Chargebacks occur when a credit card holder disputes a transaction by claiming it’s incorrect or fraudulent, and has the charge reversed. Here’s an overview of the chargeback process:

• Dispute initiation: The cardholder contacts their bank to dispute a transaction and initiate a chargeback. Common reasons for chargebacks include unauthorized transactions, dissatisfaction with a purchase, and failure to receive goods or services.

• Investigation: The bank investigates the claim by requesting information from the business that processed the transaction. The business is given a chance to present evidence that shows the transaction was legitimate.

• Decision and action: Based on the evidence provided by both parties, the bank decides whether to reverse the charge. If the bank sides with the cardholder, the disputed amount is returned to the cardholder’s account, and the business pays a fee. If the bank sides with the business, the charge will remain on the cardholder’s account.

Chargebacks are a form of consumer protection that give cardholders recourse if they’re charged incorrectly or don’t receive products or services they paid for. Frequent chargebacks can have negative consequences for businesses, including higher processing fees, the need to hold funds in reserve, or even the loss of the ability to accept credit card payments. It’s important for businesses to put in place thoughtful processes to prevent fraudulent transactions and clearly communicate with customers to minimize misunderstandings that could lead to chargebacks—especially as global chargeback transaction volumes are expected to increase 42% from 2023 to 2026, as more and more payments take place online.

Below, we’ll cover what ecommerce businesses need to know about preventing and managing chargebacks, including average chargeback rates and the differences in chargeback rates across industries.

What’s in this article?

• What is an average chargeback rate?
  
• Common causes of ecommerce chargebacks
  
• How chargebacks impact businesses
  
• How to reduce ecommerce chargeback rates
  
• How to handle disputes and reduce chargeback losses
  
• Reporting chargeback fraud in ecommerce
  
• The future of chargebacks in digital transactions
  

What is an average chargeback rate?

A chargeback rate is the percentage of a business’s sales that result in chargebacks. Average rates can vary depending on the industry, type of products or services offered, and the company’s specific business practices. Food and beverage companies, for example, tend to see fewer chargebacks compared to businesses selling electronics or subscription services.

For most industries, any chargeback rate above 1% means a business might be deemed high-risk and face penalties from payment processors and card networks. For example, Mastercard has a monitoring program that fines businesses with a chargeback rate of 1.5% or higher.

Common causes of ecommerce chargebacks

Ecommerce chargebacks can occur for many reasons, including fraud, customer service issues, technical issues, and processing errors. Addressing these factors can help businesses reduce their chargeback rate and mitigate associated risks.

• Fraud: One of the most common reasons for chargebacks is fraud, particularly in online transactions where there is a possibility of card-not-present (CNP) fraud. Fraud occurs when a transaction is made without the actual cardholder’s knowledge or consent. There are two types of fraud: true fraud, when a card is stolen or copied, and friendly fraud—when a cardholder makes a purchase and then disputes it, claiming it was unauthorized or the product or service was not as described.

• Authorization issues: Transactions that fail to obtain customer authorization can open the door for customer disputes and lead to chargebacks.

• Customer service issues: Poor customer service—including slow response times, unclear return policies, or difficulty in reaching support—can lead to increased chargebacks. Customers might resort to chargebacks if they think it’s their only way to resolve an issue.

• Product or service quality: Customers might initiate a chargeback if they are dissatisfied with a product or service, or if they believe the business has provided misleading information about its products or services. Product issues might include a customer failing to receive it, or receiving a damaged or different item. Service issues might include the business failing to meet the customer’s expectations, the advertised standards, or the service agreement.

• Technical issues: Technical glitches, such as issues with payment gateways or the transaction process, can lead to accidental double-charging or other errors that might prompt chargebacks if customers notice discrepancies on their statements.

• Lack of communication: Lack of clear communication regarding recurring charges, subscription renewals, or terms and conditions can cause customers to dispute charges they did not anticipate or do not understand.

• Delivery issues: Shipping problems such as delays, lost packages, or receiving the wrong item can lead to chargebacks—especially if the customer thinks the business has not adequately addressed the issue.

• Industry-specific risks: Certain industries are prone to higher chargeback rates due to the nature of the transactions or the level of scrutiny they attract. For example, the travel industry faces a high number of chargebacks due to cancellations, changes in plans, and other uncertainties.

• International transactions: Transactions involving international customers can have higher chargeback rates due to factors such as currency conversion issues, longer shipping times, different consumer protection laws, or increased opportunities for fraud.

• Business error: Simple mistakes such as processing errors, inaccurate product descriptions, or a failure to cancel a subscription upon request can lead to chargebacks.

