What are the reasons for chargebacks? Why are transactions disputed? If you know what caused a chargeback, can you prevent it from happening again?
Chargebacks are complicated, but we’ve come up with a simple way to explain why chargebacks happen.
NOTE
The reasons we list in this article are not the official reason codes that card brands use to classify chargebacks.
Our goal here is to provide a simplified explanation of why chargebacks happen and what you can do about them. The goal is to help you determine the underlying reason for disputes — which can often differ from the reason code that is assigned — so you can solve problems at their source.
CHARGEBACK REASON #1
Merchant error
Merchant errors are mistakes made while processing transactions, fulfilling orders, or supporting the customer experience. If you don’t realize you’ve made a mistake and quickly try to correct the error, customers will likely file chargebacks.
Let’s look at some common ways merchant errors can happen.
- An employee thought she was issuing the customer a credit but she debited the account instead — resulting in an additional charge on the customer’s card.
- During order fulfillment, an employee accidentally shipped size 9 shoes instead of size 6, so the customer received the wrong item.
- When a customer called to cancel a subscription, an employee said he would update the account, but then forgot. The customer received the recurring charge during the next billing cycle.
Preventing merchant error chargebacks
Fortunately, chargebacks resulting from merchant errors are easy to avoid. Frequently review your business practices, processes, and policies and fix any potential issues you uncover.
Consider the following tips.
- Make sure your marketing is honest. You can be flattering, but don’t over promise or deceive customers.
- Follow payment processing requirements — such as authorizing payments to verify funds, complying with Dynamic Currency Conversion rules, and waiting to charge the customer’s card until you ship goods or perform the service.
- Write clear, concise refund and cancellation policies. Publish your policies in places that are easy to find — your website footer, your order confirmation emails, etc. Respond quickly to qualified refund requests and train your staff well so that credits don’t accidentally become debits.
- Optimise your order fulfillment process by giving customers accurate delivery estimates, shipping merchandise in sufficient packaging so items don’t break during transit, and carefully monitoring inventory so customers don’t try to purchase out-of-stock goods. Also make sure staff are familiar with your inventory so the correct merchandise is shipped every time.
Mistakes happen. Sometimes it’s difficult to figure out why. Analyzing your chargeback data can help uncover the underlying issues that cause disputes and chargebacks. And better yet, using chargeback management software — like our AltoShield chargeback solutions — can streamline data analysis and improve efficiency.
Fighting merchant error chargebacks
If you make a mistake, you’ll have to accept responsibility for it — which, in the world of chargeback management means accepting liability for the chargeback.
Customers appreciate honesty and will likely return if you make things right.
The only situation where you could challenge a dispute is if it is invalid. For example, if the customer initiated the dispute after the time limit or if the dispute doesn’t adhere to card network rules.
CHARGEBACK REASON #2
Criminal fraud
Criminal fraud is the result of a fraudster or opportunistic customer using another person’s payment information without permission. These purchases are often called unauthorized transactions, and they typically result in chargebacks.
Criminal fraud can happen in various ways. Here are a few examples of what fraud could look like.
- A fraudster purchases a list of account numbers from the dark web and buys dozens of iPhones to resell on the black market.
- A woman finds a debit card lying on the sidewalk and uses it to buy herself a new purse.
- A college kid hacks into an old roommate’s online account at his favorite local cafe and uses his stored payment information to buy his morning coffee.
Preventing criminal fraud chargebacks
Criminal fraud is a frustration that often catches merchants off guard. The good news is there are multiple tools and techniques you can add to your chargeback management strategy to reduce the risk of criminal fraud.
- Third-party fraud tools can help you detect potentially fraudulent activity and block transactions that will likely result in chargebacks. Reach out to AltoPay if you’d like to learn more about available options.
- Address Verification Service (AVS) compares the billing address provided by a customer during checkout to the cardholder’s billing address on file with the issuing bank. If the information doesn’t match, it could mean that someone other than the cardholder is trying to use the card. Using this fraud solution allows you to detect suspicious activity and stop potentially fraudulent transactions.
- Requesting card security codes (CVV2, CVC2, etc.) during checkout helps confirm that a customer has physical possession of the card. If the number provided doesn’t match what the issuer has on file, it often means a fraudster has gained access to some — but not all — of the cardholder’s information.
