The Top 5 Chargeback Challenges for Businesses & How to Overcome Them

The past eighteen months have presented a unique slate of challenges and opportunities for the card-not-present space.

Shutdowns disrupted consumer patterns. Even once stores reopened, shoppers often preferred to stick with alternatives to traditional brick-and-mortar shopping. You might’ve seen unprecedented traffic if you were positioned to leverage channels like click-and-collect and online ordering. However, increased traffic goes hand-in-hand with increased risk of chargebacks and fraud.

In the recent 2021 Chargeback Field Report, published by Chargebacks911, businesses were asked to identify some of their leading challenges regarding chargeback management. Some of the pain points topping the list included sourcing chargebacks, preventing criminal attacks, and fighting illegitimate cardholder claims.

Below we examine each of the most-reported chargeback challenges and offer straightforward advice on how to tackle them.

Challenge #1: Identifying Chargeback Sources

THE PROBLEM: Each chargeback issued by a bank is attached to a chargeback reason code. This reason code is meant to explain the reason why the cardholder disputed the charge. In many cases, though, the chargeback reason codes present an inaccurate picture.

“Friendly fraud,” refers to the invalid use of the chargeback process. This can be the product of a simple misunderstanding or error on the cardholder’s part. It could also be deliberate; a way to try and “get something for free.” Data from Chargebacks911 suggests that, by 2023, six in ten chargebacks filed by cardholders will be cases of friendly fraud.

If you can identify recurring trends in chargeback intentions, you can address potential problems that might be causing these disputes. The problem is that you can’t always rely on the reason codes provided with each chargeback to give you an honest impression of the chargeback’s source.

THE SOLUTION: Identifying the causes of chargebacks calls for an intelligent approach to detecting chargeback intentions. You must examine each chargeback claim on an individual basis to determine the true motive. This will build up a substantial body of data over time which can be used to develop more dynamic defense tactics.

Challenge #2: Preventing Criminal Fraud

THE PROBLEM: It’s common practice to subject each transaction to a battery of fraud detection tools. Of course, even with the best defense possible, some fraudulent transactions will slip through from time to time.

Fraudsters are resourceful. They’re constantly looking for new methods to separate you from your revenue. They don’t really care who becomes a victim of their behavior, or the circumstances in which they act. So, these bad actors came to view the surge in post-Covid eCommerce activity as a great opportunity to commit fraud.

Businesses were already stretched thin by the challenges presented during shutdowns. Fraudsters took advantage of this to try and submit unauthorized transactions at a higher rate. According to the Field Report, a majority of businesses reported an increase in crime between 2018 and 2021, with an average increase of 21%.

THE SOLUTION: Given the dynamic nature of criminal fraud, the only real solution is a multilayer strategy. You should deploy numerous fraud detection tools, including but not limited to:

• Address Verification Service (AVS) + CVV Verification
• Geolocation
• Velocity limits
• Device fingerprinting

If your business gets a substantial amount of chargebacks, consider backing these tools with fraud scoring, which deploys machine learning to examine each transaction for fraud indicators and provide simple, up-or-down decisioning.

Challenge #3: Contesting Illegitimate Chargebacks

THE PROBLEM: Let’s say a customer files a friendly fraud chargeback. You don’t have to simply accept the losses; you can challenge the dispute through the representment process.

Representment lets you “re-present” a transaction to the issuer, along with additional evidence and documentation. You still pay the chargeback fee, and it still impacts your chargeback rate (more on that in a moment). However, you get to recover your revenue, and discourage the customer from attempting to engage in friendly fraud again in the future.

The problem is that representment success rates are depressingly low. Businesses surveyed in the study said they responded to 43% of all chargebacks. However, their net recovery rate, or their win rate as a portion of overall chargebacks issued, was just 12%. If roughly six in ten chargebacks are friendly fraud, then businesses should be contesting—and winning—a much larger share of chargebacks.

