Chargeback process: What Ecommerce owners need to know

March 8, 2022

The Bolt Team

Virtual chargeback process

Chargebacks gave consumers greater protection against fraud, but it left merchants in need of protection as well, especially as chargeback abuse runs rampant

In this guide, we will explain the chargeback process from a merchant’s perspective and show you how to dispute fraudulent or mistaken chargebacks. We’ll also show you how to prevent chargebacks from happening in the first place.

Say Goodbye to False Chargebacks

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What is a chargeback?

A chargeback is a payment dispute that occurs when a client questions a transaction on their credit card statement or online dashboard. The cardholder will request a refund from their card-issuing bank instead of the merchant. 

When this happens, the disputed funds are withheld from the merchant until the issuing bank decides how to resolve the complaint. If the bank rules in favor of the cardholder, it returns the funds to the customer. If not, it returns the disputed funds to the merchant.

The chargeback process is a complicated and time-consuming process involving a lot of paperwork and documentation. It can also impact your profits and harm your reputation. So it’s vital that you find ways to minimize chargebacks.

What causes chargebacks?

It’s important to know what triggered a particular chargeback so you can determine the best way to address the issue. This insight can help you optimize your checkout process and reduce your chargeback rate.

There are several reasons why chargebacks happen

Credit card fraud

A cardholder who discovers an unauthorized transaction may file a chargeback with their credit card company. When this happens, the bank begins an investigation to determine whether the claim is legitimate. In many cases, the merchant absorbs these charges to compensate their customers.

Merchant or customer error 

Errors from the merchant or customer can generate an erroneous chargeback. Think duplicate processing, accepting a card that’s past its expiration date, or entering the wrong card number.

Friendly fraud

Cardholders can sometimes act with ill intent. They purchase an item and then request a chargeback to obtain the item for free. This type of theft is a growing problem.

Returns and canceled transactions

Consumers sometimes change their minds and return products or cancel their transactions. There is little you can do to stop this type of behavior, but it’s important to minimize even legitimate chargebacks to keep your chargeback rate low.

Affiliate fraud

Nefarious affiliate marketers will often create fraudulent transactions to maximize their revenue. They then cash out before the merchant is aware of the fraudulent activity.

Fulfillment issues

Delivery mishaps, defective packaging, and shipping delays can lead to chargebacks. Customer satisfaction takes a hit when fulfillment issues arise, prompting chargeback requests and impacting your bottom line.

Miscommunication or lack of clarity 

If customers can’t access customer service to ask questions or resolve a frustrating shopping experience, they might initiate a chargeback. An unsatisfactory customer experience is an all-too-common cause of chargebacks.

Authorization and processing issues

These can occur on your end or the payment processor’s end. Both negatively affect your revenue and should be tracked to allow for improvements.

How much do chargebacks cost merchants?

Ecommerce losses to online payment fraud are expected to exceed $25 billion annually by 2024, according to Juniper Research. And chargebacks are a significant contributor of payment fraud.

Credit card processing fee

Credit card processors charge the merchant a credit card processing fee after a chargeback has been initiated, even if a merchant isn’t at fault. This fee includes the wholesale cost of the transaction plus the processor’s markup.

Acquiring bank fee

Additionally, the acquiring bank assesses a chargeback fee, ranging from $20 to $100. The fee covers the cost the bank incurs during the process. The higher the merchant risk profile, the higher the fees.

If a merchant wins a chargeback dispute and recovers the lost revenue, acquiring banks will not refund chargeback fees. 

Loss of relationship with a processor

Finally, it’s important to calculate the cost of a lost relationship. Credit card processors will often drop a merchant if their chargeback rate is too high. This can result in expensive business disruptions until the merchant finds a new credit card processor.

What are the steps in the chargeback process?

Though chargebacks can be challenging for merchants, knowing what’s involved in the process can help you get ahead of the game.

1. Customer purchase

A customer purchases merchandise on your online store using their credit card.

2. Payment processing

Your payment processing company processes the payment and sends you the funds.

3. Customer disputes the charge 

The customer disputes the transaction and requests a chargeback from their bank.

4. Start of the chargeback process

The issuing bank initiates the chargeback process. If you refute the chargeback, the issuing bank communicates with your bank and requests documentation to substantiate your dispute. 