- 3D Secure 2.0 (3DS 2.0) uses a combination of transaction-specific information (like shipping address) and contextual information (such as order history) to verify that a customer is who they say they are. This is yet another identity verification tool that can help detect criminal activity.
Fighting criminal fraud chargebacks
Chargebacks — a result of consumer protection legislation — were created because of criminal fraud. Chargebacks were invented to make sure cardholders wouldn’t be liable for transactions they didn’t authorize.
Unfortunately, what that means for you is — you shouldn’t fight a chargeback that results from true criminal fraud.
Card brands hold you responsible for protecting customers from fraud. If you can’t accurately detect and stop criminal activity, then you are liable for the financial losses.
And while that may seem harsh, it’s important to note that criminal activity is a relatively minor threat for most merchants compared to the persistent threat of “friendly” fraud.
CHARGEBACK REASON #3
Friendly fraud
Friendly fraud occurs when a cardholder uses the chargeback process incorrectly — whether it’s an intentional attempt to get goods and services for free or an innocent misunderstanding.
For most online merchants, friendly fraud is the leading cause for chargebacks.
Here are some examples of friendly fraud.
- A customer forgets to cancel his membership before the free trial period ends. When his account is charged, he’s annoyed. So, he calls his bank to dispute the transaction.
- After buying an expensive pair of shoes, a woman feels extreme guilt and regret. Rather than return the shoes for a refund, the customer chooses a more convenient and less confrontational option — clicking the “dispute” button in her bank’s app and claiming the shoes were counterfeit.
- A customer doesn’t recognize a business name listed on his credit card statement and can’t remember the purchases he made. So he contacts his bank and declares the purchase as fraudulent.
Preventing friendly fraud
Unfortunately, friendly fraud is difficult to prevent because it’s often an emotional response to a purchase — you can’t anticipate how a customer might respond to a situation.
But we do have good news. There are some steps you can take to reduce the likelihood of friendly fraud — especially in cases caused by confusion or forgetfulness.
- Make sure every product or service you offer is high quality. Write accurate, detailed, and helpful product descriptions so customers know exactly what they are getting and the product meets their expectations.
- Write easy-to-recognize billing descriptors so customers can understand the purchases that appear on their credit or debit card statements. Use your doing-business-as name or a phrase that customers are familiar with instead of a legal business name. Descriptors might display differently depending on the card brand (Mastercard, Visa, etc.) or card type (credit, debit, etc.). Check to see how your descriptor displays with each.
- Send regular reminders of recurring payments to your customers before processing transactions. In those notices, give customers the option to cancel to avoid a potential dispute.
- Provide exceptional customer service by answering emails promptly, reducing call wait times, monitoring social media, and responding professionally to online reviews (negative or positive). Try to address concerns quickly so that customers feel encouraged to bring issues directly to you instead of the bank.
- Sign up for Order Insight so you can share detailed transaction information with an issuer in real time. That way, when a cardholder contacts the bank to dispute a charge, the issuer can review the information you provided and clarify the transaction.
- Use prevention alerts and RDR so you have the opportunity to refund disputed transactions before they become chargebacks. While these solutions can’t stop friendly fraud from happening, they can help you manage your chargeback-to-transaction ratio and VAMP ratio to prevent threshold breaches.
Fighting friendly fraud chargebacks
Of the three chargeback types, friendly fraud chargebacks are the ones you want to fight.
Unlike the other two reasons, friendly fraud chargebacks allow you to provide evidence that validates the order, proves it was an intentional purchase, and argues the chargeback isn’t valid. Fighting these kinds of chargebacks can help you recover revenue that has been unfairly sacrificed.
If you’d like help fighting friendly fraud chargebacks, the AltoShield team can help. Our technology can help you build effective, efficiency, and accurate chargeback response packages.
Want to effectively manage all chargeback reasons?
Need help managing chargebacks? The AltoShield division of AltoPay can help.
We have decades of experience managing all types of chargebacks. We can help you create a comprehensive chargeback management strategy that addresses all reasons for chargebacks.
AUTHOR
Jessica Velasco
For more than a decade, Jessica Velasco has been a thought leader in the payments industry. She aims to provide readers with valuable, easy-to-understand resources.
