Any business accepting credit cards over internet these days eventually needs to face with a threat known as the chargeback. If you're unaware, this is when a client who purchased from you using their credit card, reverses their order and gets their money back.
Chargebacks were introduced four decades ago to protect consumers and to build public confidence in using credit cards, however since the rise of Card-Not-Present transactions (e-commerce, MOTO...), this have had very unintended consequences. The ease at which someone can initiate a chargeback has created a whole class of consumers who will play the system to get something for nothing; these chargeback scams are known as friendly fraud, but there is nothing friendly about it.
Although merchants can dispute the chargeback requests by opening a case with the bank against it and providing proofs against the client's statements, this isn't always an easy (cheap) task and the client wins in most cases.
Let us examine the common chargeback reasons and go through steps you should be making to avoid any type of chargeback.
Behind every chargeback there has to be a reason which cardholder states to their card issuing bank. There are many "reason codes" possible, but to make things easy we can narrow them down to 4 categories:
Technical Reasons - When an unwanted charge occours due to technical errors by processors including authorization of expired card or insufficient funds.
Clerical Reasons - Simply put these are human errors, for example unwanted duplicate charge, incorrect amount, not responding when client is asking for a refund.
Quality Reasons - When a client is not happy with the service or product, receives it late or not at all. As seen in above statistics these are the second most common reasons.
Fraud Reasons - Scary as it may sound, these are the most common reasons for chargebacks. Fraud means the client's card was charged without their authorization, which happens due to identity/card theft or a friendly fraud (clients illegitimately use the chargeback mechanism to get their money back).
MerchantScout Tip: There are companies offering dedicated chargeback management and prevention services. If you are faced with "friendly fraud" or want to adopt the best practices on chargeback prevention, try Chargebacks911.com.
Good customer support - Be available through different channels during any hour of the week and reply promptly. Unhappy client will probably express their concerns with you before going to their bank, so giving them a chance to speak with someone on the phone will most likely save you from an unwanted chargeback.
Be detailed - Make sure you present your products or services with as much details as possible, with correct pricing and clear terms, and you will avoid chargebacks due to clients stating they have received something else from what was being promised.
Manage Recurring Charges - Inform your clients in advance, make sure they receive your notice of any automated recurring charges. Cancel the subscriptions and do not make further charges when a client unsubscribes. In case of free trials use bold visible letters and email to inform your client when exactly the charges will begin and for what amounts.
Keep clients informed - Use automated email responses for received enquiries, send out shipping and delivery confirmations, inform the client about any potential issues associated with shipping or their pending orders.
Offer refunds - Have a friendly refunds policy by allowing clients to ask for their money back for a set period of time and do not complicate when they do so, be fast instead.
Important: Billing Descriptor - Make sure your client knows what text will appear on their credit card statement (billing descriptor). If they don't recognize your transaction, they will surely call the bank and make a chargeback without letting you know.
Authorize only - Set your payment form to make an authorization only (reservation of funds on card). After that you have several days up to 2 weeks time to verify the client, by phone for example. If client passes your verification, you can "capture" the previously authorized transaction; if not, you leave it and it expires without the charge taking place.
Ask for CVV code - On your website payment form ask for Card Verification Code and set it to mandatory.
Limit charge attempts - If your gateway provider doesn't have built-in velocity filters and fraud prevention tools, set your own custom limits on your payment form and allow for example up to 5 attempts on a specific card before blocking it for 24h. This way you avoid further unwanted attempts. Use various combinations and set of rules for which you might want to block further attempts (same e-mail, IP address, etc...)
Monitor client location - Compare the country from which client is accessing your site with country where the card has been issued, if they are different do not allow the transaction without further verification. Most gateways offer this type of filtering.
Use Address Verification System (AVS) - If taking clients from USA, Canada and UK, use AVS to verify if the client's billing address matches the one on file with their credit card issuer.
Although 5 years ago merchants did not prefer to use 3D, claiming it hurts their conversions because clients get confused, we can gladly say today consumers are used to it and in many EU countries almost every merchant is using 3D Secure.
3D Secure is an additional authentication step during a checkout process in which a client is redirected to a secure payment form where they enter their personal password assigned to their card. Visa calls it Verified by Visa (VbV) and MC calls it MasterCard SecureCode (MSC). It is the most recent and modern tool to prevent fraud and chargebacks in general.
Main advantage of using 3D is a so-called Liability Shift - when a card passes 3D verification, you as a merchant get protection against the chargeback from most common reasons. The mandatory use of 3D is in many cases a condition to get approved if you are a startup merchant or applying for a high risk merchant account, or in case of increasing chargeback levels.
If you need a near chargeback-proof way to accept credit card payments, you might want to consider preparing in advance. By asking clients to sign the transaction agreement and perhaps even add a scan of their card and/or ID, they can never win a chargeback case against you by claiming they have not authorized the charge. Such process can disturb some clients, but will definitely eliminate any fraudsters in advance.
We hope we've summed up the chargeback prevention tips in enough detail to hopefully improve your online or MOTO merchant account chargeback levels. If you have any further questions, feel free to contact us.
Our team has over 10 years of experience helping merchants, from startups to those with past high chargeback levels, get approved fast and with low rates. Get in touch with us and we'll do our best to arrange a solid merchant account solution with one of our +30 acquiring bank partners, ISOs and Payment Facilitator partners across the globe.