If your bank fails to respond to the chargeback filing, the issuing bank will probably decide in favor of the customer. 

If you provide documented evidence to back up your chargeback dispute, the issuing bank must analyze the documents and decide if the chargeback is legitimate.

5. Customer receives returned funds

If the issuing bank rules in favor of the cardholder, it will deduct the funds from your account and return them to the customer. If the bank rules in your favor, it will require the customer to pay for the charge or enter arbitration. 

In the case of arbitration, the credit card company reviews the chargeback dispute and makes a final decision.

How long does a chargeback take?

The length of a chargeback process depends on the complexity of the chargeback request and the credit card issuer. The claim investigation process typically takes between 30 and 90 days. However, it can drag on for months.

Merchants must respond to a chargeback within the timeframe set by the card network. The average time limit for all major credit cards (Visa, MasterCard, American Express) is 30 days. Once the chargeback is filed, the countdown begins. But it can take several days for the merchant to be notified.

What you can do to avoid chargebacks

We recommend the following strategies to optimize your Ecommerce store for chargebacks:

1. Communicate clearly with customers

Open, clear communication with customers can minimize the number of chargebacks you process. 

Deliver support via live chat, a call center, or a knowledge base. And provide clear disclosures before a purchase is made. Make sure your merchandise return, refund, and cancellation policies are easily accessible from your order page. 

It’s also a good idea to let customers know when they’ll receive their merchandise. If shipping takes longer than usual, let them know before the purchase is complete.

These guidelines by Visa can help you minimize chargebacks:

Visa will support your policies, provided they are clearly disclosed to cardholders. For a face-to face or Ecommerce environment, the cardholder must receive the disclosure at the time of purchase. For guaranteed reservations made by telephone, the merchant may send the disclosure after by mail, email or text message.

2. Follow PCI and payment processing standards

The PCI Security Standards Council (PCI SSC) has created clear data security standards and resources for safe payments worldwide. By following their standards, you can avoid being liable for fraud and chargebacks that occur on your platform. If you’re unsure how to comply with these standards, partner with Bolt which helps each of our merchants meet their regulatory requirements. 

3. Ship orders accurately and on time

As noted above, shipping and delivery errors can generate customer dissatisfaction, leading to chargebacks. By ensuring your shipping process runs reliably, you may be able to reduce chargebacks.

4. Work with a processor that understands Ecommerce

Choose a payment processor for your Ecommerce store that offers you easy, accessible support to manage your store and customer behavior on your platform. Bolt currently employs over 200 behavioral signals to determine the legitimacy of a transaction. And since we work with thousands of merchants, we can observe this behavior not just one one merchant’s website but across our entire network. In doing so, merchants experience higher order approval rates and lower incidences of fraud.

5. Keep your brand name in front of your customers

Keep your brand’s name front and center throughout your transactions, especially during the billing process. If your customer sees an unfamiliar name on their credit card bill, it might prompt them to file a chargeback.

6. Deliver the products you promised

If a customer receives a product that is different or of lesser quality than what they expected, they’re more likely to file a chargeback claim. This includes performance, design, look, and even packaging. 

7. Follow up with notifications or emails

Make sure the time between purchase and delivery is as small as possible. If the customer feels delivery is taking too long, they might initiate a chargeback. Active communication can mitigate shipping delays. 

Contact your customer with an order summary, delivery details, updates about delays, and completion confirmation to keep them engaged and informed on their order. 

8. Ecommerce chargeback management system

An Ecommerce chargeback management system can detect, prevent, and protect against different types of chargeback fraud. Select a platform like Bolt  that can meet your store’s needs, including fraud detection, dispute management and resolution, and a high-quality payment gateway.

The bottom line

The chargeback process helps consumers combat rising incidences of credit card fraud. But it was designed with consumers in mind, not merchants. 

As a result, many merchants face chargeback fraud and unnecessary fees, whether justified or not.

It’s important to understand the causes of chargebacks so you can design an Ecommerce experience that’s transparent and easy to use while facilitating communication with your customers. 

It’s also wise to use a fraud protection system like Bolt that can detect whether a transaction might trigger a fraudulent chargeback. This one investment can be your best protection.

ThinkShop by Bolt does not constitute professional tax or financial advice. Contact your own tax or financial professional to discuss your situation.