The Cost of Chargebacks

Though accepting credit card payments is beneficial to a business, chargebacks can cause major drawbacks. We covered a few aspects of the chargeback process here and here. In this post we’ll discuss how to avoid chargebacks. If a customer disputes a transaction for one reason or another, the merchant will have to go through a rather complicated process, during which he not only loses a sale, but also costs incurs unnecessary fees. Chargebacks involve quite a number of stringent processes and complex procedures, which may end up with the merchant losing out financially.

Simple guidelines on how to avoid chargebacks

• Obtain an authorization approval for every transaction.
• The transaction amount must never exceed the authorized amount.
• Avoid using voice authorizations, for example over the phone authorizations, unless absolutely necessary.
• If an authorization approval is more than seven days old, you are required to reauthorize the transaction, before settling it.
• Always ask for the card security codes: Visa’s CVV2, MasterCard CVC 2 and Discover’s and American Express’ CID.
• Your refund policy should be clearly visible on your website. Make it a requirement that customers read the policy before their order can be processed.
• Refund in a timely manner Failure to process credits in a timely manner can result in Chargebacks for “credit not issued.” Also inform your customer on how long it will take before the refund will hit their account.Process refunds as quickly as possible. In addition, inform your customers by email when a refund has been issued. Notify them of the date the refund was processed and provide a reference number.
• Make sure your billing descriptor is properly set up and shows your phone number, so that if there is an issue, your customer can contact you directly rather than calling her card issuer to dispute the transaction.
• Make available a customer support phone number and email address on your website so that customers can contact you directly. In fact, you cannot open a merchant account without first meeting these requirements — and that is a good thing.
• Communicate your terms and conditions clearly on your website. Also, they must be present on the same checkout screen that shows the total transaction amount or on one of the website pages your customer is accessing during the checkout process. Require customers to acknowledge acceptance by clicking on an “Agree” or a similar affirmative button.
• Notify your customers by email of the details of each transaction and indicate that their cards will be charged.
• For monthly fees or other recurring payments, obtain your customers’ written or electronic signatures, giving you express permission to charge their cards on a regular basis.
• Make it easy for your customers to discontinue a membership or subscription and cancel a recurring plan — have a “no-questions-asked” policy.
• Make sure that you provide your customers with all possible contact information and good customer service. This way, you will encourage them to channel their complaints to you first, before calling up their issuing bank to request a chargeback.
• Be clear with your return policy, as well as your shipping policies, and make sure that your customer clearly understands them before dealing with you.
• Always send confirmation emails to your customer. These should be automated ones which contain the invoice. Once shipped, send another confirmation e-mail providing shipping details and tracking information.
• When the shipping address is different from the billing address, try to confirm the information and exercise extra caution.
• Many consumers ask for a chargeback when they do not recognize the charge being made on their credit card statement. Thus, make sure that your company name and a clear transaction description will be reflected on their bill.
• Contact suspicious orders–Call, fax or email any large or suspicious orders to ensure the order is legit. If you are unable to reach the customer, you might have intentionally been given incorrect contact information. Issue a refund to prevent a Chargeback by the credit card holder.
• Duplicate transactions-Ensure that transactions/orders are only made once. Entering the same transaction more than once (by customers pressing the back button or clicking on the CheckOut button more than once), can result in “duplicate transaction” Chargebacks.

The Takeaway

These are all very basic rules, which everyone should be able to implement without much trouble, and yet merchants routinely ignore them. For some of them, like creating clear return and cancellation policies and sticking to these policies, there is no excuse, but things are often more complex than that. For example, many merchants refuse to ask for the security codes, on the belief that doing so may confuse some of their customers or otherwise put them off and lead to lost sales. More broadly, some merchants try to minimize the amount of information they collect at checkout as much as they can, which, they have found, increases their “conversion rates” and reduces “checkout abandonment”. Well, that may well be true, but such practices also lead, inevitably, to higher chargeback rates, which, as we already noted, can quickly get you in big trouble. Still, the decision is yours.

Author

Eran Feinstein is the founder of 3G Direct Pay Limited.  3G provides global e-commerce and online payments solutions for the travel and related industries  He is a leading authority in the fields of e-commerce, travel and payments, having acquired extensive experience from various parts of the world.