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How to Minimize and Manage Chargebacks

By: Ted Rogers
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In ecommerce, the interaction with a customer extends well beyond the completion of any sale. Every step, from the decision to purchase to post-sale support, offers opportunities to either build a lasting relationship or risk losing the customer. Among these post-transaction challenges, chargebacks stand out as a significant concern for today’s brands.

While securing a sale is a notable achievement, various factors like website security, unclear transaction details, or inadequate customer support can lead to chargebacks. This not only affects customer retention and revenue but also reflects on the business’s customer relationship management. In this article, we delve into the intricacies of chargebacks—what they are, their mechanisms, and their impact on ecommerce brands.

What are chargebacks?

Chargebacks occur when a customer disputes a transaction and asks their bank or card issuer for a refund. Unlike a regular refund where the customer directly interacts with the business, chargebacks are processed through the bank, often without prior communication with the merchant. This process was initially designed to protect consumers from unauthorized or fraudulent transactions but has evolved into a complex mechanism that’s invoked for various reasons.

Why do chargebacks happen?

Chargebacks can stem from multiple causes, including:

  • Fraudulent Transactions: Customers fall victim to unauthorized card usage, prompting them to dispute the charge.
  • Unsatisfactory Product or Service Experience: Customers may feel that the product or service did not meet the advertised standards. Rather than disputing it with the business—or after unsuccessfully attempting to—they dispute the charge with their bank or card issuer in order to obtain a refund.
  • Technical Issues: These include accidental double billing or incorrect charge amounts.
  • Processing Errors: Miscommunications or errors occur during the transaction process.
  • Consumer Fraud: Increasingly, it’s been businesses themselves who are the victims of chargeback-related fraud. Also known as “friendly fraud,” chargebacks made while keeping the purchased product have been on the rise.[1]
  • Subscription or Recurring Billing Issues: Customers might forget about an ongoing subscription, face difficulties in canceling, or be misinformed about the terms.

Subscription-based models are particularly vulnerable to chargebacks due to the nature of recurring payments. Customers might not recognize a recurring charge, be surprised by a renewal, or, in cases of “friendly fraud,” deny authorizing a continuous subscription despite being aware of the terms. This can lead to disputes and chargebacks, categorized as “fraud” by card issuers, that adversely affect the merchant’s standing.

Why chargeback management matters

Effective chargeback management is critical for all ecommerce businesses. The implications of chargebacks extend beyond financial loss. They involve a time-consuming resolution process and can lead to a higher incidence of chargeback fraud. Properly managing chargebacks is essential to mitigate these risks and maintain a healthy business model.

How to reduce chargebacks

Reducing chargebacks in the realm of ecommerce involves a multifaceted approach that addresses various aspects of customer interaction and transaction processing. While some chargebacks remain inevitable, ecommerce businesses can implement strategies to minimize their frequency. These include:

Improved communication and transparency

Ensuring that customers have a clear understanding of what they are purchasing can significantly reduce chargebacks. This involves providing detailed product descriptions, realistic representations of products through images and videos, and unambiguous terms of service. Importantly, this also includes providing localized content that’s easily understood and engaged with by customers in international markets.

Transparency about shipping timeline; costs, including an order’s total landed cost; and return policies can also play a crucial role. A well-designed shopping and checkout experience, along with a comprehensive FAQ section addressing common concerns can preempt misunderstandings that might lead to chargebacks.

Streamlined customer service

Offering exceptional customer service is crucial. This includes providing multiple localized channels for customer support (such as phone, email, live chat), ensuring timely and empathetic responses to customer inquiries and complaints, and training staff to handle disputes effectively. Quick resolution of issues can often prevent a customer from resorting to a chargeback.

Secure transaction processes

Implementing robust security measures to prevent unauthorized transactions is vital. This includes employing fraud detection tools like CVV verification, address verification service (AVS), and two-factor authentication. Regularly updating security protocols and complying with industry standards (like PCI DSS) can also help in safeguarding against fraudulent activities that lead to chargebacks.

Up-to-date fraud detection tools

In addition to complying with industry standards, detecting fraudulent transactions with the latest fraud prevention tools can help deter fraudsters from pursuing chargeback-driven schemes. Taking swift action and refunding purchases by these fraudsters can also save your business the costs of disputes.

Clear billing descriptors 

Customers often file chargebacks because they don’t recognize a charge on their statement. Using clear, recognizable billing descriptors can help customers recall the transaction, thereby reducing the chances of a mistaken chargeback. It’s essential to ensure that the name appearing on the statement is easily linked to your brand or product.

Effective subscription management

For businesses with subscription models, it’s crucial to communicate the terms of the subscription clearly, including any recurring charges, right from the start. Providing easy access to subscription management options, like cancellation or pause features, can mitigate the risk of chargebacks. Sending reminders before renewal dates or when a free trial is about to end can also help in reducing disputes.

Manage chargebacks with the help of Digital River

Successfully managing chargebacks is essential to driving growth in ecommerce today, especially if you’re operating a subscription-based business. But without the right tools or partnership, this common problem can take a bite out of revenues—and burden your business with time-consuming complexity and unwanted risk.

MyCommerce, Digital River’s configurable, turnkey ecommerce platform designed for digital products and SaaS, gives businesses instant access to robust subscriptions management and global payments capabilities, as well as protection from international tax, fraud, and compliance risk.

This all-in-one solution offers a host of tools to drive customer retention and optimize billing to help minimize chargebacks in the first place. With Digital River as your merchant of record, we’ll assume liability for all transactions—and our chargeback team will manage the dispute process on your behalf.

In 2021, merchants actively disputing chargebacks saw an average ROI of 914%.[2] Contact us today—or sign up for a free demo of MyCommerce—to learn more about how you can leverage our platform and expertise to accelerate your business’s growth.

 

[1] https://thepaypers.com/thought-leader-insights/trends-in-the-fraud-and-payments-space-for-2023–1259556

[2]  https://midigator.com/chargeback-report-statistics/