How to Prevent Chargebacks as a Merchant: A Complete Guide

Tired of chargebacks stealing revenue and interfering with your business’s growth? Want a stable, proven-effective strategy that can easily adapt to industry changes? We’ve got what you need!

Use our comprehensive guide to get started. 

Before you can prevent chargebacks, you have to know why they are happening. Then, you can put a plan in place to stop future disputes.

Every chargeback is accompanied by a reason code — a description of why the cardholder’s bank (issuer) filed the dispute.

Each card brand (American Express^®, Discover^®, Mastercard^®, and Visa^®) has their own set of reason codes.

Go back through the chargeback notices you have received over the last 3-6 months. Make a note of the reason code for each. 

Once you have a list of your most common reason codes, you’ll want to consolidate and condense everything.

The card brands each have their own codes, but they all lump those codes into four general categories.

For example, American Express code C28 Cancelled Recurring Billing and Visa code 13.2 Cancelled Recurring Transaction are both cases of a cardholder dispute. 

These broad categories can help you start to narrow down your strategy. 

For example, if 90% of reason codes are fraud related and 10% are cardholder disputes, you don’t even need to worry about preventing authorization and processing error disputes.

A reason code gives you a good idea of why the bank thinks a transaction should be disputed. 

But it doesn’t tell you a cardholder’s underlying motive.

To get that information, you’ll need to drill down to the real reason for chargebacks. We’ve identified three main causes.  

1. Merchant error: You made a mistake while processing the transaction. 
2. Criminal fraud: A fraudster used a cardholder’s account or card without permission to make an unauthorised purchase. 
3. Friendly fraud: The cardholder used the chargeback process incorrectly — either intentionally or because of confusion. 

It’s important to gather this information because it can influence your chargeback prevention strategy. 

Consider this example — a single reason code could have two different causes.

If the chargeback was the result of a mistake on your part, all you have to do to prevent future chargebacks is make sure your team and technology are following through on cancellation requests. But if the chargeback was a case of friendly fraud, your response would be different.

For example, maybe you need to send a reminder email before charging the card and include instructions on how to cancel.

Before you go any farther in your chargeback prevention strategy, it’s important to understand a couple limitations and realities. 

First, it is impossible to completely eliminate the risk of chargebacks. 

Chargebacks are a consumer protection mechanism rooted in U.S. federal law. 

Any solution provider offering complete chargeback protection isn’t being fully transparent. 

Second, some chargebacks are easier to prevent than others. 

Remember our simplified classification system? 

1. 1. 1. Merchant error
      2. Criminal fraud
      3. Friendly fraud

    

If we were to place those three categories on a scale from ‘easy to prevent’ to ‘difficult to prevent’, it would look something like this:

Merchant error is pretty easy to prevent. You’ll want to continuously audit your internal processes and procedures. The fewer mistakes you make, the fewer chargebacks you’ll receive. 

And with the right technology in place, criminal fraud is also relatively easy to detect and prevent. A fraud detection solution can look for common indicators of fraud and decline transactions that are likely unauthorised. 

But friendly fraud is harder to prevent. 

It’s more ambiguous. It can’t be traced back to an easily defined activity — like stealing a roommate’s credit card or shipping a red bag instead of a blue one. 

Friendly fraud is driven by the consumer’s preferences, emotions, opinions, beliefs, morals, or fears. And those factors can fluctuate significantly by person and instance. It’s very hard to predict an action and proactively work to stop it from happening. 

However, that doesn’t mean it’s impossible to manage friendly fraud. 

You just have to have the right strategy in place.

The more complete your strategy, the more chargebacks you will prevent. And a complete strategy usually involves dozens of different management tactics, implemented at various points along the customer journey. 

Some layers in a multi-layer strategy involve technology. 

There are several tools that can help prevent fraud and chargebacks — and you should definitely consider using them. We’ll explain available options later in this guide. 

But before you turn to outside help, see what internal updates you can make to reduce risk. There are probably dozens of small changes you can make that will have a major impact. And, most things you can do for free!

Sell high-quality goods and services. Don’t offer subpar, damaged, or counterfeit items. Disputes are justified if you are selling items of little or no value.  

