Your Guide to Managing Chargebacks and Reducing Fraud Losses

What are ecommerce chargebacks?

An ecommerce chargeback is a transaction made on an online store that is disputed by the buyer. The customer disputes a charge that they believe is invalid and the credit card company returns the fee, charging the retailer. As an ecommerce retailer, chargebacks cost you lost revenue and a small fee.

A chargeback involves three parties: the customer, the retailer, and the processing bank. The cardholder reports a chargeback to the bank, and they return the payment to the customer. The bank then negotiates the dispute with the retailer, determining if the transaction was handled properly.

How do ecommerce chargebacks work?

After a chargeback dispute is filed from a bank, you as a retailer must provide details of the transaction to justify why the transaction was approved. The bank will provide details about the reason for the chargeback (often in the form of reason codes), and the retailer has a short window of time to respond to the bank and justify the chargeback.

Having a high-quality chargeback management system that protects against fraud and helps you manage chargeback disputes will save you lost revenue and allow you to approve more valid orders.

Why ecommerce chargebacks occur

To address the problem of chargebacks, you will first need to understand where your chargebacks are coming from. Analyze the sources and causes of chargebacks on your online store, and use your learnings to improve your checkout to better defend and protect against chargebacks.

• Returns and cancelled transactions: In most cases, these are legitimate chargebacks. However, they still negatively impact your chargeback rate and revenue.
• Affiliate fraud: When malicious affiliate marketers allow a lot of fraudulent transactions to drive up their revenue, cashing out before the merchant is aware of the fraudulent activity.
• Fulfillment issues: Problems with packaging, shipping, and delivery can all lead to chargebacks. Customers that are no longer satisfied with the product or experience request a chargeback, impacting your bottom line.
• Miscommunication or lack of clarity: As customers ordering online are unable to deal with a service representative, they are unable to ask questions and get support throughout the process. Failure to make the process clear leads to chargebacks, as the customer feels they were not given all the information they needed upfront.
• Authorization and processing issues: These often occur on your or the payment processor’s end. Both negatively affect your revenue, and should be tracked to allow for improvements.

Chargeback costs and fees: what do chargebacks cost you?

Chargeback fraud costs online retailers much more than the initial fraud. In fact, starting in 2016, each dollar of fraud cost retailers $2.40 and by 2018, this had risen to $2.94 per dollar of fraud. This is because retailers are charged a fee when a chargeback occurs. On top of these, marketing efforts have been exhausted to get customers to the point of purchase, and with a chargeback, that money has gone to waste.

These added costs are due to how chargeback fraud is handled. Here are the main reasons chargebacks cost retailers more than the initial fraud:

Credit card processing fees

Retailers pay the credit card processor a small percentage for each transaction processed using their card. When a transaction results in a chargeback – regardless of whether it was the retailers fault or not – the retailer does not recoup these processing fees. This means that the retailer is out any processing fees paid on a fraudulent chargeback.

Acquiring bank fees

When a retailer receives a chargeback from a transaction, the acquiring bank also adds a chargeback fee (typically between $20 and $100) to cover the costs the acquiring bank absorbs from the chargeback process. Fees are calculated based on the risk associated with the retailer. When a chargeback dispute is filed and confirmed, the retailer is not returned this chargeback fee and they have to absorb this expense.

Elevated chargeback ratios

Acquiring banks monitor the chargeback ratios of retailers, to help protect against risk. Online retailers that experience high chargeback ratios will have higher costs associated with these transactions, as the bank sees the merchant as risky. In a serious case, the retailer can even be blacklisted. Either way, maintaining a low chargeback rate will help avoid these additional costs.

Operational costs

There is more to the cost of chargebacks than just the fees. There are also the upfront investments you’ve made, including operational expenses. This includes the value of the product lost, the labour and time it took to process, ship, and deliver the goods, storing and inventory costs, shipping fees, and running the fraud management system. These are all upfront costs spent that have now been lost.

Marketing expenses

Advertising your product and enticing customers to buy takes time, effort, and money. When you incur a chargeback, you’ve also lost all of that time, effort, and exposure attracting attention and drawing customers to your product.

How to calculate ecommerce chargeback rate

The ecommerce chargeback rate (or the chargeback-to-transaction ratio) is calculated by dividing the total number of chargeback cases each month by the total number of transactions per month. This gives you the percentage of chargebacks that occured on all transactions across your ecommerce platform.

The chargeback rate formula can be represented as follows:

What is an average ecommerce chargeback rate?

An average, good, or bad chargeback rate varies depending on a number of factors, including the industry, sales history, and type of product you sell. As such, companies aim to stay below the standard maximum chargeback rate of 1%, as set by top credit card processors. Always maintain a chargeback rate below 1%.

A chargeback rate above the 1% industry maximum standard will result in you being labelled a high-risk merchant, which can cost you business with major credit card processing companies. Because of this, most companies use this as the benchmark to stay below, optimizing to reduce even further when possible. To gauge your chargeback rate, use industry averages as benchmarks.

How to manage and prevent ecommerce chargebacks

Whether or not you are struggling to keep your chargeback rate below 1%, you should always be optimizing your buying experience to reduce your chargeback rate. By keeping your chargeback rate low, you eliminate fraud, reduce additional fees, and capture more revenue.