How chargebacks impact businesses

Chargebacks directly affect revenue and have broader implications that can impact a business’s operational efficiency, reputation, and long-term sustainability.

• Lost revenue: The most immediate impact of chargebacks is the loss of revenue from the sale. When a chargeback occurs, the business must refund the customer, losing the income from the transaction. It was estimated that businesses would pay over $100 billion in chargebacks in 2023.

• Lost product or service: If the chargeback involves a physical product that has already been shipped, the business loses that inventory without compensation. If the chargeback involves a service, the business loses the time and resources put into that service.

• Operational costs: Addressing chargebacks requires administrative effort. Employees must investigate the claim, compile evidence on the transaction, and communicate with banks and credit card processors. This process diverts resources from other productive activities, adding labor costs.

• Fees and penalties: Businesses can incur additional fees, such as administrative fees from banks or payment processors when a chargeback is filed. Repeated chargebacks can lead to higher processing fees and penalties.

• Banking relationships: A high chargeback rate can strain relationships with payment processors and banks. Businesses might face increased scrutiny, higher processing fees, or account termination—limiting their ability to conduct operations.

• Customer trust and reputation: Frequent chargebacks can damage a business’s reputation. Potential customers might see a high chargeback rate as a sign of unreliable service or product quality, deterring future business.

• Market access and expansion: High chargeback rates can complicate expansion into new markets, especially if they result in restricted payment processing options or increased scrutiny in new jurisdictions.

• Legal and compliance risks: A high chargeback rate might lead to legal challenges, especially if chargebacks are linked to compliance issues or fraud.

How to reduce ecommerce chargeback rates

Reducing ecommerce chargeback rates helps maintain financial health and build trust with customers and payment processors. Following these practices can help businesses reduce chargeback rates and mitigate chargeback requests as they arise.

All chargebacks

• Detailed transaction records: Keep thorough records of transactions, including communications with customers, receipts, and shipping information. These documents can help dispute unwarranted chargebacks.

• Staff training: Train your staff to recognize and respond to the early signs of chargeback triggers. A well-informed team can take proactive steps to prevent disputes from escalating.

• Chargeback alerts: Some services provide alerts when a chargeback is initiated, giving the business a chance to address the issue with the customer directly and potentially resolve it before it progresses.

• Data analytics and chargeback reason code mapping: Use advanced analytics to dissect chargeback data. Map chargeback reason codes to specific operational issues to pinpoint the root causes. This can reveal systemic issues or emerging fraud trends that need addressing.

• Regulatory compliance and monitoring: Stay aware of and comply with evolving regulations related to online transactions and customer data protection. Noncompliance can lead to disputes and chargebacks, as well as fines.

Chargebacks due to customer misunderstandings or complaints

• Detailed product descriptions: Ensure that your website provides clear, concise product descriptions and images to prevent misunderstandings about what the customer is purchasing.

• Clear communication: Maintaining transparent communication with customers about product details, total cost, and the delivery time frame can further reduce chargebacks related to misunderstandings or unmet expectations.

• Shipping and delivery confirmation: Use shipping services that provide tracking and delivery confirmation. For higher-value items, consider requiring a signature upon delivery. These strategies can provide evidence that the item was delivered and accepted, which can be used to dispute chargebacks related to claims of nonreceipt of merchandise.

• Order confirmation and tracking: Send detailed order confirmations and provide tracking information for all shipments. Keep customers informed throughout the process to reduce potential chargebacks related to shipping and delivery disputes.

• Return policy: Have a clear, fair, and easily accessible return policy. Returning products or seeking refunds should be a straightforward process for customers.

• Transparent billing: Your billing descriptor (the name displayed on the customer’s statement) should be clear and recognizable. One reason that customers might initiate chargebacks is because they don’t recognize a transaction.

• Personalization of customer experience: Use data to personalize the customer experience, reducing the likelihood of confusion or dissatisfaction that can lead to chargebacks. Design personalized communication and offers based on the customer’s previous interactions and preferences.

• Subscription management: For businesses with recurring payments, implement transparent and user-friendly subscription management options. Allow customers to easily pause, cancel, or modify their subscriptions to prevent disputes related to unwanted recurring charges.

• Prompt customer service: Offer easy-to-access customer service channels. Quick and responsive support can resolve issues before they escalate to chargebacks.

Chargebacks due to fraud

• Secure payment gateways: Use reputable and secure payment gateways to reduce the risk of data breaches and associated fraudulent chargebacks.