Write detailed, accurate product descriptions. Be as detailed as possible. The more clarity you can provide, the less chance there is for confusion or misaligned expectations. 

• If you sell physical merchandise, share details about materials used, size, and weight. Include photos of the item. Take shots from different angles. Zoom in on details.
• If you sell digital goods, mention the file size and type. Include screenshots or other tangible evidence of your merchandise. 
• If you sell services, clearly outline what can be expected. Explain how and when the service will be performed. 

Mentioned applicable licences and certificates. Take advantage of opportunities to prove the validity of your business. Customers may be less likely to dispute purchases if they feel you are credible. 

Make sure your marketing efforts are honest. Don’t overpromise and underdeliver. That’s just asking for trouble!

Test different price points. See where the sweet spot is to balance profits with perceived value. You don’t want to charge more than the customer is willing to pay.  

Look for high-risk products or services. Are some of your items more prone to chargebacks than others? Consider removing items from inventory if they cause higher-than-normal chargeback activity.

Write clear billing descriptors. A billing descriptor is the short purchase explanation that appears on a cardholder’s statement or online banking portal. Make sure yours is easy to recognize. 

• Your processor might automatically use your legal business name, but you want your descriptor to be your “doing business as” name. If your legal business name isn’t something your customers will recognize, ask for an edit.
• Make test purchases to ensure your billing descriptor is clear for all card brands (American Express, Discover, Mastercard, and Visa) and all card types (credit and debit). 
• Use abbreviations if necessary. You don’t want critical information to be truncated. Most descriptors are only 20-25 characters long. 
• If you can, include your customer service phone number in your descriptor (but only if someone is available to answer calls 24/7).

Manage currencies correctly. Always process transactions in your local currency unless the cardholder specifically asks to use a different currency. Tools like Dynamic Currency Conversion (DCC) make it possible to process in the cardholder’s currency instead of yours. However, there is usually a fee for this service. Unexpected surcharges can easily lead to disputes.

Send order confirmation emails. Once you’ve processed a transaction, immediately email the customer. This notification serves two purposes. First, cardholders can refer back to your message if they later don’t remember or recognize a charge to their account. Second, the cardholder can more easily detect accidental purchases. For example, a child might make an in-app purchase with a parent’s stored credit card. The cardholder could reach out to cancel or refund the purchase without resorting to a chargeback. 

Clearly disclose subscriptions and trial offers. If you use a recurring billing model, you need to be super clear about how and when a card will be charged. Failing to share important information will understandably lead to chargebacks. 

Remind customers of upcoming charges. If you use a recurring billing model, make sure customers know about upcoming charges. You might even want to include a link to your cancellation policy. If you are going to lose a customer anyway, it’s better to proactively cancel a subscription than receive a chargeback. 

Ask for the expiration date. Some chargebacks are only valid if the card has expired. If you don’t request this information, the bank might not be able to block invalid disputes. 

Settle transactions by the deadline. A transaction isn’t complete until it has been settled. Most businesses settle transactions immediately or in a batch at the end of the day. If you choose to prolong the settlement process, make sure you are still within card brand timelines. If you take too long to settle a transaction, it automatically qualifies for a chargeback. 

Request authorization for all transactions. During the authorization process, the issuing bank will advise you to either approve or decline a transaction. Most transactions are approved, but there are a couple reasons why a purchase should be declined — for example, the cardholder’s account doesn’t have sufficient funds or the card has been reported stolen. Declining appropriate purchases can help avoid chargebacks.  

Use authorization holds correctly. An authorization hold allows you to freeze funds until you can settle the transaction. This is helpful for delayed charges — like at hotels or car rental companies. But if you don’t manage the hold properly, the transaction automatically qualifies for a chargeback.

Promptly fulfil qualified refund requests. It can take a few days for a refund to reach the cardholder’s account. So make sure you act as quickly as possible. Also, tell customers when they can expect to receive the money back in their account to avoid chargebacks driven by confusion and frustration. 

Look for signs of fraud. Fraud detection and prevention technology can help block unauthorised transactions that will result in chargebacks.

Accurately fulfil all orders. Give customers the physical goods, digital goods, or services they ordered. This may seem obvious, but if you provide the wrong item, the customer probably won’t be happy. 

