The online marketplace is booming, but this surge in digital shopping brings with it the growing challenge of ecommerce chargebacks.

Not all chargebacks are fraudulent, but as a mechanism, chargebacks are particularly vulnerable to fraud and end up creating a significant influx of fraudulent activity. LexisNexis estimates that every $1 lost to fraud costs $4.24 for businesses that don’t integrate customer experience operations with fraud prevention strategies—but that number falls to $3.66 for businesses that do.

Understanding and addressing the issue of chargebacks is an important concern for ecommerce businesses. Not only do chargebacks result in lost sales and added fees, but a high chargeback rate can also strain relationships with payment processors, and sometimes lead to account termination. Additionally, chargebacks can damage consumer trust. Taking steps to minimize chargebacks is an investment in the long-term health and sustainability of an online business. Below are insights and strategies to help businesses protect themselves against the costly—and potentially debilitating—effects of chargebacks.

What’s in this article?

• What are ecommerce chargebacks?
  
• How do ecommerce chargebacks work?
  
• Why do ecommerce chargebacks happen?
  
• How do ecommerce chargebacks impact businesses?
  
• How to prevent ecommerce chargebacks
  

What are ecommerce chargebacks?

Ecommerce chargebacks are a process in which a customer disputes a charge made by an online business and seeks to reverse the transaction. Chargebacks are meant to be a form of consumer protection, but sometimes they are misused—this is called chargeback fraud—or occur as a result of genuine misunderstandings.

How do ecommerce chargebacks work?

Ecommerce chargebacks consist of a series of steps involving the customer, the business, and the card issuer or bank. Here’s how the process works:

• Initiation: The customer contacts their credit card issuer or bank to dispute a transaction, and provides a reason for the chargeback, such as: the charge was the result of unauthorized use, they never received the item the charge was related to, or the product they received didn’t match how it was described. Further below, we’ll cover the different reasons why chargebacks happen.

• Review by issuer: The card issuer or bank reviews the claim. If it believes it might be valid, it credits the disputed amount back to the customer temporarily, and initiates the chargeback process.

• Notification to business: The card issuer or bank notifies the business of the chargeback and may be asked to provide evidence to counter the customer’s claim. This could include shipping information, communication logs, or transaction records. This part of the process is known as representment.

• Business response: The business submits any evidence it has to counter the customer’s claim. This step is important for the business because it allows it to defend the legitimacy of the transaction.

• Final decision: The card issuer reviews the evidence from the customer and the business and makes a final decision. If the card issuer decides to uphold the chargeback, the temporary credit that was sent to the customer becomes permanent. If the card issuer decides to deny the chargeback, the temporary credit is reversed and the customer is charged again.

• Potential additional fees: If the card issuer decides to uphold the chargeback, the business usually has to pay a chargeback fee and might face other penalties depending on the number of chargebacks it receives.

Why do ecommerce chargebacks happen?

Ecommerce chargebacks are a double-edged sword. While they are designed to protect consumers from fraudulent transactions and unsatisfactory experiences, they can also harm businesses if customers misuse them, or if they occur too frequently. Chargebacks can happen in different circumstances and for different reasons, such as:

• Fraudulent transactions
  This is when a fraudulent actor gains unauthorized access to someone's credit card information and uses it to make purchases. When the legitimate cardholder discovers these unauthorized transactions they file for a chargeback to reclaim the stolen funds. Businesses need to have strong security measures to detect and prevent fraudulent transactions—more on that below.

• Credit card not present
  By default, ecommerce transactions occur without a physical card, which makes it difficult to verify whether the person making the purchase is the actual cardholder—and leads to higher instances of fraud. For businesses, implementing additional verification steps, such as requiring customers to type in CVV codes during a purchase, can help mitigate this.

• Item not received
  Sometimes, a customer does not receive the product they ordered due to shipping errors or other logistical issues. If the customer thinks the business is unresponsive or that it’s failing to solve the issue in a timely manner, they may file a chargeback—which is why it’s important for businesses to provide reliable shipping and communicate with customers about any delays or issues.

• Item delivered is not as described
  When a customer receives the product they ordered and realizes it’s significantly different from what they saw online, they may file a chargeback, especially if the business’s return policy is unclear or unsatisfactory. To minimize the chances of this happening, businesses should ensure that product descriptions and images are accurate and clear.

• Duplicate charges
  Sometimes, technical glitches or errors that occur during payment processing can result in duplicate charges for a single purchase. When a customer realizes they have been charged multiple times, they may file a chargeback to recover the funds from the duplicate charge. Businesses can prevent this by monitoring and correcting billing errors promptly.

• Processing errors
  Processing errors include mistakes that occur during the transaction process, such as when a business charges a customer the wrong amount. A customer who notices an incorrect charge on their statement might file a chargeback to correct the problem. This emphasizes how important it is for businesses to prioritize meticulous transaction processing and rectify errors promptly.

• Customer dissatisfaction
  If a customer is unhappy with a product or thinks that the level of service they received was inadequate, they might seek a refund through the business. But if the business does not resolve the issue to the customer’s satisfaction, the customer may file a chargeback as a last resort. Offering exceptional customer service and a fair return policy is key to preventing these types of chargebacks.

• Friendly fraud
  Friendly fraud is when a customer intentionally abuses the chargeback process by making a false claim that a transaction was unauthorized or the product wasn't received, even though they received and kept the item. This is a form of theft and hurts businesses. Implementing strong verification processes and maintaining detailed records can help businesses in disputing such cases.

How do ecommerce chargebacks impact businesses?