• Advanced fraud detection tools: Use advanced fraud detection tools that can analyze different transaction elements—such as IP address, geolocation, and spending patterns—to identify suspicious activities and flag potentially fraudulent transactions. These systems identify patterns that humans might miss, and they improve their fraud detection capabilities over time by learning from each transaction.

• Address verification service (AVS): AVS helps prevent fraud by comparing the billing address that the customer provides with the one the card issuer has on file.

• Card verification value (CVV) checks: Requiring the customer to enter their card’s CVV code at checkout is another fraud prevention method that ensures the customer physically has the card in their possession.

• Customer authentication: Use Strong Customer Authentication (SCA) processes such as 3D Secure to add an additional layer of verification during transactions and shift some liability away from the business. An adaptive 3D Secure authentication process can adjust the level of scrutiny based on the transaction’s risk level, allowing a simpler checkout experience for low-risk transactions and adding additional layers of authentication for high-risk transactions.

• Fraud scoring: Some services provide a risk score for each transaction based on multiple criteria, allowing businesses to flag or block potentially fraudulent transactions.

How to handle disputes and reduce chargeback losses

• Chargeback representment: Develop a process for contesting unjustified chargebacks, known as representment. This process involves presenting evidence to the bank to prove that the transaction was legitimate, and that the product or service was delivered as promised.

• Collaboration with issuing banks: Establish a direct line of communication with issuing banks. This can facilitate faster resolution of disputes and provide deeper insights into the reasons behind chargebacks, allowing for more targeted preventive measures.

• Customized dispute resolution strategies: Develop customized dispute resolution strategies based on the type of transaction, customer history, and the specific reason for the chargeback. This can improve the chances of successfully reversing unjustified chargebacks.

Reporting chargeback fraud in ecommerce

Chargeback fraud, often called “friendly fraud,” is when a customer makes a purchase online and then disputes the charge with their bank to get a refund—despite having received the goods or services they paid for. Here’s how ecommerce businesses can handle and report these kinds of incidents.

• Identify the fraud: The first step is recognizing when a chargeback is fraudulent. This might involve reviewing the transaction details, customer communication, and delivery confirmation to ensure that the product or service was delivered and met the agreed-upon standards.

• Gather evidence: Once you suspect chargeback fraud, compile all relevant evidence. This includes sales receipts, delivery records, communication logs with the customer, and any other documentation that proves the legitimacy of the transaction.

• Dispute the chargeback: Use the evidence you’ve gathered to dispute the chargeback with the bank. Submit your documentation to the bank to prove that the transaction was valid and that the customer received what they paid for.

• Report to authorities: If you encounter a pattern or a particularly egregious case of chargeback fraud, consider reporting it to the relevant authorities. This could involve contacting law enforcement or cybercrime units, depending on the severity and nature of the fraud.

• Inform the payment processor: Alert your payment processor or business service provider about the fraudulent activity. They might have additional tips or protocols to help address the issue and prevent future occurrences.

• Maintain case records: Keep detailed records of all your interactions, reports, and evidence related to the fraud. This documentation can help in future disputes, legal actions, or investigations.

The future of chargebacks in digital transactions

Here’s how the changing digital transaction environment might impact chargebacks.

• Enhanced fraud detection: As machine learning and AI technologies advance, fraud detection systems will become more sophisticated, reducing fraudulent transactions and related chargebacks.

• Improved authentication methods: With the rise of biometric authentication and multifactor authentication methods, the identity verification process during transactions will likely improve, reducing unauthorized transactions and related chargebacks.

• Customer education: Increased awareness about online scams, fraud, and the proper use of chargebacks could lead to more informed customers, which might result in a decrease of friendly fraud.

• Blockchain and smart contracts: The integration of blockchain technology and smart contracts could introduce new ways of securing transactions and resolving disputes, providing a transparent and immutable record of transactions that might lead to reduced chargebacks that are caused by ambiguity or a misunderstanding.

• Real-time resolution: Technology will enable faster communication between businesses, banks, and customers—potentially allowing for real-time dispute resolution. This could reduce the need for traditional chargeback processes, as issues might be resolved before a chargeback is initiated.

• Business-centric solutions: New tools and platforms specifically designed to help businesses manage and dispute chargebacks might emerge, offering more nuanced insights into chargeback reasons and helping businesses to address underlying issues.

• Global standardization: As ecommerce continues to grow globally, there might be efforts to standardize chargeback processes across borders, reducing the number of chargebacks related to international transactions.

• Customer relationship management: Businesses will likely leverage advanced CRM systems to better understand and interact with their customers, potentially reducing chargebacks that are due to service or product dissatisfaction.