How To Reduce Chargebacks and Reduce Fraud Losses

November 25, 2019

The Bolt Team

reducing chargebacks as a mobile order is returned

Chargebacks include returns and disputed transactions and result in additional charges to you as a retailer. Learn strategies to reduce chargebacks and minimize its impact on your revenue.

You’ve developed a great product, expended a hefty marketing budget to gain traction, and established distribution channels, but that isn’t the end. Even though customers are converting through an optimized checkout, you need to keep them happy post-purchase to avoid chargebacks.

Say Goodbye to False Chargebacks

Retailers who accept fraudulent payments expose themselves to unnecessary risk, but it doesn’t have to be that way

Learn Why

If customers don’t get the quality product or delivery they seek, they may initiate a return or chargeback. Here’s everything retailers need to know to reduce chargebacks:

Before we dive into strategies to optimize your ecommerce chargeback management system, let’s answer a few basic questions: what are ecommerce chargebacks, how do they work, and what causes them? From there, we can examine ways to reduce chargebacks and their impact on your conversions and revenue.

What are ecommerce chargebacks?

An ecommerce chargeback is an online transaction that a buyer disputes. The customer disputes the charge that they believe is invalid, and in some cases, the credit card company returns the fee and charges the retailer. As a business owner, chargebacks cost you lost sales 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 the back returns the payment to the customer. The bank then negotiates the dispute with the retailer and determines if the transaction was handled properly.

How do ecommerce chargebacks work?

After the bank files the dispute, retailers must provide details of the transaction to justify the approved transaction. The bank will provide details about the reason for the chargeback (often in the form of reason codes), giving retailers a short window to respond to the bank and justify the chargeback.

Having a high-quality chargeback management system that provides fraud protection and manages 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 and reduce 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 affiliate marketers encourage fraudulent transactions to drive up their revenue and cash out before merchants are aware of the nefarious activity.
  • Fulfillment issues: Problems with packaging, shipping, and delivering can all lead to chargebacks. Customers that feel dissatisfied with a product or experience will request a chargeback.
  • Miscommunication or lack of clarity: Failure to make the customer service process clear leads to chargebacks. Customers feel they didn’t receive all the necessary information upfront.
  • Authorization and processing issues: These often occur on your or the payment processor’s end. Both negatively affect your revenue, and you should keep an eye on theme 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 pay a fee when a chargeback occurs. Paying these fees over and over can siphon money from marketing efforts that drive customers to your website.

Here are the other reasons chargebacks cost retailers more than the initial fraud:

Credit card processing fees

Retailers pay credit card processors a small percentage of each transaction. When a transaction results in a chargeback – regardless if it was the retailers fault or not – the retailer does not recoup 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, the acquiring bank tacks on fee (typically between $20 and $100) to cover the costs the acquiring bank absorbs in the process. The fees equal the risk associated with the retailer. When the dispute is filed and confirmed, the retailer doesn’t receive back their payment; they end up absorbing 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 is even 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 fees. There are also the upfront investments you’ve made, including operational expenses. This includes the value of the product lost, the labor and time it took to process, ship, and deliver the goods. You also have to consider costs associated with storing and inventory, shipping, and running a fraud management system. These upfront costs spent are now lost.

Marketing expenses

Graphic of computer with analytics, surrounded by symbols representing marketing expenses

Advertising your product and enticing customers to buy takes time, effort, and money. When you incur a chargeback, you’ve also lost the initial investment you made in attracting attention and customers.

How to calculate ecommerce chargeback rate

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

The chargeback rate formula is as follows:

how to calculate chargebacks and chargeback rates

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%, the figure set by top credit card processors.

A chargeback rate above the 1% industry maximum standard will result in the label “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 reduce chargebacks

Whether or not you struggle to keep your chargeback rate below 1%, you should always optimize your buying experience to reduce chargebacks. 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 prevent chargebacks from occurring. Enabling customer support via live chat, a call center, or a knowledge base gives customers answers and peace of mind about the shipment, quality, and the warranty on their product.

2. Follow PCI Compliance and payment processing rules

Abide by all credit card processing rules, including payment card industry (PCI) compliance standards, the prevailing technical and operational standards businesses must follow when processing and storing credit card data. Credit card payment processors must follow these guidelines at all times.

Not doing so makes you liable for the fraud and chargebacks that occur on your platform.

3. Ship orders accurately and on time

Graphic of delivery man, a virtual map, and a clock, representing timely order shipment

Errors in packaging and shipping can cause chargebacks. Customers may express discontent with the quality of the product or the timeliness of the delivery. Ensuring that orders ship on time, come in protective packaging, and arrive at the correct address reduces the chances of chargebacks.

4. Offer great customer service

Graphic showing customer support person and methods of communicating with them

Ensuring customers have the support they need will cause less customers to file chargebacks. By offering responsive customer support when issues arise, customers will leave with a more enjoyable experience. And therefore you encounter fewer chargebacks.

5. Select a processor with good retailer support

Just as customers expect exceptional customer service from you, you should expect the same from your payment processors. Ensure your partner solutions offer accessible support that helps you manage your store and customer expectations on your platform.

6. Maintain brand name across transactions

Use a consistent, familiar name for all business transactions, especially when billing clients. If clients purchase from a business with one name and see a different name on their bill, they may question the authenticity of the purchase. When you can’t avoid using a different name, inform your 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 often happen when a customer is unsatisfied with the quality of the product and the shipping experience. If the product doesn’t live up to its billing – from look and feel to the package it arrives in – customers could request a chargeback. Always sell the product as advertised to keep customers satisfied and avoid chargebacks.

8. Follow up with notifications or emails

Graphic of mobile device with an alert showing a message

The time between purchase and delivery is critical in mitigating chargebacks. Provide customers with step by step details about delivery times to set expectations. 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 and prevents chargeback fraud can reduce the impact of chargebacks. Select one with features that suit your store’s needs, 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 you and your customers. Great systems offer customers a safe, secure payment system, reduces fraud on your platform, and minimize fraud-related losses.

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. You should 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 tools you choose, it can require more or less control from your team.
  • Solution integration: The tools you use should integrate with your legacy systems, and any solutions you plan to use in the future. Having a solution that can easily integrate with other software is great for providing the flexibility you need.
  • Chargeback notifications: Getting real-time notifications let you resolve disputes as they occur and reduces the impact chargebacks 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 in mind; we optimized the platform to reduce fraud, to 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. We still offer a checkout experience twice as fast as competitors.

We are so confident in our fraud protection that we offer a 100% coverage of fraudulent chargebacks. Using Bolt‘s fraud protection will give you back more of your time. That way you can focus on developing great products and optimizing the checkout experience.

Want more tips to combat fraud? Download our free ebook: All About Chargebacks

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