Chargebacks are designed to protect customers, however, some customers will abuse the chargeback system by habitually requesting chargebacks. Chargebacks can have negative impacts on both the customer and the merchant. A customer requesting too many chargebacks may be blacklisted by merchants, and merchants with a high chargeback status will incur chargeback transaction fees from their merchant account provider. The period of time for which the customer can request a chargeback varies by the card issuing banks or networks; some will allow chargebacks for up to a few weeks to months after a purchase was made.
The most common reason for chargebacks include:
- Quality: Customer claims to have never received the goods as promised at the time of purchase; customer was shipped an item that was very different from the seller's description; or the item was damaged when the buyer received it.
- Fraud: Customer claims they did not authorize the purchase, they did not make the purchase, or they were a victim of identity or credit card theft
The best way to deal with any chargeback is to prevent it from happening in the first place. The following suggestions are very generic and can be used by most businesses to decrease their chargeback potential:
- Verify CVC and CVV Verification Numbers
- This approach not only significantly reduces chargebacks, but also reduces transaction processing fees. All major credit cards have a 3-digit or 4-digit security code that is separate from the credit card number. This code is not captured in a carbon-copy of credit cards, and therefore provides additional assurance that the customer has the card in possession. Most online payment processors support providing these additional security codes when processing credit card orders. Check with your specific payment gateway to see if they support it, and use it if they do.
- Use Address Verification System (AVS)
- AVS matches the billing address entered by the buyer/customer on the order to the cardholder's billing address on record with card issuer. It is supported by Visa and Mastercard in the US, Canada and the UK, and by American Express in the US.
- Use a clear DBA (Doing Business As) name that customers will recognize
- An unrecognized DBA name on billing statements is one of the most common causes of chargebacks. A vague corporate name that does not mirror the name the customer is familiar with, or does not describe your company's products or services will confuse customers when they review their billing statements. Make sure the customer knows what name will appear on their credit card statement at the end of the month. This will help to reduce any confusion that might would otherwise occur. Alternately, you can put your phone number on your customers' statements, and if they do not recognize your DBA, they can call you to find out who you are and why you charged them.
- Utilize merchant descriptors (sometimes called soft merchant descriptors), when available
- Many gateways offer you the ability to send a soft descriptor with your transactions that will show up on the cardholder's credit card statement. This could be an 800 number staffed with your employees or contractors, who can talk to the cardholder and prevent a chargeback from being entered into the system, perhaps by explaining the charge, or taking steps to resolve an issue. Data shows that a toll-free number works much better than a toll number. Or it could be a link to your website where the cardholder could chat live with an agent.
- Always respond to a chargeback as quickly as possible
- A limited amount of time (10 business days) is available to resolve a chargeback. If you miss the window of opportunity to respond, you forfeit your ability to fight the chargeback.
- Posting a warning message
- Taking the time to post a warning message on your order page to those who may attempt to make a fraudulent order will greatly deter the number of instances of fraud. Be sure to mention that IP (Internet Protocol) addresses are being logged. IP addresses can come in handy when locating people about fraudulent orders.
Balancing Chargebacks and Customer Acquisition
Taking measures to deter and eliminate fraud and chargebacks from occurring are a necessity in order to operate a successful online business. However, one important thing to bear in mind is that there is usually tension between chargeback rates and customer acquisition rates. Extremely low chargeback rates could mean that you (the merchant) are not being aggressive enough in your customer acquisition strategy, and are sticking too close to your core customer demographic, thereby leaving some potential new customers and money on the table. One guiding factor is the industry in which you operate - different industries have different chargeback rates that are considered "normal", and staying within those ranges is usually a time-tested way to meet your goal of balancing customer acquisition (marketing response rates) and fraud costs.