Every e-commerce business must deal with chargebacks, also known as disputes. But some companies have a much higher chargeback rate than others. A higher chargeback rate means you pay more in fees and spend more time collecting evidence to defend your business. However, you can purchase chargeback protection so that you don’t have to spend a lot of time and resources on managing disputes.
What is Chargeback Protection?
In general, chargeback protection is a paid service where the liability of unauthorized transactions and fraudulent payment disputes are shifted from the business to the chargeback protection provider. Many payment processors and fraud prevention companies offer chargeback protection, and the level of protection and associated costs vary among them.
Some providers will fight disputes on behalf of the business and cover the cost of each disputed charge along with the chargeback fee. Many chargeback protection services involve an automated process for inspecting transactions and a “chargeback guarantee.” If a transaction results in a dispute, the service provider will reimburse the business for the chargeback fee and conditional refund.
Why Should E-Commerce Businesses Have Chargeback Protection?
Disputing a chargeback is a time-consuming and complicated process, one that differs for each credit card network. You need to collect evidence to fight a chargeback, providing documentation that complies with the representment processing requirements and supports your case. Common types of documents used to fight a dispute include:
- Proof of Delivery – Delivery receipt and a photo of the package that shows the order was delivered at the location specified by the customer. The receipt should also include a tracking number and shipment route.
- Returns Policy – A copy of the company’s returns policy, and if possible, proof it is easily accessible on the website or mobile app.
- Product Information – Detailed information and photos for the product(s) involved in the dispute, along with links to the product web page(s) on the website.
- Pickup Confirmation – If the delivery for the order was buy online pickup in-store (BOPIS), provide a copy of the signed receipt that shows proof of pickup.
- Customer Communications – Provide any communications with the customer that show acceptance of or satisfaction with the product(s). Communications could be in the form of emails, text messages, or chatbot transcripts.
You have a strict amount of time to dispute a chargeback, and it is easy to miss a dispute notice—many consumers initiate a dispute long after the transaction has been completed. Often, a business does not become aware of a chargeback until after the customer receives a conditional refund. Unexpected debits from disputes put a strain on a company’s finances potentially leading to cash flow issues.
Sometimes a business will win a dispute, only to have the card issuer file a second one for the same transaction. The issuer may have discovered new evidence regarding the case or the reason code for the chargeback was changed. If the issuer files a second chargeback, the business can either accept it or go through arbitration. Arbitration means the company must spend more time and money fighting the chargeback and may face penalties if they lose the arbitration case.
With chargeback protection, businesses can eliminate disruptions in cash flow and the financial uncertainty that come with chargebacks. They don’t have to spend a lot of time and resources collecting evidence to fight each dispute, and they don’t have to worry about getting hit with high fees and penalties.
What Are the Main Causes of Chargebacks?
Chargebacks occur for three main reasons:
- Criminal Fraud
- Friendly Fraud
- Merchant / Business Error
Chargebacks can occur because of criminal behavior on the part of the buyer. Examples of criminal behavior include:
- A fraudster pays for the purchase using a stolen credit card number purchased from a dark web marketplace or credit card information obtained through a phishing
- An individual deliberately disputes a legitimate payment transaction to keep the item(s) they purchased without paying, resulting in a chargeback for the business—this is referred to as chargeback fraud.
Some chargebacks occur because of fraud committed by the e-commerce business. For example, a customer may initiate a dispute because the company sold them a counterfeit product or deliberately didn’t ship the order.
Many chargebacks occur because of friendly fraud. Friendly fraud is where a consumer initiates a dispute due to an honest mistake on their part. For example, a customer might file a dispute because:
- They didn’t recognize the payment descriptor on their credit card statement.
- They forgot about the purchase they made on the company’s website or app.
- A family member made a purchase with their credit card and didn’t tell them about it.
The term friendly fraud is often used interchangeably with chargeback fraud, but they are not the same. People who commit chargeback fraud do it to get items without paying, essentially stealing them. In general, people who engage in friendly fraud don’t have malicious intentions.
Merchant / Business Error
Sometimes customers will file a dispute because of errors made on the part of the e-commerce business. Examples of mistakes that could lead to chargebacks include:
- The charge on the credit card statement doesn’t match the total price for the order.
- The customer is charged twice for the same order.
- The item received doesn’t match the description on the website. For example, the item may be inferior in quality or appearance then what the business described.
Chargeback protection doesn’t prevent e-commerce businesses from making errors. Companies need to pay close attention to errors that lead to disputes, taking steps to avoid them in the future.
What Are the Consequences of Having a High Chargeback Rate?
The fees and penalties for a high chargeback rate vary among credit card networks, e.g., Visa, Mastercard, American Express. If you continue to have a high chargeback rate, you risk getting relegated to one or more chargeback monitoring programs or losing the ability to accept credit cards altogether.
Not long ago, a 1% chargeback rate was considered the acceptable threshold. At the time of this writing, the chargeback rate threshold for Visa is 0.9% of transactions, and Mastercard is 1.5% of transactions. Every credit card network uses different calculations to figure out your chargeback ratio and when you would have to enter a chargeback monitoring program.
Entering a monitoring program means you get hit with additional costs on top of the fee for every chargeback. Each credit card network charges different fees for its monitoring programs. For example, the Visa Dispute Monitoring Program (VDMP) has three tiers for fine assessments: standard, excessive, and high-risk. Visa identifies months on a 12-month basis. Starting at the seventh month, the review fee for the excessive and high-risk tiers is $25,000.
A High Chargeback Rate Is Bad for Your Business
E-commerce businesses require the ability to accept credit card payments on their websites. An ongoing high chargeback rate threatens that ability. Chargeback protection allows organizations to spend less time managing disputes and more time on core tasks that generate revenue.