What is chargeback? 7 chargeback mistakes merchants make


Merchants make 7 chargeback mistakes repeatedly. Charge back is a complex issue and costly to merchants in order retain customers. This article will cover the following, what is charge back? What are these mistakes? Why they occur? 

28th October, AtoZForexMerchants make seven repeated charge back mistakes. Charge back is a complex issue and costly to merchants in order retain customers. How does it impact the markets?

Understanding Chargeback? 

Charge back is a scheme by which customers can claim through your card provider to reverse a transaction on your credit or debit card and makes both the card company and goods/service provider liable.  Please note, this may not apply to the Financial markets as the card providers may class this as gambling.

Types of Chargeback? 

There are two types of chargeback, classified as fraud and non-fraud. Fraud covers true fraud and friendly fraud. True fraud is when the cardholder did not make a purchase as for example, identity theft. Friendly fraud is when cardholder challenges the fact that they did authorize the purchase and deny the purchase and usually referred to as cyber-shoplifting .

In the case of non-fraud the cardholders purchase the goods and challenges the merchants and denies having received the goods (or were damaged, not placed order).

Chargeback Process

The current process does not favour the merchants, as banks and credit companies require minimum proof from the cardholder for validation of the claim and keeping the cardholder happy is a top priority. Lack of information necessary to strengthen the merchant’s case does not help the merchants.

Some reasons that cardholders make a chargeback claim

Listed below are some genuine possible reasons for claiming a chargeback by a cardholder

  • Company goes into administration – the company the cardholder purchased from has gone bust.
  • Quality of item – the goods were not as described or were defective.
  • Non-delivery – the goods were not received as promised.
  • Technical issue – expired authorisation or a processing error by the bank.
  • Clerical error – being charged multiple times or being billed for the incorrect amount.
  • Fraud – the cardholder has been the victim of fraud and did not authorise the purchase.

What Merchants should do in the case of chargebacks

Recurring merchants must ensure to provide all the relevant documentation, reference numbers(e.g. the Acquirer Reference Number), case number and additionally submit all the evidence required for challenging the chargeback. This could be in the form of Proof of signed delivery receipts, all documented email communication with cardholder, evidence confirming security code (CVV) was provided by the cardholder,  any relevant signed terms & conditions or contracts showing acceptance, evidence of check of billing address and in the case of refunds, merchants need to provided evidence of refund to the cardholder.  In summary, collate as much information and in the shortest time possible to present any challenges.

7 Chargeback mistakes made by recurring merchants when challenging chargebacks

#1 – Lack of Knowledge of Chargeback reason codes

Many recurring merchants do not even take time to understand and lack knowledge of chargeback reason codes. Recurring transactions such as Club Memberships, Service providers, where transactions are processed without the card holder swiping the card or order on each occasion are where most disputes are likely to occur.

Direction for merchants – A thorough understanding and knowledge of chargeback reason codes is a must for effectively combating chargebacks. These reasons codes classify the type of chargeback,  reason why the cardholder is disputing and setting the ground essential if the merchant disputes the cardholder’s claim.

#2 – Not Challenging

Merchants doing nothing or not carrying out sufficient checks to challenge chargebacks.

Direction to merchants – It is not necessary for merchants to challenge each and every chargeback, however, merchants must check every chargeback to ensure those that can be challenged must be challenged. Doing nothing, will result in merchants losing all their money and in any case, merchants should do their best resolve the issue directly with the cardholder rather than the cardholder register the dispute through the issuer of the card.

Merchants should weigh up the cost of challenging the chargeback versus the cost of accepting the chargeback. Especially, the time resources to be spent on the case as well as the amount of supporting evidence. If the cost of the challenge is greater than the chargeback cost, it is only common sense to go down the route of offering a refund without any quibble as a gesture of goodwill without admission of liability.

#3 – Poor Customer Service

Merchants fail to maintain good customer service best practice, such as dealing with the cardholders concerns swiftly and effectively.

Direction to merchants – Merchants overlook the power of proactive customer activity as a prevention tool.  Best practices like clear customer service contact details not displayed in the various media mediums such as websites, on the checkout out page. Another best practice merchants fail to display is clear refund policy and the terms and conditions.

For subscription based merchants, it is important to provide clear information and details of how the subscription works and what is included in the package the cardholder should expect, with visual information what they will be getting.

Another good practice not followed by recurring merchants is the pricing placement in as many areas on the website as practically possible and essential to bring it to the attention of the cardholder they will be charged on a recurring basis and clearly stating the re-charge time frame, yearly, quarterly, monthly. weekly, whichever may be applicable. What is more important to clearly provide information on the opt-out process, as well as clear billing and delivery information.

As far as pricing and charging/renewal fees are concerned, recurring merchants should clearly highlight these on the pricing page, in the terms and condition, on the checkout page, emails to cardholder before and after charging.

