The costs of chargebacks are anything but friendly

When it comes to chargebacks by customers disputing a purchase, retailers may feel like they’re at the mercy of always having to pay them. And when it comes to fraud, including friendly fraud, it can be a hard, costly pill to swallow. But with some best practices and knowledge, retailers are in a better position to reduce and refute chargebacks.

The costs of chargebacks are anything but friendly

Feel the power of taking charge when it comes to costly chargebacks

To your customers an honest chargeback may seem like no big deal—they ordered something that never arrived, or they bought it in your store, took it home and it didn’t work so of course they should receive a refund for it.

But what they don’t know is that it costs you more than just the value of the product that was lost or the service that was wasted. From costly fees—usually between $20 and $100 per chargeback—to operational costs including shipping and labor, it’s estimated that chargebacks cost retailers billions each year. And for many retail owners and operators who have worked hard to stay in business during a challenging time, chargeback costs can threaten already thin profit margins. So, what can you do about them?

Knowledge is power, understand the various kinds of chargebacks

Chargebacks are initiated by your customers to dispute a charge for various reasons. To help stay on top of them, the following is an overview of chargebacks.

When is fraud nice? “Friendly fraud” may sound contradictory, and on the whole it is, but there are cases when consumers genuinely believe they didn’t make a purchase and request a chargeback. For example, a man living in New York sees a charge for something purchased in San Francisco—a place where he’s never stepped foot—and for good reason is suspicious.

He assumes someone living in San Francisco has hacked into one of his electronic devices, retrieved his financial information and is happily using it to buy things, including something from you. So he calls his bank and they start the chargeback process. Unfortunately, what he failed to realize is that your company is based in San Francisco and he did make the purchase online.

Another “friendly” example that is definitely not nice is when one of your customers receives their package and knowingly asks for a chargeback because they either can’t afford it or simply decide to steal from you. Unfortunately, as reported by CNBC Select, during the pandemic there has been an increase in this type of friendly fraud.

Beyond “friendly fraud” there are many other reasons why customers will dispute a charge including:

  • They truly never got the product or service
  • There’s a billing error—for example, being charged twice
  • When it arrived, the product was damaged during shipping
  • The product was not what had been described
  • The payment wasn’t authorized by the card holder
  • Straightforward fraud—their credit card information was stolen and used by someone else

In addition, if your customers decide they simply aren’t satisfied with your product or service they can request a chargeback. It may not be successful, but it’s their prerogative.

Best practices to avoid chargebacks

The way you decide to handle avoiding chargebacks can be tricky business. On the one hand one of the last things you want to do is compromise your customer loyalty and on the other the last thing you want to do is go out of business. So, there’s an inherent conflict that wise retailers keep in mind as they work to prevent chargebacks—but some of the following best practices can help.

Your POS should be EMV ready. As of October 1, 2015, EMV compliance—a global payment technology standard that was established by Europay, Mastercard and Visa—required all merchants to be EMV compliant (that is, to have a point-of-sale system that accepts EMV chip-embedded cards).

Since then, there’s been a large increase among retailers to accept EMV payments because if they don’t and there’s a fraudulent charge they’re responsible for it. On top of that, retailers benefit from EMV chips that are easier to protect against fraud than the magnetic strip and taking EMV payments demonstrates to your customers that you’re protecting their cards.

Make sure your descriptions are on point. Retailers hire professional copywriters to write their product descriptions for good reasons—beyond simply selling more, they need to be accurate and showcase your brand. And it can be easy to get carried away with your own products and unintentionally oversell them. So, if you’re a retailer who writes their own product descriptions make sure you take the time to have a number of people read them, compare it to the product and give you feedback.

Damage-proof packaging as much as possible. After your customers place an order, they wait excitedly to receive it and you can imagine their disappointment if it arrives and they’re unable to use it. And if you balk at their request to receive their money back it’s a decent bet that they’re not going to purchase from you again. And damaged products are among the top five reasons why customers send products back, so investing in packaging that protects your goods can be a quick and steady ROI.

Ensure shipping instructions are clear. About that waiting, if your customers start their orders and see that it’s supposed to arrive in say five days but then once they pay and complete their order, they receive a message saying it’s not going to arrive for ten days? They may result in a chargeback on the spot—especially if it’s something they need as quickly as possible. Taking the time to ensure that your delivery and shipping information is accurate all the time can put a dent in your chargebacks.

Make sure the name on the bill is clear. Going back to the example of the customer who innocently initiated a chargeback because he thought he didn’t order the product; part of the confusion in those situations can be that the name on their credit or debit card statement doesn’t make it clear what they ordered. So whenever possible make sure your company name is clear on their statements.

Stay in good communication about subscription payments. Consumers have grown weary of keeping up with sneaky subscriptions that pile up and end up costing them hundreds of dollars each month. Make it a habit to send emails, other electronic messages or even snail mail to remind your customers about their subscription—and take the opportunity to remind them what the advantages are for making their monthly payments. They will appreciate that you aren’t trying to stay quiet, hoping they’ll forget about your services while you continue to receive their payments because when they finally remember they’ll likely cancel and go elsewhere.

Why it may be better to give them a refund

In many situations it’s usually best to give a customer who has a legitimate complaint a refund. First, it’s good customer service that will likely increase loyalty and strengthen your reputation—some stores stake a part of their brand on kind return policies that pay off with more business and loyal customers. Also, when you refuse the return, many customers will resort to chargebacks and that’s when the fees come into play—return their money and you eliminate that part of the costs. Just make sure that you have a plan in place to root out “friendly fraudsters” trying to scheme your return system.

How to win in a chargeback dispute

While it can be time consuming and difficult to prove your case, it’s well within your right to fight the chargeback—but it’s not easy to do. What you’ll want to have in place is some of the following:

  • Have a handy list of chargeback codes to see why the chargeback has been filed and prepare your case accordingly (every credit card service has its own that you can easily find via an online search)
  • Keep and maintain accurate records for every transaction and have a process that allows you to easily access and present that information
  • Try to resolve the issue with your customer—there’s always a chance that there was a misunderstanding that just takes some clarification, but be proactive about it
  • Take action as soon as you see the chargeback—don’t wait to give supporting information to a customer’s bank that demonstrates they’re trying to pull off some “friendly fraud”

Getting back in charge of chargebacks

For retailers it may seem that when it comes to chargebacks the system is stacked against them and it’s true that consumers generally have the upper hand. But, by reducing the amount of issues that could lead to a chargeback and equipping yourself with ways to fight fraudsters, you can level the playing field. And that can place you in control of chargebacks.