How to Protect Your Merchant Account From Chargebacks
Chargebacks can cost merchants dearly in the form of fees and a high chargeback ratio, but with an integrated merchant chargeback management plan, it’s possible to minimise the fallout. If you’re a new merchant or an established merchant seeking to reduce your chargeback ratio, understanding the kinds of merchant protection from chargebacks that exist will help you establish the most effective strategy for your business.
Pre-Transaction Chargeback Protection
Fraud Prevention Tools
Around 30% of chargebacks occur because of credit card fraud, making merchant fraud prevention tools an essential part of your chargeback prevention strategy. If you can recognise and prevent fraudulent transactions before they occur, the cardholder won’t have to file a chargeback to recuperate the funds.
To prevent criminal fraud, merchants can use a combination of verification tools before processing a transaction through their payment gateway, including:
- Address verification service
- Card verification value
- Multi-factor authentication
- Reverse lookups for phone numbers and email addresses
- IP address tools
- Credit card blacklists
- Calling the customer
Typically, merchant service providers include fraud prevention tools as part of their merchant services package. These adjustable tools allow the merchant to decide which kinds of suspicious transactions to block and which to flag and how high to set transaction thresholds at different times of the year. If you identify that a lot of your chargebacks are coming from true fraud, your fraud prevention settings might be due for review.
Legitimate Customer Chargebacks
Customers issue chargebacks for legitimate orders, as well. They are allowed to do this under consumer protection laws for credit card holders.
There are several common reasons why legitimate customers issue chargebacks:
- The customer didn’t recognise the name on their bank statement.
- The goods didn’t arrive in the expected timeframe.
- The goods didn’t arrive at all.
- The goods received did not match the order.
- The goods received were not as advertised.
- The customer was charged incorrectly for their order.
Some customer-issued chargebacks are malicious and occur when the customer receives the goods but is trying to avoid paying for them. They might wait several weeks or even months and then dispute the charge, saying that the products never arrived. These are known as “friendly fraud chargebacks”, but in reality, they are anything but friendly!
Preventing Chargebacks from Legitimate Customers
To prevent merchant error chargebacks and chargebacks from friendly fraud, merchants need to improve processes on their end. Third-party chargeback protection services can only help when merchants have their own processes and procedures in order:
- Have a clear and consistent billing name that appears on customers’ bank statements
- Inform your customers about how your business name will appear on their bank statements as part of your “thank you for your purchase” message
- Have a clear returns and refunds policy
- Train staff regarding correct billing practices
- Use tools that automatically block a repeat charge
- Have customer service representatives available all the time during business hours (or more) to answer questions and resolve problems with a customer’s order
- Issue refunds promptly
- Communicate with customers if there is a shipping delay or if a certain item they ordered has run out
- Require a signature on delivery and keep records of delivery confirmation
- Follow up with customers to ensure they received their order and that they are happy with it
Post-Transaction Chargeback Protection Services
If you can prevent fraudulent transactions and eliminate merchant error, you should be able to lower your chargeback rates significantly. However, no prevention system is perfect and there will still be some customers who initiate chargebacks because of a perceived error, criminal fraud or intentional chargeback fraud. For these cases, there are two kinds of chargeback protection services that can help you protect your business:
- Chargeback alerts
- Chargeback deflection services
With chargeback alerts, merchants are notified as soon as a customer disputes a charge, giving you 24-72 hours (depending on the card network) either to issue a refund before the chargeback is processed or to allow the chargeback to go through, at which point you can contest the charge. This is a paid service that costs you money for each alert, but it comes with the guarantee that you won’t be double-charged as long as you issue the refund in time.
If you get a lot of merchant error chargebacks, signing up for alerts through Verifi’s Chargeback Dispute Resolution Network (CDRN, by Visa) and Ethoca (MasterCard) could help you to lower your chargeback rates and save money on chargeback fees, which can add up to as much as 2.5 times the disputed amount. However, as this service still costs money, it’s still in your best interest to reduce merchant error to minimise the number of alerts.
Chargeback Deflection Services
Chargeback deflection services are also activated post-transaction but before the chargeback process is complete. In this chargeback protection service, issuing banks are given access to the merchant’s records about a particular transaction so that they can decline requests for fraudulent chargebacks before they occur.
To sign up for this paid service, merchants must contact Verifi and Ethoca and pay the required fee. Their records will then be accessible to issuing banks through Visa and MasterCard’s chargeback dispute resolution networks. If there are significant shipping delays due to an unforeseen circumstance or you experience a lot of friendly fraud, this service can help you prevent chargeback disputes before they occur.
Some payment processors offer their own chargeback protection solution that guarantees you won’t have to deal with a chargeback as long as you have appropriate fraud prevention tools in place. Through a process of fraud scoring, the processor determines whether you’ve done enough to prevent chargebacks due to fraud and agrees to cover any chargebacks that you incur on approved transactions. This protection may come at an added per-transaction cost.
If your payment processor offers this kind of protection (essentially a form of insurance), it’s important to read the terms and conditions carefully so that you know which transactions are covered. Chargeback reason codes often change annually and you need to know which codes will be covered and what kind of chargeback those codes represent. There may also be an annual limit for coverage, so it’s important not to go beyond that.
Analyse Chargeback Sources
Ultimately, the best chargeback management strategy for your business will be tailored to the kinds of chargebacks you receive. It’s important to analyse your past chargebacks and chargeback disputes to identify the source of the problem and prioritise the actions you need to take.
It’s also important to compare several chargeback protection services to see exactly what each one offers and the cost vis-a-vis how much you’ll save. If you already have chargeback insurance through your payment processor, you don’t need to take out chargeback insurance through a separate provider. Instead, focus on services that aren’t included, like chargeback deflection services or reducing merchant error.
Why It’s Important to Keep Your Chargeback Rates Low
We’ve mentioned the high cost of chargeback fees, but there are several other reasons that it’s important to prevent chargebacks:
A high number of credit card chargebacks can lead to your business being placed on an excessive chargeback program (ECP) with your merchant acquiring bank, leading to higher rates and additional fees.
Merchant Account Termination
Merchants who fail to bring their chargeback ratios down may have their merchant account terminated and be placed on the MasterCard MATCH list—essentially an industry blacklist that could prevent others from working with you.
Damage to Customer Relationships
Inadequate fraud protection and frequent mistakes with orders can damage customer relationships and give your business a bad reputation. A customer who receives a prompt refund will be far more likely to recommend your business and make additional purchases in the future.
The Best Strategy Will Be Tailored to You
After reviewing the top protection services out there, it should be clear that there is no one-size-fits-all chargeback protection strategy. Each merchant will need a range of chargeback protection services that address the most common sources of chargebacks for that merchant.
After analysing your chargeback data, improve any in-house processes that you can and talk with your payment processor about any chargeback protection services they can help you with. Finding a payment processing partner who can work with you to develop a tailored strategy will ultimately be your best line of defence.