Example of best customer practice – If the cardholder starts a chargeback, merchants should contact the cardholder as soon as possible directly and establish as soon as possible reasons for the chargeback. If this is done in the correct manner, swiftly and in a timely way, there is a possibility of the cardholder to stop the chargeback through the issuer. It is important to establish if the cardholder’s grievance is justified and resolve it as soon as possible.

#4 – Duplication of efforts

Recurring merchants fail to understand which disputes qualify for automatic representment  and will be handled by the acquirer, ending up duplicating effort, wasting time and resources.

Direction to merchants – Merchants should empower themselves with knowledge and understand which disputes qualify for automatic representments. These qualifications for automatic representments differ from acquirer to acquirer and recurring merchants must know which will be taken care of automatically.

When certain criteria are met and the issuer should not have charged back, automatic representment is possible. Some of these are listed below, these may differ from acquirer to acquirer and recurring merchants should check,

  • if the card number is listed on a fraud service program before representment, an automatic action is taken to represent incoming fraudulent chargeback
  • if the cardholder has already been refunded or given credit by the merchant and the merchant still faces a chargeback, automatic action is taken to represent incoming chargeback
  • if a full chargeback is initiated on the same representment twice, automatic action is taken to represent incoming chargeback
  • if a chargeback is started which is beyond a certain time period for non-service related chargebacks, an automatic action representment occurs.

#5 – Warning signs ignored

Recurring merchants fail to fail to track each chargeback from start to finish and use it as a learning process to pick up on possible warning flags.

Direction to merchants – Track each chargeback from start to finish and implement any changes to their fraud prevention processes with the view to improve. Always track common chargeback reasons and pay close attention to the following warning signs;

  • reasons for chargebacks and disputes
  • common issuing/cardholders initiating chargebacks
  • the percentage of chargeback related fraud
  • reason(s) for unsuccesful representment
  • win/loss ratio
  • the percentage of chargebacks initiated by geographical location

Using their chargeback data, recurring merchants should be able to pin-point what went wrong and take action to correct it as soon as possible.  Tracking chargebacks will not stop chargebacks, it will however provide the merchants to make smart decisions and not waste time.

#6 – Win/Loss rate evaluation

Recurring merchants fail to evaluate their win/loss rate.

Direction to merchants – Many third party representment service providers claim high percentage of win rate. Merchants should note that most of these exaggerated claims are based on calculations first representments, merchants should be aware that these first representments may result in reversals.

Calculation of win rates based on first representment singularly is misleading because in the end the final result may still be a chargeback.  There are different ways of measuring the win rate and there is a wide disparity and picture may vary from merchant to merchant.  Most of the chargebacks reported are fraud related leaving a large gap for non-fraud related chargebacks.

Merchants should calculated the true win rate by looking at total number disputes successfully represented divided by the total number of disputes.

#7 – Financial costs and Resources

Most recurring merchants lack the expertise, resources and time to devout to fighting chargebacks.  The primary aim of merchants is to grow their buisnessess and serve their customers. However, in this digital age, many merchants (over 50%) have allocated resources internally dedicated to fraud and chargeback, which results in reduction of the budget to other revenue generating projects and departments.

Direction to merchants – Merchants should look towards acquiring the necessary expertise in-house or work with representment partner. Working with a representment partner has the added advantage of allowing merchants to focus on the running of their business. Free up time to develop a successful business is key to any business and offloading some of chargebacks can free up resources and time. As any merchant is too well aware time is money.

Having a professional representment team on board means that merchants can have experienced personnel experienced in all areas related to disputes and have established relationships with all those concerned from processors, issurers to banks.

This kind of partnership can result in a high funds recovery rate and swifter resolution resulting in a improved p&l for the buisness.

Summary

Recurring merchants need to ensure they have the time, expertise and resources within their organisation to fight chargebacks effectively. Merchants should have a clear and thorough understanding of the

  • timeline necessary to represent a chargeback and the process
  • the documentation and information necessary for representing a recurring transaction chargeback
  • the 7 chargeback mistakes to avoid
  • working with a representment partner to free time and resources
  • carry out due diligence when selecting a third party as a partner
  •  the different types of fraud
  • costs of fighting a chargeback compared to the chargeback cost itself

It is clear that the chargeback dispute process is not favourable to recurring merchants and both issuing banks and credit card companies need very minimum proof from cardholders for validating a dispute claim.  Keeping cardholders happy is an unbalanced equation for the recurring merchants. Merchants on their part must play apart in ensuring clear information for the cardholder, gather all relevant information to fight the chargeback.

Fraud and chargeback currently is unfair for merchants and a much open system between all the stakeholders is necessary for both the cardholder and merchant, so that all disputes are resolved in a timely manner. Without a common database for clear transparency between the merchants, banks and credit card companies, it will be an uphill struggle to reduce both fraud and chargebacks.

It is a challenge for both merchants and issuers to ensure compliance and protect payments against fraud with stricter regulations and new technologies. Fraudulent chargebacks are a no win situation for the issuers, cardholders, banks and merchants as eventually in the long term the costs are past onto the cardholder. With centralised data sharing all concerned parties will benefit and result in a seamless dispute resolution.

All win working together. 

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