Make sure your order fulfilment timelines are realistic. Take both fulfilment and shipping into account when you put timeline estimates on your website. It might be a good idea to offer a variety of shipping speeds so everyone’s expectations are met.  

Don’t charge the card until the merchandise has been sent or services provided. Customers shouldn’t have to pay for something they haven’t received. 

Use appropriate packing materials. Don’t let merchandise break while in transit. 

Give clear access or download instructions for digital goods. Provide easy-to-understand explanations with step-by-step instructions. Frustration can cause chargebacks. 

Consider providing tracking information. If the customer knows where the shipment is and when it can be expected, there is less chance of a “merchandise not received” chargeback.

Share your contact information. Provide as many contact methods as possible—phone, email, social media and even live chat—and make it easy for customers to find your contact information.”

Check call wait times. The longer someone has to wait to resolve a problem, the greater the risk of a chargeback. 

Quickly respond to emails. Again, the faster you resolve an issue, the better. Make sure your responses are helpful and accurate. 

Use social media for more than marketing. Social media platforms are a great way to promote your business. But customers can also use them for troubleshooting and complaints. Monitor all accounts, and promptly respond to anyone who reaches out. 

Train employees. All employees from all teams can be involved in your chargeback prevention strategy. Help team members understand what’s at stake and how their individual roles play a part in your overall goals. Empower employees to be proactive problem solvers.  

Criminal fraud is one of the main causes of chargebacks. If a fraudster makes an unauthorised purchase, a chargeback is justified. 

Fortunately, there are tools available to help detect and block unauthorised transactions so you can avoid the resulting chargebacks.

3D Secure 2.0 verifies a shopper’s identity by comparing transaction, order, and user data provided during checkout with information the issuing bank has on file. 

When a shopper initiates a transaction on your website, information is sent to the cardholder’s bank in real time. Some example data points include: 

• Transaction amount
• Account number
• Card expiration date
• Email address
• Shipping address
• IP address
• Device information

The issuer uses machine learning to analyse the provided information and determine the likelihood of fraud. Based on the analysis, the issuer will suggest you do one of the following: 

• Approve the transaction because the bank believes the shopper is the actual cardholder.
• Challenge the transaction because the information provided doesn’t match what’s on file or otherwise seems suspicious. Transactions can be challenged with a one-time password sent via email or text. 

3D Secure 2.0 is provided by various third-party vendors. Check our payment technology page if you’d like a recommendation.

Requesting the card security code during checkout can help prove the shopper has possession of the physical card — and isn’t using information stolen from a data breach. 

A card security code is the three- or four-digit number printed on debit and credit cards. This code goes by brand-specific names:

• American Express – Card Identification Number (CID)
• Mastercard – Card Verification Code (CVC)
• Visa – Card Verification Value (CVV)

Once a transaction is initiated, the card security code is transmitted to the issuer in real time. The issuer checks what number is actually printed on the card and sends back a response. Based on the response provided, you’ll likely do one of two things: 

• Approve the transaction because the code provided matches what is actually printed on the card. 
• Decline the transaction because the code provided doesn’t match — and a fraudster is likely attempting an unauthorised transaction. 

If you want to incorporate card security codes into your fraud detection strategy, contact your payment processor. Your processor controls whether or not this technology is incorporated into the transaction processing workflow.

Address Verification Service compares the billing address provided during checkout to the billing address on file with the cardholder’s issuing bank. The idea is that the cardholder would know this personal information, but a fraudster probably wouldn’t. 

When you send the billing address to the issuer for authentication, you’ll receive one of a dozen different responses. For example, both the street address and ZIP code match. Or only the ZIP code matches. Or maybe nothing matches, and it’s likely fraud. 

Based on the response provided, you’ll have to decide if you want to approve or decline the transaction. 

If you’d like to start using AVS, reach out to your payment processor. Your processor can enable this technology for you.

Some purchases go exactly as planned. But other times, either the cardholder or the issuing bank has a problem with the transaction. 

When a transaction needs to be disputed, the issuer will launch the dispute process. If you use a dispute resolution tool, the process will be paused so you can respond. If you don’t respond or you don’t use a resolution tool, the dispute will advance to a chargeback. 

