Dealing with chargebacks is a frustrating and draining experience for any business.
Unfortunately, there is no easy way to eliminate chargebacks, as cardholders have a right to dispute any charges on their account that seem erroneous or fraudulent.
However, even if you can’t avoid dealing with disputes, you can keep them to a minimum with the help of eCommerce chargeback protection.
Chargeback protection will not only save you lots of resources spent on resolving disputes, but it also ensures that you have enough time to attend to more important business matters.
So what is chargeback protection and why are chargeback eCommerce protected businesses doing better than those without chargeback protection.
Let’s find out.
What Is Chargeback Protection
Chargeback protection is any service offered to businesses to help protect them from the effects of fraudulent and erroneous payment disputes. This service is often offered to online and brick-and-mortar businesses by fraudulent prevention firms and payment gateway providers.
The chargeback protection providers offer pre- and post-transaction chargeback prevention services in addition to post-transaction chargeback protection services. These providers often use various measures to protect your business from dispute liability, as explained below:
- They identify and stop errors and frauds before the authorization of transactions
- Respond to errors and frauds after the authorization of transactions
- Fight chargeback disputes on behalf of your business
- Take on liability in case a transaction results in a dispute
Why Should Ecommerce Businesses Have Chargeback Protection
While chargebacks protect customers from fraudulent charges, they also pose a notable challenge to eCommerce businesses, especially if they’re caused by miscommunication or genuine mistakes.
According to Loss Prevention Media, chargebacks cost eCommerce businesses a staggering $125 billion annually. Online stores also have to part with between $25 and $100 as chargeback fees for every disputed claim granted.
Disputing a chargeback is also a time-consuming process. The chargeback process involves many steps, as both the issuing bank and the merchant account provider have to investigate and determine whether the chargeback is justified. A dispute investigation often takes between 30 and 90 days.
Further, the time offered for merchants to respond to a dispute is often 30-40 days, which is too short. In case a merchant fails to respond within this period, the chargeback claim is granted, and the merchant has to assume the costs.
Another reason why eCommerce stores need chargeback protection is due to the rise in friendly fraud. Friendly fraud occurs when a customer claims a chargeback despite receiving the products they have ordered. This results in the bank refunding the customer without the knowledge that the fraud hasn’t occurred.
Notably, the 2021 Global Fraud Report ranked friendly fraud as the number one online fraud attack. The report further provided that almost 80% of eCommerce merchant accounts have experienced friendly fraud in the last three years.
Chargeback protection can help eCommerce businesses reduce the occurrence of chargebacks as they help prevent fraudulent disputes, reduce the impact of chargebacks, and also conduct research to identify dispute sources.
What Are the Consequences of Having a Chargeback Rate
Every business faces chargebacks at some point.
Unfortunately, when chargebacks occur too often, then they can land your business in trouble.
Your business chargeback ratio is one of the metrics card networks and payment processors look out for when determining whether you’re worth doing business with.
Although not every dispute is the merchant’s fault, a high chargeback ratio indicates that either your business is involved in fraudulent transactions or you aren’t taking measures to avoid chargebacks.
Unfortunately, when it comes to the calculation of the chargeback rate, the number of chargebacks you have won doesn’t count. Card issuer networks while calculating this rate consider the number of total disputes against your business.
For instance, the Visa chargeback rate is obtained by dividing the number of disputes a merchant has received monthly by the total monthly transactions. When it comes to MasterCard, the chargeback ratio is calculated by dividing the number of chargeback requests in the current month by the total transactions of the previous month.
Although the accepted chargeback ratio threshold varies from one card issuer to the other, the standard threshold for the Visa card network is 0.9%. The early warning threshold is 0.65% while the excessive threshold for Visa is 1.8%. MasterCard’s chargeback standard threshold is 1% while a ratio higher than 1.5% is considered excessive.
So, what are the consequences of having a high chargeback rate?
- You’ll need to join a monitoring program – Credit cards have monitoring programs for merchants who exceed the chargeback ratio threshold. Once you join the program, you’ll be charged higher processing costs to encourage you to keep your chargeback ratio low. A good example of a monitoring program is the Visa Dispute Monitoring Program (VDMP)
- Your business will be labeled high risk – If your chargeback ratio goes above the accepted threshold, your business will be labeled as high-risk. Your card issuer may give you time to try and keep your chargeback rate below the threshold. However, if you’re unable to do so, most networks will count their losses and close your merchant account.
- You’ll be added to the MATCH list – If you continue to maintain a high chargeback rate, you’ll also be added to the MATCH list. This list that is maintained by MasterCard has the details of merchants considered to be high risk. At this point, the only option you’ll have is to seek a high-risk merchant account, as most merchant service providers will be hesitant to work with you.
Ways to Avoid the Chargeback
The best way to avoid chargebacks is to embrace some simple best practices that are outlined below.
- Request for credit card code authorization
- Have a generous refund policy
- Use effective chargeback fraud prevention and detection tools
- Eliminate avoidable merchant errors
- Watch out for potential chargeback fraud red flags
- Offer excellent customer service
- Ensure you provide your contact information where customers can reach you in case of a dispute
- Respond to phone calls, emails, and social media messages promptly
- Process refunds promptly
- Communicate with your customers on the shipping dates and the expected arrival dates of their products
In closing, every business deals with chargebacks once in a while.
However, too many disputes can be detrimental to your business. Considering that the number of chargebacks has been on the rise in the recent past, eCommerce merchants need to take every preventive measure to avoid them.
One such effective chargeback protection and preventive measure is the use of chargeback protection. Chargeback protection in addition to protecting your business against dispute liabilities will also help you fight and win chargeback claims.