Are Chargebacks Holding You Back?

By definition, a chargeback is “a demand by a credit-card provider for a retailer to make good the loss on a fraudulent or disputed transaction.” What’s not included in this definition is the time and money lost by merchants every year due to chargebacks. Not to mention the hassles and the unpredictable nature of chargebacks that creep up on you months after you’ve made the sale. So what can you do to minimize or control chargebacks?

We believe there are steps every merchant can take to protect themselves and certain realities about chargebacks that need to be better understood:

The Growing Scale of Online Credit Card Fraud

With the adoption of EMV, fraudsters have focused aggressively on fraudulent purchases online for goods and services they can resell quickly. In fact, according to PYMNTS.com, online fraud attacks soared over 200% between Q1 of 2015 and Q4 of 2015. Contrary to the perception of a lone wolf operating from his mother’s basement, the modern fraudster is part of a sophisticated international network of criminals who deal in consumer identities. In addition to the professional fraudster, consumers are also leveraging chargebacks as a means for recovering funds paid online, a practice commonly referred to as “friendly fraud”.

Multitude of Merchant Costs Due to Chargebacks

As most of you know, U.S. law favors consumers in chargeback cases through the 1968 ‘Truth in Lending Act’. But, you’re also being penalized by your payment processor for chargebacks through a series of fees and penalties for which you are liable.

  1. Chargeback Fees on Every Order
    In addition to the financial loss of the order itself, merchants pay chargeback fees that vary across card issuers (American Express, MasterCard, Visa, etc.) and payment gateways. Despite these fees you’re unlikely to dispute chargebacks on smaller orders as the total amount you may recover still may not validate the time and resources involved.
  2. Higher Processor Costs Due to Chargebacks
    Merchants who consistently have a high percentage of chargebacks will face a higher processing rate from their payment gateway for each transaction. This will obviously erode margins and create an enormous extra cost for your business.
  3. The 1% Rule
    Regardless of whether or not you win or lose your cases against chargebacks, if chargebacks consistently represent more than 1% of your orders you will be deemed a “High-Risk Merchant”. This will result in higher processing fees, being placed in a chargeback monitoring program that has its own costs (which can be upwards of $10,000) and in a worst-case scenario you could lose your ability to process credit cards payment online.

Damage to Your Brand

While your order review and fraud management team may sit nowhere close to your brand or marketing team, chargebacks can create a huge problem for your brand since every opinion or online review counts. Most customers who have had filed chargebacks against you obviously want their money back but they may also have a valid reason for their grievance. They trust your brand and probably have a limited understanding of how difficult it is for you to ensure their credit card will never be used for fraud on your site. But those customers who aren’t victims of fraud and are filing chargebacks against you, your “friendly fraud” customers, they’re less likely to file these chargebacks if you make a few key changes to your processes.

To help you with your uphill battle against chargebacks we’ve collected some best practices and suggested changes you can make today to better protect yourself from the hassles and costs of chargebacks. While every merchant deals with chargebacks differently, we encourage you not to simply surrender a certain % of your margin to chargebacks. You can take a proactive approach to reducing or completely eliminating chargeback risk and we’re here to help you do just that.

Charge Ahead Against Chargebacks

Karyn Bordoni

Karyn Bordoni is a former Product Marketing Manager at Signifyd

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