The following is a high-level overview of dispute resolution tools.

Order Insight shares information with issuing banks in real time. 

When a cardholder contacts the bank to dispute a purchase, the issuer can send an Order Insight inquiry. Within two seconds, a response is returned with information such as: 

• The business’s name and contact information
• A description of what was purchased
• The shopper’s contact information

The hope is that additional insights will help clarify the purchase and eliminate the need for a chargeback. 

Order Insight is a Visa product, managed by certified resellers. Check our payment technology page if you’d like a recommendation.

Prevention alerts give you advanced notice of a dispute — usually between 24 and 72 hours — so you can review the situation and determine a response. 

For example, if you’ve issued a refund, you can let the bank know that a credit is already on the way. Or maybe, when alerted, you decide to refund the transaction and resolve the case. 

Usually, once a transaction is refunded, a chargeback is no longer needed.

Prevention alerts are provided by two vendors: Ethoca and Verifi. 

You can integrate directly with each vendor, or you can consolidate solutions via a single provider — like AltoPay. Using a solution provider is usually the best option — for a variety of reasons. Management is simpler, you’ll get better results, and you can easily monitor outcomes. Plus, the price is the same no matter who you work with. Check our chargeback prevention page to learn more.

Usually, revenue loss is the biggest, most noticeable impact of chargebacks. 

No business wants to lose money. But we often hear merchants just accept chargebacks as a cost of doing business because they don’t have the resources needed to manage disputes effectively. 

But managing chargebacks is about much more than avoiding short-term financial losses. If you don’t have a chargeback prevention strategy in place, you could lose your ability to process payments.  

Because other industry members — like your acquirer and the card brands — don’t like losing money either. And they certainly don’t want to forfeit revenue because of your inability to manage fraud and chargebacks. 

So to protect themselves from potential risk caused by their merchants, the card brands have created chargeback monitoring programs. These programs are intended to be both a penalty for excessive chargebacks and a corrective effort to help manage chargebacks more effectively.

If you struggle to effectively prevent chargebacks, you could be enrolled in a monitoring program — and suffer the consequences. 

Here are four things you need to know about monitoring programs.

Industry members use a couple different metrics to monitor risk. Metrics — and how they are calculated — can vary by card brand and processor. But here are the general measurements used most commonly.

• Chargeback count: This metric counts how many chargebacks you receive each month. It’s usually calculated per merchant account and broken down by card brand. 
• Chargeback-to-transaction ratio: This metric calculates the percent of monthly transactions that have a corresponding chargeback. Again, the ratio is calculated for each merchant account and broken down by brand.

It’s your responsibility to continuously calculate and monitor these metrics. And that’s no easy task. It requires accessing data that could be stored in multiple platforms, consolidating it in one place, and regularly running the calculations. 

Even though this can be a challenging task, it’s an essential one. 

A proactive strategy is easier to manage than a reactive strategy. Knowing where you stand means you can quickly adjust your strategy as risk fluctuates. But if you ignore your data and hope for the best, you could find yourself at a point where it’s impossible to recover.

Chargebacks are usually accompanied by a chargeback fee. This fee is charged by the acquirer and used to cover administrative costs. 

If you are enrolled in a chargeback monitoring program, you’ll probably have to pay additional fees — either per dispute or a set amount each month. 

So basically, these fees mean you are paying money to lose revenue. And the longer you are in a program, the more you’ll forfeit.

The card brands set thresholds for risk monitoring metrics, and you are expected to stay below the limits.

The threshold for the chargeback-to-transaction ratio varies but is usually between 0.9% and 1.5%. 

If you go over that limit, you could be enrolled in a program. To get out of the program, your chargeback activity has to go below the limit and stay there for several months. 

That’s where a comprehensive chargeback prevention strategy comes into play. If you’ve been enrolled in a monitoring program, you’ll need a quick and drastic reduction in chargebacks. And implementing the tools and suggestions we’ve shared here, in this guide, can help. 

Check our chargeback prevention page to learn how to get started.

The card brands offer their chargeback monitoring programs as a warning for excessive chargebacks. These programs give you the chance to make necessary adjustments to help lower your risk. 

