Chargeback Management Lessons that Businesses Need to Learn From 2021

I get it. As a business owner, there are a lot of matters demanding your attention right now.

Trying to navigate the marketplace in a post-Covid environment is a massive challenge. We’ve seen sudden shifts in consumer behavior, buying patterns, payment technology, and shipping and logistics over the past year. Chargeback management might not be topping your list of concerns at the moment, but you can’t afford to ignore this issue.

Chargeback costs extend beyond just the value of the transaction in question. Yes, you lose the revenue from the sale, along with the cost of any merchandise shipped. However, you also get hit with additional fees to cover administration costs associated with each dispute. Then, you have to account for overhead fees associated with the transaction, like Interchange costs and shipping costs.

Chargebacks present greater risk than ever in a post-Covid environment. That said, you still have abundant opportunities to recover revenue, prevent chargebacks, and grow your business to take advantage of the rapid growth in card-not-present payments. The key is having the right perspective on the topic of chargebacks, and to put the right strategies in place.

With all that in mind, here are some of the key chargeback takeaways from 2021 that you need to keep in mind:

Lesson #1: The Cost of Chargebacks is Going Up

Chargebacks aren’t cheap. The 2021 LexisNexis True Cost of Fraud study found that the average business will ultimately pay $3.60 for every dollar lost this year to fraud and chargebacks. This is a 15% increase in costs compared to pre-pandemic levels.

There are many factors contributing to this increase. Some were direct results of the pandemic; with brick-and-mortar shops closed, and millions of people still choosing to limit their public outings, a lot of consumer spending shifted into remote channels. In turn, fraudsters decided to take advantage of the trend and leverage it as an opportunity to conduct more fraudulent activity, knowing that defenses would be stretched thin.

At the same time, we’ve tracked a consistent upward trend in chargeback issuances, as well as costs, over the last decade. Back in 2016, for instance, LexisNexis found that businesses lost $2.40 per every dollar lost to fraud and chargebacks, meaning that costs have increased by 50% in the last five years. We can attribute this to a combination of changing consumer expectations, technology making it easier for cardholders to dispute transactions, and wider awareness of the chargeback process.

The bottom line: chargeback costs are rising, and consumers are disputing more transactions than ever before. You need to be ready to respond according to the situation.

Lesson #2: Chargebacks Aren’t Just Another “Cost of Doing Business”

There’s a tendency among businesses to view chargebacks as “regrettable, but unavoidable.” It’s a reasonable assumption; after all, if a cardholder has a legitimate complaint and files a chargeback, there’s nothing you can do to prevent that loss.

We have a twofold problem here. First, you have more chargeback prevention options than you probably realize. Second, in many cases, those cardholders’ complaints aren’t legitimate; internal data from Chargebacks911® suggests that roughly six out of every ten chargebacks filed by 2023 will be cases of friendly fraud. 

The solution is to break chargebacks down by one of three basic sources: friendly fraud, criminal fraud, or business error. As outlined in a previous post, though, identifying chargeback sources is a common problem for businesses. 

Lesson #3: You Have the Power to Prevent Many Chargebacks Before They Happen

Chargeback management isn’t a purely reactive process. If done correctly, you can diagnose recurring chargeback triggers and identify patterns among disputes. You can then eliminate many of them before they happen.

With chargeback source data at your disposal, you can build out a strategy that’s customized to your unique business needs. For example, let’s say that you notice a lot of chargebacks issued against you are related to your return policy. Cardholders repeatedly claim that the policy is unclear, or that it discourages them from requesting a refund, and choose to file chargebacks in response. By tweaking the wording on your policies page, you may be able to prevent these chargebacks from happening.

In another example, maybe you notice repeated chargeback issuances tied to fraudulent transactions submitted by buyers in a specific country or region. You can choose to automatically flag transactions submitted by buyers from the region in question, and either blacklist them or subject them to manual review.

There are dozens of different strategies you can deploy to prevent chargebacks.

In-house tactics include:

• Creating detailed product descriptions with high-res images from different angles.
• Communicating order and shipping status.
• Providing round-the-clock customer service.

Tactics that require third-party service include:

• Leveraging a Merchant Account Provider that offers chargeback alerts.
• Using multiple tools to detect fraud from different sources.
• Deploying fraud scoring to flag and reject suspicious transactions.
• Enrolling in network automated programs like Order Insight and Consumer Clarity

It’s important to note that if your business gets a substantial amount of chargebacks, the latter third-party service options would be ideal. For businesses that get infrequent chargebacks, boosting your in-house tactics and partnering with a Merchant Account Provider that can alert you to chargebacks and streamline the dispute process would be a good fit to support your business.

Lesson #4: You Should Fight Back (When Appropriate)

Adhering to best practices will help you prevent business error chargebacks. Also, you can prevent criminal fraud chargebacks by deploying fraud detection tools in an intelligent, coordinated manner. It’s a different story for friendly fraud, though.

You won’t typically have any indication that a friendly fraud attack is underway until the moment the cardholder calls the bank to dispute a charge. There are some based practices that can help avoid these incidents, including:

• Simplifying the cancellation process for recurring payments.
• Reminding the cardholder of upcoming rebills before charging the card.
• Using clearly identifiable billing descriptors so that the cardholder can recognize your charge.
• Using delivery confirmation for high-ticket value items.

Generally, though, friendly fraud operates by catching you off-guard with an unanticipated chargeback. This is especially true when a cardholder engages in “cyber shoplifting,” and deliberately abuses the chargeback process. When that happens, your best option is to fight the dispute through the representment process.

Engaging in representment gives you a chance at recouping some funds lost to chargebacks. You’ll still be responsible for the non-refundable chargeback fee, but you can claw back the revenue from the initial sale. Plus, it helps retrain consumer behavior by discouraging future abuse of the chargeback process.

Representment is a complex, time-consuming process, though, and there’s no guarantee of success. In fact, businesses report that they only successfully represent transactions in about 12% of cases when self-managing their representments. You can’t let that discourage you, though, given what’s at stake.

Lesson #5: Adapt to Changing Customer Expectations

You can rely on your in-house staff to handle aspects of chargeback management like business error detection and representment. You can also opt to work with a third party, which could offer a better long-term ROI compared to in-house efforts. But, regardless of which direction you take, you can’t afford to ignore chargeback management any longer.

Consumers’ expectations change quickly in the card-not-present space. Buyers adapt to new technologies that offer greater convenience, then start to view that as their new baseline standard for acceptable service. You have to keep pace with changing consumer expectations to avoid a sudden surge in chargeback issuances from unsatisfied customers.

Contemporary buyers expect:

• A seamless experience across different devices and channels.
• A personalized service that caters to their individual preferences.
• Instant, round-the-clock response to questions and inquiries.
• Unique experiences that build affinity for the brand itself.

Card-not-present commerce will never be the same as it was pre-Covid. However, we should also acknowledge that a lot of what’s changed was already inevitable, based on the state of technological development.

These changes we’ve observed over the last two years aren’t temporary. Thus, taking these lessons to heart will be essential for your business's continued success.

Were any of these lessons surprising to you? Which will you take back and start implementing for next year? Tell us in the comments section below.