In theory, chargebacks serve as a consumer protection mechanism, but they can also be used to exploit businesses. In both cases, chargebacks can pose serious problems and costs for businesses. Here's a detailed look at the different ways in which ecommerce chargebacks can affect businesses:

• Financial losses
  When a customer files a chargeback, the business loses not only the revenue from the sale, but also the product (if it has already been shipped). Additionally, card networks usually charge businesses for each chargeback, a fee that ranges from $20 to $100 or more. For example, if a business sells a laptop for $1,000 and faces a chargeback, it might lose both the laptop and an additional fee. This is when it’s helpful to work with the right payment processing provider. Stripe, for example, offers chargeback protection, which covers the disputed amount plus fees.

• Operational costs
  Dealing with chargebacks requires time and resources. If they are not working with a payment provider that handles chargebacks, businesses must allocate staff to handle chargeback disputes, gather evidence, and communicate with banks and payment processors. This can be particularly difficult for small businesses with limited resources.

• Increased processing fees
  If a business experiences a high number of chargebacks relative to its sales volume, payment processors may categorize the business as high-risk. This can lead to increased transaction fees or stricter terms. For instance, a small online store that experiences a sudden influx of chargebacks might find that its payment processor increases transaction fees from 2.9% to 4.5%.

• Loss of payment processing
  In extreme cases, if a business consistently exceeds a certain chargeback ratio, payment processors might terminate their service altogether. This would mean that the business would no longer be able to accept credit card payments, which is often necessary for ecommerce operations.

• Damage to reputation
  Frequent chargebacks can damage a business's reputation. Customers may perceive the business as unreliable, or even fraudulent. In the age of online reviews and social media, a negative review can spread quickly and deter potential customers from making purchases. For example, if an online clothing store frequently sends out items that don’t match the description, resulting in numerous chargebacks, potential customers might read about these experiences in reviews and choose to shop elsewhere.

• Loss of merchandise and restocking
  In cases where the product is returned, the business may incur additional costs associated with restocking and refurbishing the product for resale. If the product is perishable or time-sensitive (such as a seasonal item), the business might not be able to resell the item.

• Cash flow issues
  Chargebacks can create cash flow problems, especially for small businesses. When a customer initiates a chargeback, the funds are immediately withdrawn from the business’s account. This can be a problem if the business is relying on that revenue for operations. For larger ecommerce businesses, marketplaces, and platforms, this could make it difficult or impossible to forecast revenue reliably, which can significantly hinder growth planning.

While some chargebacks are unavoidable, many aren’t. Businesses should do everything in their power to minimize chargebacks through excellent customer service, clear communication, accurate product descriptions, and effective fraud prevention measures. These steps allow businesses to protect their revenue, reputation, and relationships with payment processors. Below is more information about these prevention measures.

How to prevent ecommerce chargebacks

For online businesses, preventing ecommerce chargebacks is important for safeguarding their reputation and financial health. These businesses can implement a combination of tactics to mitigate the risk of chargebacks. Here's a detailed look at some of these actions:

• Write clear and accurate product descriptions
  Ensure that all product descriptions on your website are comprehensive and precise. Include high-resolution images from different angles to give customers as much information as possible. This can help to reduce chargebacks that occur when a customer receives a product that looks different from the one they thought they ordered.

• Create and publicize transparent policies
  Be up front about your shipping, return, refund, and cancellation policies. Make sure these policies are easily accessible on your website and are written in clear language that limits the chances of misunderstandings and subsequent chargebacks.

• Provide exceptional customer service
  Provide prompt and effective customer support through multiple channels (email, phone, chat, etc). Meeting customer inquiries and complaints with high-quality customer service can prevent customers from filing a chargeback in the first place.

• Offer regular order confirmation and updates
  Send order confirmations immediately after a customer makes a purchase and keep the customer informed about the shipping and delivery status. This provides customers with a timeline and helps to manage expectations, which can reduce the likelihood of chargebacks.

• Use a secure payment gateway
  Employ reputable and secure payment gateway and processing providers to handle transactions. This adds an extra layer of security and often comes with built-in fraud detection tools like Stripe Radar.

• Employ an address verification service (AVS)
  Implement an AVS to compare the billing address that the customer provides with the address registered with the credit card company. This helps to identify potentially fraudulent transactions.

• Require card verification value (CVV) checks
  Requiring customers to input the CVV code during a transaction can reduce fraud because it ensures the person making the purchase has the physical card. This is especially important for online transactions.

• Use 3D Secure authentication
  Use additional security measures like Verified by Visa or Mastercard SecureCode to authenticate the customer’s identity. These technologies require the customer to enter a password or a code before the transaction can be authorized.

• Engage in regular monitoring of transactions
  Keep an eye on transaction patterns and watch for suspicious activity such as multiple orders from the same IP address or several orders placed within a short time. This can indicate fraudulent activity, a common cause of chargebacks.

• Use chargeback management tools
  Consider using third-party services that specialize in chargeback management, like Stripe’s Chargeback Protection. Chargeback Protection safeguards your revenue by shielding your sales from fraudulent disputes, thereby averting potential losses. Regardless of the legitimacy of the dispute, Stripe Chargeback Protection ensures that you are reimbursed for the disputed sum and waives any associated fees.

Chargeback Protection is built to serve all businesses that use Stripe. It covers both digital and physical goods and applies to transactions of all sizes, anywhere in the world. These tools can help you identify potential chargebacks before they happen, manage disputes efficiently, and offer valuable insights for improving your prevention strategies. To learn more, go here.