businesses are most concerned with: customer satisfaction, keeping revenue up, mitigating losses and limiting liabilities in all areas of the business. Chargebacks are a particularly frustrating part of running a consumer business, and most businesses will have to deal with at least some on a regular basis, no matter how vigorously they work on their chargeback prevention. Unfortunately, there is no secret fix to permanently eradicate chargebacks, but the more you know about what chargebacks are, what causes them and what you can do to prevent them (including the use of chargeback management tools), the more manageable the issue becomes.

Below is everything you need to know about chargeback protection and reducing the number of chargebacks your business gets hit with.

What's in this article?

  • What are chargebacks?
  • Why do chargebacks happen?
  • Why chargebacks are bad for businesses
  • How many chargebacks are normal for businesses?
  • Eight ways businesses can reduce their number of chargebacks:
    • Prioritise security for online and in-person payments.
    • Have clear return and refund policies.
    • Keep online inventory up to date.
    • Be clear with product descriptions.
    • Manage delivery expectations.
    • Be accessible.
    • Provide free trials, with no hidden costs.
    • Make sure that your real company name is displayed on credit card statements.

What are chargebacks?

A chargeback is a reversal of funds from a credit or debit card issuer to the cardholder following a cardholder's dispute of a charge. Unlike a refund, which involves the business initiating the reversal of funds, chargebacks involve the issuing bank pulling funds from the business's account, holding on to the money while they investigate the legitimacy of the dispute and then giving the funds back to the customer if the customer's claim is deemed to be legitimate.

Why do chargebacks happen?

Chargebacks are intended to rectify cases of credit card fraud and mistakes such as accidental duplicate charges. This is their stated purpose. That said, some consumers dispute charges and request chargebacks for other reasons – namely, to avoid going through the process of returning an item and requesting a refund.

Chargebacks were originally established more than 40 years ago as a means of recourse in the event of credit card fraud. The goal was to increase consumer confidence in credit cards by giving consumers a way to recover any funds lost to fraud. If a purchase was made fraudulently, the cardholder would see the charge show up on their credit card statement, flag it to the bank that issued their credit card and have the funds returned to them. In theory, the mechanism makes complete sense for basic consumer protection.

In reality, chargebacks are used by customers not only to rectify instances of genuine fraud, but also to circumvent the returns process on goods that they're displeased with or as a solution for orders that never showed up. Here are some of the most common reasons why chargebacks occur:

  • Genuine fraud – the charge was not authorised by the cardholder.
  • The items associated with the order never arrived.
  • The customer received the wrong item(s).
  • The customer requested a refund but it took longer than expected.
  • The customer was dissatisfied with the quality of the item(s).
  • The product was markedly different from its description on the website.
  • Clerical errors (for example, the customer was charged more than once).

Chargebacks that are requested for reasons other than legitimate fraud are referred to as "friendly fraud", and these situations constitute up to 86% of all chargebacks. For businesses, credit card fraud is clearly bad on many fronts. However, it's a much dicier issue when customers use chargebacks instead of going through normal channels to return items and request refunds.

Why chargebacks are bad for businesses

Chargebacks hurt businesses for obvious reasons. After all, any situation where you have to return funds to a customer is inherently not ideal. Beyond the lost revenue from a reversed transaction, chargebacks cost businesses dearly. When you factor in the cost of the time spent processing a chargeback, lost inventory and the fees charged by payment processing providers, businesses lose a disproportionate amount of money from dealing with chargebacks. According to a study from LexisNexis, US$1.00 of fraud now costs US retail and e-commerce businesses US$3.75 – this is 19.80% higher than 2019's cost of US$3.13 per US$1.00 of fraud.

In addition to incurring costs, chargebacks are often negative indicators of customer satisfaction and, in the case of legitimate fraud, of a problem with security. The bottom line: if your business is seeing a large number of chargebacks, there are likely to be systemic problems that need to be addressed.

How many chargebacks are normal for businesses?

