Chargebacks: Top 8 Prevention and Management Techniques

Top 8 Ways to Prevent and Manage Chargebacks


What is a Chargeback?

A chargeback is the result of a dispute of a charge by the credit card holder.  If the card issuing bank accepts the dispute, it will immediately refund the charge to the card holder then file the chargeback through the acquiring network who will then draft the refund out of your checking account and send you notification of the chargeback.  You will then have 3-4 weeks to dispute the chargeback by providing documentation of the sale.  On-line merchants are at higher risk of an unsuccessful dispute of a chargeback given the lack of a signed receipt which provides evidence of a sale.  There are both valid (e.g. duplicate transactions and damaged items) and invalid (fraudulent) reasons for chargebacks.  Merchants should take steps to prevent and minimize chargebacks, regardless of whether the dispute is valid.


Top 5 Ways to Manage Chargeback Risk

As previously stated, there are many reasons a customer may dispute a charge.  How a merchant manages the risk surrounding such disputes will determine whether it results in a chargeback.  Here are 5 common scenarios and ways to mitigate risk.

  1. Customer refunds – When a customer requests and is entitled to a refund, be sure to do so quickly to avoid a “credit not processed” chargeback.  Furthermore, be sure that your refund fund policy is clearly stated on every transaction, and the customer should be required to click an “I agree” button before order is finalized.  Only refund to the same credit card used as with the original purchase.
  2. Implement preventative controls for fraudulent charges – Since the card is not present during the transaction, online transactions are have higher fraud risk.  Here are some methods to reduce this risk:
    • Require the security code on the back of the credit card in order to process payment.
    • Maintain a record of problematic customers and block transactions from such customers.
    • Limit the number of transactions by the same customer for a specified time period (e.g. hour, day, week).
    • Maintain good records.
      Track communication with customers, and record customer IP addresses.
    • Use an address verification service.  This will match the cardholder’s address to the card prior to approving the sale.
  3. Customer service – If a customer cannot find your information when there is a question or complaint, they may go straight to their credit card company to dispute the charge rather than contacting you first.  Make your customer service contact information easy to find.  Make it visible on your website, include it with the shipped product and have it on all emails.  Respond to your customers quickly.  This will encourage the customer to call you with the dispute before going to their credit card companies, give you the opportunity to correct the problem, and can also provide for a good reputation for customer service.
  4. Recurring transactions – Recurring transactions are often used for subscriptions and are often times automated.  As soon as a customer cancels a subscription, act immediately stopping the automatic payment.  This will avoid multiple chargebacks from the same customer.
  5. Merchandise not received –  A charge cannot be processed until goods or services are provided.  Using a delivery service that offers delivery confirmation will provide proof of delivery.  Here are ways to handle delivery scenarios that are not as straight forward:
    • Paying in InstallmentsBe sure to disclose all terms of installment in writing and have customer accept these terms by using an “I agree” button.  The first installment payment cannot be processed before the shipment of goods.
    • Delayed delivery – A payment can be processed before delivery if the sale is described as “delayed delivery” in the terms; however, you cannot process a deposit before delivery.  Again, have the customer click an “I agree” button.


Top 3 Ways to Respond to Chargebacks

If a chargeback does occur for any reason, follow the steps below to obtain a higher chance of successfully disputing the chargeback:

  1. Respond to the dispute as soon as you receive notification.  If you don’t respond within the required timeframe, you’ll lose the entire sale plus any chargeback penalties.
  2. Gather all documentation surrounding the sale, and provide it to the credit card company.  This includes order confirmations, delivery notices, the customer’s IP address and any correspondence with the customer.
  3. Learn from each chargeback scenario and respond by setting up systems to prevent a similar occurance.

Our experienced team has a ton of experience helping merchants understand and manage chargebacks.  Contact us if you need help setting up a merchant account.

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