But the card brands only give you so much time. If you aren’t able to achieve the desired results quick enough, your acquirer will probably close your account. 

If you lose a merchant account, you’ll probably struggle to continue processing payments. And if you can’t process payments, you’ll have a hard time earning enough revenue to stay in business.

Chargeback management is a dynamic process. Even the most effective techniques have to adapt as threats evolve.

To get the best results possible, you’ll want to monitor outcomes and make adjustments when necessary. 

Here are some key performance indicators (KPIs) to keep an eye on.

The chargeback-to-transaction ratio is a metric that’s widely used throughout the payments industry. 

 It calculates the percent of monthly transactions that have a corresponding chargeback. 

Here’s how American Express, Discover, and Visa calculate the ratio:

Here’s how Mastercard calculates the ratio: 

Depending on the card brand, your ratio usually has to be below 0.9% – 1.5%. 

You definitely want to keep your ratio within the limits, but that’s not the only way to think about this KPI. 

Let’s consider a hypothetical example. 

Acme Corporation doesn’t have to worry about breaching ratio thresholds. Chargeback risk is minimal, and their average ratio hovers around 0.4%. One month, out of the blue, Acme’s ratio spikes to 0.8%. 

Should the business not worry because the ratio is still below thresholds? 

No! Any increase or out-of-the-norm activity is noteworthy. 

Ok, let’s consider another example. 

Dunder Mifflin has a 1.3% chargeback ratio and will soon be enrolled in a monitoring program. They need to get their ratio below the threshold — quick. So they do some deceptive things to artificially lower their ratio. 

Should the business celebrate their achievement? 

No! Attempts to conceal problems, disguise risk, or unnaturally improve performance metrics are in direct violation of numerous regulations.

Of course card brand thresholds are important. But focusing on them exclusively probably won’t get you the long-lasting results you’re looking for. Instead, create a strategy that revolves around stability and consistency. And focus on finding a balance between risk and revenue that’s perfect for your business. 

Check our chargeback prevention page to learn more about creating a balanced chargeback management strategy.

Chargeback prevention tools provide a lot of useful data. And that data can help you measure the success of your strategy. 

Start by checking how many chargebacks are prevented by each tool. Here’s an example.

Each business and each strategy is different. However, here are some average benchmarks to compare your results. 

• Order Insight resolves about 10-20% of Visa disputes. 
• Alerts resolve about 30-40% of disputes. 
• RDR resolves about 90% of Visa disputes. 

After you determine results for each tool, calculate the effectiveness of all your tools combined — alerts, Rapid Dispute Resolution, and Order Insight. Like this.

Monitor results over time. If outcomes aren’t what you anticipated, consider changing your management strategy. 

For example, could you integrate your CRM with Order Insight and send dynamic responses instead of static? Could you move from manual alert management to automated so cases don’t expire? Do you need to adjust your RDR filters so you can resolve more disputes?

Most of the time, your chargeback prevention strategy will work exactly as you intended. But other times, things won’t go as planned. 

There are two metrics that can help monitor glitches in your strategy. 

• Overlap is a single dispute case with multiple resolution attempts. For example, a disputed transaction receives both an Ethoca alert and a Verifi alert. 
• Leakage is a prevention attempt that doesn’t stop the chargeback. 

Overlap and leakage are most common with prevention alerts.

Some issuers are a part of both Ethoca and Verifi networks, so overlap can happen. However, it’s pretty rare, affecting between 4% and 10% of cases. 

Leakage can happen for a couple reasons: 

• A refund wasn’t issued quick enough.
• A response wasn’t sent or wasn’t sent within the time limit. 
• Only a partial refund was issued, and the cardholder disputed the remaining amount.
• The issuer made a mistake (new employee, processing error, technical difficulties, etc.)

Like overlap, leakage is rare, affecting about 7-10% of cases.

In certain situations, you may be reimbursed for unsuccessful resolution attempts. 

But to receive financial credits, you need a system to detect, prove, and report overlaps and leakage. Using a robust data platform that consolidates all your prevention cases is the most efficient and transparent way to monitor performance.

Because it’s impossible to completely emanate the risk of chargebacks, your management strategy should look something like this: