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The 3 Most Common Types of Chargebacks and How You Can Prevent Them

January 18, 2017

Types of Chargebacks
Types of Chargebacks

The 3 Most Common Types of Chargebacks and How You Can Prevent Them

January 18, 2017

According to the LexisNexis 2016 True Cost of Fraud study, online merchants report that 49% of fraud-related revenue loss is a direct result of chargebacks. By beginning to understand online fraud and why chargebacks occur, you can take steps to keep them from happening, which will save you time and money. But before we tell you about the best way to prevent chargebacks, let’s clarify what the different types of chargebacks are:

1.     Merchant error

This includes system errors, clerical mistakes, or anything else that could leave the customer unsatisfied. Some examples are:

  • Goods never received by the customer, or received in an unsatisfactory condition.
  • Credit not processed after the customer returns merchandise or cancels a service.
  • Technical problems with the payment process leading to duplicate transactions or authorization errors.
  • Recurring transactions after the cardholder has cancelled a subscription or similar ongoing service.

2.     Criminal fraud

This is when credit card information is used without the cardholder’s consent. It can happen when a criminal uses a card that they either found or stole, or when a transaction takes place through the use of hacked account information. Chargebacks were created to protect customers from this kind of fraud. When customers see unauthorized transactions appear on their credit card statements, they usually file  chargebacks.

3.     Friendly-fraud

Friendly-fraud is when a dishonest buyer reverses charges, despite having received the merchandise or service purchased. This is the most common type of chargeback, with Global Risk Technologies estimating that approximately 86% of chargebacks occur for this reason. Sometimes friendly-fraud is accidental. A customer will dispute an authorized charge because they don’t recognize a transaction on the credit card statement, or they will change their mind about a service with a recurring charge, such as a subscription-based service.  Other times it is committed purposefully, simply to keep a product, or use a service, without paying for it.

How to prevent chargebacks

Now that you know what the three main types of chargebacks are, you can take steps to prevent them from happening.

Here are some tips:

The authorization process:

  • Make sure to obtain authorization approval for every transaction.
  • Don’t use voice authorization unless unavoidable.
  • If authorization approval is over seven days old, reauthorize.
  • Never allow the transaction to exceed the authorized amount.
  • Obtain signatures for services with recurring fees, such as subscriptions.

Security precautions:

  • Work with a PCI DSS Level 1 certified payment service provider that provides merchant account services including a secure online platform.
  • Ask for card security codes such as Visa’s CVV2, MasterCard’s CVC 2.
  • Proceed with caution when there are differences between shipping and billing addresses.

The refund process:

  • State your refund policy and any associated terms and conditions clearly on your website.
  • Require customers to read and agree to the refund policy before placing an order.
  • Refund quickly before customers have a chance to file a ‘credit not issued’ chargeback.
  • Send customers email confirmations of refunds processed, with a date and reference number.


  • Send email confirmations to customers in a timely manner, with the details of each transaction.
  • Contact customers making a large or suspicious order by phone, fax, or email to confirm it is legitimate.
  • Make a final check by confirming the customer’s ID and getting signatures on orders or receipts.
  • Always be available through multiple channels of communication, with phone numbers and email addresses clearly visible on you site. This is so customers can discuss issues with you, directly, instead of filing a chargeback.

Disputing chargebacks

If a chargeback is filed and there isn’t a legitimate reason for it, you can dispute it and most likely get the chargeback reversed. This is called ‘chargeback representment’, and this can be managed for you by your payment service provider. Here are some tips for how you, together with your payment service provider, can go about disputing a chargeback in the best way possible:

  • Contact the customer. First, find out from your customer exactly what made them file a chargeback. Once you know the reason, you may be able to sort things out. For example, it could be that the customer filed the chargeback erroneously because they didn’t recognize the name of the company associated with the charge on the credit card statement (known as the descriptor).
  • Collect all documentation and evidence, including all correspondence with the customer. Receipts, order forms, delivery confirmation, recorded phone calls, and emails are all valuable proof. Signatures collected during the order and delivery process are also important. Essentially, include anything that proves your customer received the product they ordered.
  • Write a winning rebuttal letter to accompany your compelling evidence. Stick with professional language and pay careful attention to detail, using facts wherever possible.
  • Respond quickly to the chargeback – usually you will have seven days to dispute the chargeback. If you respond in time and provide all the above evidence, you have a good chance of being able to reverse the chargeback.

The #1 way to stop chargebacks

Chargebacks are one of the top challenges of online payments, but in this digital era, with most consumers demanding a way to pay online, merchants must find a way to cater to their needs while protecting their businesses. The best way to minimize the occurrence of chargebacks is by working with a payment service provider that provides advanced risk management services, like real-time transaction monitoring, black lists, manual checks, etc. And when chargebacks do occur, the risk management team of the payment service provider has the know-how to effectively represent your company to get them reversed.

Now that you understand the three main types of chargebacks and how to prevent them, you can protect your business and reduce your losses. Direct Pay Online has an excellent track record for successfully representing merchants during chargeback disputes. In the event that a chargeback does occur, speak to your Direct Pay Online representative to discuss how, together, you can get it reversed.

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