Below is a list of 9 strategies to optimize your ecommerce store for chargebacks:

1. Establish clear communication with customers

In many cases, open, clear communication with the customer can resolve issues customers have and prevent chargebacks from occurring. Enabling customer support via live chat, a call centre, or a knowledge base can give customers answers and peace of mind about the shipment, quality, and warranty of their product.

2. Follow PCI Compliance and payment processing rules

Abide by all credit card processing rules, including payment card industry (PCI) compliance standards, which are technical and operational standards businesses are required to follow when processing and storing credit card data. These guidelines are required to be followed by any credit card payment processor.

Without properly processing credit card transactions using these standards, you risk being liable for the fraud and chargebacks that occur on your platform.

3. Ship orders accurately and on time

Errors in packaging and shipping can cause chargebacks, as customers are not happy with the quality of the product after being shipped or the timeliness of the delivery. Ensuring that orders are shipped on time, are packaged to protect the product during delivery, and that orders are sent to the correct address will greatly reduce chargebacks.

4. Offer great customer service

Ensuring customers have the support they need will cause less customers to file chargebacks. By offering timely, adequate customer support to customers experiencing issues (including shipping, delivery, and payment) you reduce the likelihood of problems with the experience and therefore reduce chargebacks.

5. Select a processor with good retailer support

Just as your customers expect exceptional customer service from your platform, you should expect good support from the processors you interact with. Ensure the payment processors you use on your ecommerce store offer you easy, accessible support to properly manage your store and customer behavior on your platform.

6. Maintain brand name across transactions

Use a consistent, familiar name for your business for all transactions, especially when billing clients. If clients purchase from a business with a specific name and their bill is listed under a different name, they will question the authenticity of the purchase. When you can’t avoid using a different billing name than business name, ensure you inform customers that the billing name will be different. In general, make sure your billing identification makes the transaction clear to the customer.

7. Sell products as advertised

Chargebacks are always more likely when a customer is unsatisfied with the quality of the product and the overall shipping experience. If the product doesn’t live up to the way it was advertised – including performance, design, look, and even packaging – the customer could request a chargeback, which costs you revenue in the long run. Always sell the product as advertised to keep customers satisfied and avoid chargebacks.

8. Follow up with notifications or emails

The time between purchase and delivery is important for mitigating chargebacks. Provide customers with an order summary, delivery details, updates about delays, and completion confirmation to keep them engaged and informed on their order. This will satisfy many customers and avoid causing them to return the product.

9. Ecommerce Chargeback Management System

Using an ecommerce chargeback management system that detects, prevents, and protects against various forms of chargeback fraud is a great way to reduce the impact it has on your online store. Select one with features that suit the needs of your store, including fraud detection, dispute management and resolution, and a high-quality payment gateway.

Must-have features of ecommerce chargeback solutions

Having the best ecommerce chargeback system will help your customers and you as a retailer. Great systems offer customers a safe, secure payment system while also helping you reduce fraud on your platform and revenue losses associated with fraud.

When looking, these are some key features to check for.

• Fraud detection: Your system should monitor for and detect fraud, by identifying the user and fraudulent behavior. Attempt to do this before authorizing payments to stop fraud before it occurs.
• Address Verification Service (AVS): Identify high-risk transactions by comparing the billing address to the address on file for the payer. This step is also required of major credit card processors in order for you to successfully dispute chargebacks.
• Credit Card Verification code: A payment gateway should always require a credit card user input their CVV/CVC number. The gateway will communicate with the credit card company, validating the transaction. Without this validation, the transaction should be declined.
• 3D-secure: Major credit card processors offer 3D-secure, an added layer of protection that uses a PIN for transactions. When possible, use these from larger payment processors like Mastercard SecureCode and Verified by Visa.
• Blacklist: This dynamic database stores a list of customers who have done a chargeback or filed a chargeback dispute. Pairing this with your customer relationship management (CRM) platform will help you flag potential fraud based on past behavior.
• Workflow management: Software tools allow you to automate many of the processes in the background. This helps free up time for you to work on developing a spectacular product. Depending on the tool you choose, it can require more or less control from your team.
• Solution integration: The tool you get should integrate with your legacy systems, and any solutions you plan to use in the near future. Having a solution that can easily integrate with other software is great for providing the flexibility you need.
• Chargeback notifications: Getting chargeback notifications in real-time can help you resolve disputes as they occur and reduce the impact they have on your bottom line. In some cases, you can refund the transaction directly to the vendor and avoid a chargeback dispute altogether.
• Chargeback analysis: Despite seeing good results, you shouldn’t stop trying to optimize. Continue to capture and analyze metrics related to chargebacks, identifying trends and patterns and finding areas to improve.

Bolt is designed with you as a retailer in mind, and is optimized to reduce fraud on your platform, minimize fraud losses, and to capture more revenue. This ensures that more valid orders are approved, reducing the impact of fraud losses on your business. All this is provided without compromising on performance, offering a checkout experience twice as fast as competitors.

We are so confident in the fraud protection our checkout platform provides that we offer a 100% coverage of fraudulent chargebacks. Being able to rely on Bolt to protect against fraud gives you peace of mind to focus on developing great products and optimizing the checkout experience.

If you’re interested in getting more comprehensive tips to better help you combat ecommerce fraud and help you better navigate chargeback disputes, download our free ebook: All About Chargebacks