How Merchants Can Reduce Chargeback Risks for Virtual Items

Would you pay hundreds, even thousands of dollars for something you can't hold in your hands? 

Many people do. Digital or virtual items like entry passes, custom graphics, in-app  purchases, e-books and software have become increasingly popular online purchases. Add 2021's buzz about NFTs, and it's clear that more and more people are making—and keeping—their purchases on their devices. 

And while merchants are happy to have a market for their virtual products, they’re finding these products to be more vulnerable than physical goods to expensive chargebacks.

A 2020 LexisNexis report revealed that digital goods sellers of all sizes, from small to enterprise, saw a massive increase in fraud attacks in 2020.  For small merchants selling digital goods, successful fraud attempts increased by 27%. 

For medium to enterprise-level digital goods merchants, successful fraud attempts increased by 48% from 2019 to 2020.

One reason it’s so hard to mount a successful chargeback defense is because it’s hard to prove the buyer received and used their virtual item. Proof of delivery is so challenging that payment giant PayPal doesn’t offer seller protection for digital goods and other intangible purchases.   

With the cards stacked against merchants, is there anything they can do to prevent — or successfully dispute — chargebacks for their virtual products and services? We’ve got seven tips that can help merchants prevent lost revenue due to virtual item chargebacks.

Seven Strategies for Protecting Virtual Transactions

Merchants may feel it’s impossible to win a chargeback for digital goods, and for good reason: The odds are rarely in the merchant’s favor for any transaction, and fighting disputes can be expensive. Each forced return costs merchants upward of $75, including fees, penalties and lost personnel costs.

It’s no surprise, then, that many merchants are using these strategies to stop chargebacks from ever happening.

1. Keep Detailed Documentation

Establishing purchase and delivery expectations early can help eliminate any confusion about an order and reduce the customer’s ability to say they didn’t get what they paid for. Merchants who sell digital images, for example, may provide a watermarked proof to the customer. Once the customer approves it, merchants email the final image without the watermark.

Although PayPal doesn’t protect transactions for virtual items, merchants may still win a dispute if they can prove their customer agreed to exchange payment for a digital good/service and then approved of and received it.

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2. Communicate Clearly

Many chargebacks occur simply because a customer isn’t informed about the status of their order. Avoid this by sending customers a detailed summary of the transaction and then keeping customers updated throughout a transaction — from receiving the order, processing the payment, beginning production, delivering the final product and asking for feedback.

For recurring charges, merchants should inform the customer well in advance of each billing event and provide instructions for cancelling or changing their subscription.

3. Establish a Refund Policy

Some merchants are their own worst enemies when it comes to refunds.

How? They make their policies unclear, too strict, or both. 

Not only does this create a negative customer experience, but it often leads to chargebacks by frustrated customers. From there, the merchant has to issue the chargeback plus a chargeback fee. Additionally, the higher the merchant's chargeback rate, the more likely their payment processor is to view them as a risky customer—leading to higher processing fees and perhaps even a suspension of the merchant account. 

Returns aren't ideal, but they'll always be part of the ecommerce landscape - and they're exponentially less damaging than chargebacks.

Here are some ways to make your return policy work for your customers and your business:

  • Make your return policy crystal-clear on product pages, checkout pages, electronic receipts, FAQs and wherever else it can be placed. 
  • Consider a "fitting room" option that gives customers a discount if they order several items, while allowing them to return those items within a limited time without fees. This can reduce wardrobing fraud.
  • Instead of discarding returned items, consider discounting them instead. 
  • Pre-paid return labels enclosed in the shipment make it much easier for customers to return unwanted merchandise. 
  • "Buy online, return in store" (or BORIS) is a popular vector for fraud, so consider asking for a receipt and offering store credit instead of refunds. 

4. Provide Great Customer Service

Ecommerce retailers never close — neither should their customer service. If frustrated customers can’t reach the merchant, they may file a chargeback instead for a quick resolution.

Great customer service isn’t about just being accessible; it’s about making your customers' lives easier. In addition to providing clear and accessible information around return policies, make a point of keeping customers informed. Sending order confirmations along with shipping and tracking updates are an excellent way to build trust with your customers. 

Another reason to pay close attention to your customers and their needs? You learn more about their shopping habits, which makes you better at spotting unusual—and possibly fraudulent—activity.

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5. Ship a Physical Product

There are two reasons merchants should always require shipping addresses, even if the item is delivered virtually.

First, having the shipping address lets a merchant use the Address Verification System to compare billing and shipping addresses.

Second, merchants can use the shipping address to mail a physical package to customers that includes:

  • Digital download instructions for their order
  • A receipt that lists the date of purchase, order status, order number, and the buyer’s and seller’s contact information
  • Other relevant purchasing information

Send this package with delivery confirmation, and you have the proof you need to make it harder for a customer to claim they didn’t receive an order. 

If shipping is unfeasible, email can work just as well (see Number 7 below).

6. Require the CVV Number

The CVV — the three- or four-digit number printed or embossed on a physical credit card — is the one piece of information a fraudster is least likely to have in their hands. Merchants who require this number increase the likelihood that they’re making a sale to the legitimate cardholder.

7. Send Trackable E-mails

Merchants who email customers links to their digital downloads or virtual purchases should consider using an email client that can track who received and opened the email – and when. Such documentation provides valuable proof the customer received the purchase.

Bolster Chargeback Defenses With a Fraud Protection Solution

There are many reasons a customer might file a chargeback. Regardless of the reason, merchants who sell virtual goods will want to avoid these expensive disputes. Fighting chargebacks is a worthwhile endeavor, but not an easy one. 

Ideally, by creating smart policies and providing great customer service, merchants can vastly reduce the amount of chargebacks they need to deal with.

However, time spent investigating chargebacks is time not spent on business growth. 

That's why many merchants hand the task over to trusted partners who have expertise and experience with the chargeback process, and who provide a comprehensive fraud protection solution that uses trained staff and advanced artificial intelligence to evaluate the legitimacy of transactions and block fraud before it affects a merchant’s bottom line.

Contact a ClearSale analyst today to learn how we can help ecommerce merchants defend their sales of virtual items against fraudulent transactions and chargebacks.


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