The good news is that the number of chargebacks that businesses see overall tends to decrease year on year. Yet still, the lost revenue they cause is staggering: in 2020 alone, businesses lost US$17.5 billion due to chargebacks and fraud, according to a Juniper Research study.

Different card networks and acquirers have varying standards about how many chargebacks is too many for a given business. In general, a 1% chargeback-to-transaction ratio is considered to be the highest acceptable figure. If your business exceeds the 1% threshold for chargebacks, a few things might happen. Depending on who your payments provider is, you might find yourself facing higher transaction fees and other penalties if you have an excessively high chargeback ratio. In some cases, Stripe will start building up a reserve account for businesses if their chargeback ratio increases or if it otherwise appears that the business has an elevated risk of customers requesting refunds or disputing charges.

Card networks also take a proactive stance towards chargebacks. For example, Visa and Mastercard both have programmes that incentivise businesses with high chargeback ratios to take chargeback prevention steps to lower their number of chargebacks. Visa's programmes are called the Visa Fraud Monitoring Programme (VFMP) and Visa Dispute Monitoring Programme (VDMP). Mastercard has the Excessive Chargeback Programme (ECP), which consists of two levels: Excessive Chargeback Merchant (ECM) and High Excessive Chargeback Merchant (HECM).

Eight ways businesses can reduce their number of chargebacks

Chargeback prevention means doing everything in your power to ensure that your customers get what they want when they expect it, are satisfied with what they receive and can contact you easily should any issues arise. While this goal is absolutely achievable, its execution is a complex and evolving project.

Orchestrating a customer experience that successfully delivers on this goal involves refining every aspect of your business operations. Here are a few key places to start:

Prioritise security for online and in-person payments

Since chargebacks commonly occur as a result of credit card fraud, making security a top priority is the single most impactful form of chargeback protection that businesses can implement to minimise the volume of chargebacks. You can take a number of steps on this front, including:

  • Consulting your payments provider:
    Payment processing providers have a strong interest in helping their customers to maintain the lowest possible chargeback ratios. As a result, talking to your provider about what types of support they offer is a good place to start when thinking about chargeback prevention. For example, Stripe offers extensive support surrounding fraud prevention and chargeback protection. Stripe Radar is our fraud prevention tool that is built into your Stripe platform from day one, without any need for integration or to opt in. Radar leverages payment data from 197 countries to prevent fraudulent transactions, making it an effective chargeback management tool. By learning from millions of global businesses processing billions in payments each year, Radar can assign risk scores to every payment and block many high-risk payments automatically. If you want to take your dispute protection a step further, Stripe offers additional chargeback protection that safeguards your sales against fraudulent disputes, helping prevent losses, reimbursing the disputed amount and waiving dispute fees – whether or not the chargeback is legitimate.

  • Regularly update your point-of-sale (POS) software:
    Failure to keep your POS software up to date can lead to security vulnerabilities. Don't let this easily avoidable problem happen to you.

  • Opt for more secure card transactions:
    Invest in payment gateways and checkout terminals that are equipped to accept contactless payments that use extra-secure NFC technology and EMV chips. Swiped credit and debit card transactions are less secure, since they transmit the card number itself, as opposed to NFC and EMV transactions which encrypt all sensitive card data.

  • Require customer signatures and PIN number usage:
    This is especially helpful for adding a layer of protection to swiped card transactions.

Have clear return and refund policies

Friendly fraud can be more complicated to combat than straightforward credit card fraud. Many chargebacks happen because customers would rather not go through the trouble of returning an item or seeking a refund. You can encourage customers to go through the proper channels for returning a product that they don't want (instead of just giving up and disputing the charge with their bank) by creating an easy, low-lift and accommodating return policy and communicating it clearly to your customers.

On the surface, it might seem like creating an easy returns process could work against your bottom line, but that's not the case – it is actually an effective form of chargeback prevention, too. If a customer is determined to get their money back following a purchase, you need to do everything in your power to make sure that the reversal of funds happens through a refund rather than a chargeback. Even though returns, similarly to chargebacks, involve returning funds to the customer (which isn't what any business wants to do), refunds are much more business friendly than chargebacks.

Keep online inventory up to date

If a customer is able to complete a transaction for a product that is in fact out of stock, you run the risk that the customer will initiate a chargeback instead of coming to you for a refund. Be diligent about keeping your online inventory up to date.

Be clear with product descriptions

Another leading cause of chargebacks? Customers don't believe that the product they received matches its online description. Spending a little extra time crafting thoughtful product descriptions, in addition to including true-to-life photos or videos of the product, is a worthwhile investment that can contribute to a reduction in chargebacks.

Manage delivery expectations

Consumers will often initiate a chargeback if they think that a product they ordered has got lost in the delivery process or is otherwise unlikely to arrive. You can help neutralise this risk and give yourself extra chargeback protection by providing customers with clear delivery details, including:

  • Which delivery carrier you're using
  • Confirmation and tracking numbers, along with links to where they can enter the tracking information for updates about their delivery
  • Expectations about delivery time
  • Instructions on whom to contact if they stop receiving delivery updates or if their package doesn't arrive

By providing your customers with important information such as delivery times, tracking numbers and the name of the delivery provider fulfilling their order, you empower them to pursue the correct channels when an expected item doesn't arrive. This offers an alternative to disputing the charge, making managing expectations an effective form of chargeback prevention.

Be accessible

Quite often, chargeback requests only happen after someone has tried and failed to get the business to engage with them about the problem. If a customer has any kind of issue with the goods or services that they've purchased from your business – anything from being charged unexpectedly for a subscription at the end of a free trial period, to erroneously being charged twice or receiving an incorrect item in their order – and they're not able to get in touch with your company easily to resolve the issue, they're much more likely to request a chargeback.

Establishing a comprehensive customer service function for your business is the best way to ensure that, in the event of a problem, customers talk to you instead of their credit card company or bank, thus offering you chargeback protection. If your team is easy to reach (ideally on multiple channels, including email, chat, text and by phone), you have a higher chance of being able to fix more issues without a reversal of funds. And for those instances when returning a customer's funds is warranted, you can initiate it yourself, as opposed to incurring the additional costs associated with chargebacks. To cut a long story short: make it easy for customers to contact your team.

Provide free trials, with no hidden costs

If your business sells subscriptions or memberships and you offer a free trial, it's a good idea to avoid ending the free-trial period with automatic billing. While it's a common practice, automatic billing can lead to unnecessary chargebacks. Giving customers the chance to opt in to a membership or subscription at the end of the free trial period might increase the number of people who drop off, but when you factor in the risk of chargebacks and refund requests, as well as all the associated costs, eliminating automatic billing after free trials might be a strategic move for your business in terms of chargeback prevention. Here's everything you need to know about enabling free trials for subscriptions with Stripe.

Make sure that your real company name is displayed on credit card statements

One of the most common reasons why customers dispute charges is because they simply don't recognise the name of the business on their credit card statement. When charges show up on a statement, there's always a brief description of the transaction, called the billing descriptor. Typically, the name of the business appears in this description, but sometimes the business name isn't recognisable or doesn't appear at all. Many consumers will dispute any charge on their account that looks mysterious. As a result, it's worth making sure that transactions from your business are clearly visible when they appear on your customers' statements, as this offers another form of chargeback prevention. (We also have an article dedicated to approaching billing descriptors in a way that minimises chargebacks for your business.)

For most businesses, chargebacks can't be completely eradicated, but they can be successfully managed by taking precautions and using chargeback management tools. Ultimately, even if you take every security precaution and proactively set up a business with consistently elevated communication and easy customer service access, chargebacks can't be avoided entirely. However, if you can reduce the number of chargebacks that come your way, you'll be in a stronger position to adequately dispute any that are unwarranted, while effectively processing any cases of legitimate fraud.

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