THE SOLUTION: Many businesses make the mistake of relying on automated representment processes when it’s a complex process that demands direct human involvement. You can’t send out formulaic responses or limited evidence. You need a tightly-written, yet comprehensive rebuttal letter, supported by a significant amount of compelling evidence. Receipts, transcripts of any communication with the customer, tracking and delivery information, printouts of your policies—these are all acceptable forms of evidence. Determining which pieces you need depends on the specific case.

Challenge #4: Preventing Friendly Fraud

THE PROBLEM: Friendly fraud can be accidental, deliberate, or even a combination of both. One of the most common friendly fraud sources is buyer’s remorse. In these cases, the buyer may not have intended to commit friendly fraud, but they ultimately do so anyway. In any case, the end result is the same.

Tricky as it can be to prevent criminal attacks, trying to prevent friendly fraud is even harder. Friendly fraud is post-transactional. This means the transaction appears to be legitimate until the moment the cardholder files a dispute. This presents a challenge: how do you prevent something before you know it’s going to happen?

THE SOLUTION: You can’t totally “prevent” friendly fraud. If a cardholder is committed to engaging in premeditated cyber shoplifting, they’re going to do it. These are a small minority of cases though; you can prevent many friendly fraud chargebacks by addressing points that lead customers to file chargebacks:

• Customers experiencing buyer’s remorse? Give them a clear, detailed impression of the goods they’re buying before checkout. This calls for detailed product descriptions, with pictures of all merchandise from multiple angles alongside other objects to give an impression of scale.
• Customers forgetting about subscription charges? Notify them before each charge, especially after the end of a free trial and before the initial charge.
• Buyers can’t identify your charges on their statements? Use clear and identifiable billing descriptors, including your name, URL, and a brief product description.
• Shipping takes longer than the buyer anticipated? Offer tracking information, plus delivery confirmation for high-value items.
• Do they think the chargeback process is easier than a return? Prevent this by ensuring all policies are clearly stated, and making the return process as friction-free as possible.

Challenge #5: Decreasing my Chargeback Rate

THE PROBLEM: Your chargeback rate (also known as a chargeback ratio) is a figure that measures your monthly chargeback issuances as a share of overall transactions. These figures are gauged and tracked by the card schemes. You have a different chargeback rate for each card brand.

This is one of your business’s most vital KPIs. If your chargeback rate exceeds the limits set by Visa, or those set by Mastercard, the card network will place you in a chargeback management program. This will entail much higher fees and more restrictions on your business. If you’re unable to get your chargeback rate under control by the end of the program period, your merchant account could be closed. This would make it difficult—if not impossible—to secure another Merchant Account Provider and process card payments.

If you’re on the brink of breaching Visa or Mastercard chargeback thresholds, this is more than a question of profitability and revenue. It’s a matter of life and death for your business.

THE SOLUTION: You can enroll in chargeback alerts as a way to provide some short-term breathing room if you’re close to breaching chargeback thresholds. While certain businesses could gain from alerts that give you advance notice of a dispute, letting you refund the buyer before a chargeback happens, others would benefit from a system that allows you to manage and streamline the dispute process after a chargeback has occurred. According to the Field Report, the average business saw a 19% reduction in chargebacks thanks to alerts. Network inquiry programs like Verifi Order Insights and Ethoca Consumer Clarity are options, too. These programs offered an additional 17% decrease in chargebacks, on average.

Taking a Wider View of Chargebacks

In the long term, managing chargebacks plays into your ability to prevent disputes from happening, regardless of their source. That’s why it’s important to view chargeback management as a holistic process.

Stopping criminal fraud and friendly fraud aren’t distinct, unrelated questions. They need to be part of an integrated strategy to identify chargeback sources using machine learning and human oversight. Only then can you deploy the right tools and tactics to mitigate those threat sources.

Chargeback management isn’t a step-by-step checklist of items. It’s a comprehensive plan.

Interested in learning about third-party tools for managing chargebacks?

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