Chargebacks 101: Understanding the Four Chargeback Types
In today’s ecommerce environment, providing a wide array of payment options is non-negotiable. So, when an online business racks up too many transaction disputes – due to criminal or friendly fraud – it can jeopardize their ability to diversify those payment options.
We’re talking about chargebacks, which happen when debit and credit card issuers reverse transactions as a result of successful consumer disputes. Not only are businesses on the hook for the cost of the merchandise, shipping, fulfillment and other fees, but they also have to pay the issuers the equivalent of a processing fee or “chargeback.”
Chargebacks Are Supposed to Protect Customers
Chargebacks were originally created as a consumer protection measure. That’s a good thing – until fraudsters figured out that they could take advantage of the chargeback process to make money. Even consumers file chargebacks unnecessarily – sometimes in bad faith and sometimes because of a misunderstanding with the business.
High chargeback rates can be problematic for businesses, especially small and midsize companies that rely heavily on every dollar of revenue. The time spent managing and disputing chargebacks can further contribute to losses.
Preventing chargebacks is complicated. The first step companies should take when presented with a disputed transaction is to look at the reason code, which is useful information.
Understanding Chargeback Reason Codes
For every customer dispute, there’s a reason – a reason code, to be more precise. That numeric code corresponds with the description. Of course, it would be easy if all banks and card issuers used the same reason codes, but they don’t. Every issuer has its own set of codes. However, whether you’re working with Visa, American Express, Mastercard or another issuer, they all separate those reason codes into the same four categories:
1. Criminal Fraud
When cardholders discover a criminal accessed their credit card data and used it to make fraudulent purchases, the customer may file a chargeback to recoup their funds.
2. Consumer Disputes
Some consumer disputes are legitimate complaints about an order that doesn’t go as planned. In other cases, the customer is making an honest mistake. For example, if the customer doesn’t recognize the business’s name on their credit card statement or forgets about a recurring credit card charge, the customer may file a chargeback — even though in both situations, the transaction was perfectly legitimate. Both scenarios are considered “friendly fraud.”
Here are a few other examples of friendly fraud:
- A customer forgets they made a purchase that shows up on their statement.
- A purchase was authorized by another family member, unbeknownst to the customer.
- A customer forgets they agreed to a recurring payment, such as a subscription service.
- A customer is confused about the business’s return policy.
In any of these cases, those reasons could instead be “excuses” for why the customer doesn’t want to pay and start the chargeback process. That’s what makes this type of fraud so difficult to prevent. Meanwhile, this type of fraud is increasing 15%-20% across all segments, making it quite costly.
Sometimes, however, customers file chargebacks with the dishonest intention of ordering a product, receiving a refund on the order and still keeping the product. This situation is considered “chargeback fraud.” Over 85% of chargebacks are fraudulent and about 40% of people who file one fraudulent chargeback are likely to file another within 90 days.
It’s difficult, if not impossible, for businesses to determine which customers are making an honest chargeback claim and which ones are trying to defraud the business. In the end, the result is the same: lost merchandise, lost revenue and an increased chargeback ratio.
3. Authorization Issues
These chargebacks occur when businesses don’t get the proper authorization for a transaction, don’t submit a valid authorization approval or don’t submit a verifiable authorization.
4. Processing Errors
Sometimes, customers don’t dispute they made a purchase. What they do dispute is whether the business held up their end of the deal. These are considered processing errors.
The most common types of processing errors include:
- A cardholder authorized a transaction but didn’t receive the goods or services from the business.
- The consumer cancels a recurring transaction, but the business doesn’t process the cancellation.
- A transaction charge was processed more than once.
- A customer returns an order, but the business doesn’t refund the credit card.
- The transaction amount the business submits differs from the amount the cardholder agreed to.
Leveraging Chargeback Reason Codes
Ecommerce companies can also use reason codes in a few other ways:
First and foremost, reason codes help online businesses determine why a customer has challenged the transaction. From there, the business can determine if it makes sense to dispute the chargeback. With enough evidence, ecommerce businesses can win chargeback disputes and prevent the impact on their chargeback rate. Inversely, the business may look at the reason code and determine that they are in the wrong or that it isn’t worth disputing.
Reason codes are also useful for data analysis. For example, let’s say that the same reason code is reported in 50% of the chargebacks. That should tell the business that something is up. It may be a fulfillment issue, a shipping disconnect or an unclear policy on their website — or it could signal a fraud problem.
Using this data is helpful; however, ecommerce businesses should really focus their energy on preventing chargebacks from happening in the first place.
Tips for Preventing Chargebacks
Chargebacks may seem like an inevitable part of doing business, but there are steps businesses can take to avoid them.
Foster exceptional customer relationships
Customers remember a great first impression. Make the shopping experience memorable and foster trust so customers will default to asking questions about a purchase instead of disputing a charge.
Confirm orders through multiple channels
The best way to make sure a customer remembers they made a purchase is to send multiple confirmations to customers, especially through the channel they prefer. Include email, text and in-app confirmations, if possible.
Clearly communicate shipping and delivery information
Shipping and delivery are big issues with customers. If they don’t know when to expect their products or they expected their products sooner, there’s a higher likelihood that they’ll assume the worst. Make sure to provide clear expectations about delivery dates to give customers peace of mind.
Require signatures at delivery for high-value orders
High-value items are among the most likely to be stolen or be involved in a fraud scheme. By requiring signatures for deliveries, especially high-value orders, companies can make it harder for a customer to deny receipt.
Ensure clarity on bank and credit card statements
Consider the business name that displays on a customer’s bank or credit card statement. Ensure the description won’t confuse customers — at the very least, let customers know what name they should expect to see on statements.
Make policies prominent
Make sure that customers can easily find cancellation, refund and return policies, as well as shipping information. These should be clearly stated on the website, receipts, emails and texts — and even consider pop-up notifications as they apply.
Create an easy return process
Great customer service isn’t about just being accessible; it’s also about fixing customers’ concerns — even if it means refunding the purchase to avoid a costly chargeback. Establish a flexible return policy that’s fair to both businesses and consumers, and then communicate it — on product pages, transaction confirmations and email communications.
Of course, the best defense is a great offense.
How ClearSale Helps Businesses Prevent Fraud and Chargebacks
Ecommerce businesses should consider partnering with fraud prevention solutions providers like ClearSale to protect against both fraud attacks and increasing chargeback levels.
Our hybrid solution includes a highly effective automatic approval algorithm that “learns” as transactions are processed. Globally experienced fraud analysts assess the small percentage of orders flagged for review with the goal of locating as many additional approvals as possible. Fraudulent transactions are identified and declined.
Highly trained human analysts along with advanced machine learning address the friendly fraud threat in real time. Not only can we help protect your business over the long term, but we also guarantee transactions 100% against fraudulent chargebacks.
By applying this global lens and a large database of orders across industries, we’re able to quickly recognize fraud trends and help clients eliminate fraud threats and prevent chargebacks — all while approving more orders, faster.
Through our partnership with enterprise chargeback management service provider ChargebackOps, ClearSale offers full-scale chargeback management:
- Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
- Chargeback Guarantee reimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
- End-to-End Chargeback Management delivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.
Give your business a fighting chance to defend its reputation and keep its hard-earned revenue. Contact a ClearSale analyst today to learn why so many businesses around the world use us as their trusted partner in the fight against fraud and chargebacks.