Seven Chargeback Management Tips for Digital Goods

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

Many people do. Digital goods or virtual items like entry passes, graphics and digital art, in-app purchases, online courses, eBooks and software have become increasingly popular online purchases. Tech like AI, virtual reality (VR) and augmented reality (AR) are opening new frontiers for digital products used in education, healthcare, and even retail.  

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

Stripe reports that the digital goods and money transfer industries are the most vulnerable to online fraud, with combined losses expected to reach $60 billion by 2025. Though 0.5% or below is considered a good chargeback ratio, the average chargeback ratio for digital goods and services tends to be more than that.

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 Shopify’s Shopify Protect fraud tool only protects orders that contain physical items requiring shipping.   

With the cards stacked against businesses, 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 businesses prevent lost revenue due to virtual item chargebacks.

Shopify’s Approach to High-Risk Orders and Chargebacks

Seven Strategies for Protecting Digital Goods

Businesses may feel it’s impossible to win a chargeback for digital goods, and for good reason: The odds are rarely in the business’s favor for any transaction, and fighting disputes can be expensive. Each forced return costs businesses upward of $100, including fees, penalties and lost personnel costs.

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

1. Create and 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. Businesses who sell digital images, for example, may provide a watermarked proof to the customer. Once the customer approves it, businesses email the final image without the watermark.

As consumer appetite for digital goods grows, sellers are taking advantage of new technologies to create a digital paper trail of product receipt. For instance, it’s possible to generate a record of delivery for downloadable content (eBooks, music, photos, etc.) with a tool like DPD (Digital Product Delivery) that provides a “proof of delivery” reporting, including:

  • Day and time the purchase took place
  • Buyer’s IP address
  • Download attempts and amount of the file transferred
  • Successful deliveries
  • Download IP address
  • Geographic location

After payment is received and before granting access to the product, you can set up a mechanism that requires activation, registration, or validation before download or an email is sent. This protects both the buyer and seller from accidental purchases. 

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

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.

Recurring charges, such as for monthly subscriptions, can slip the purchaser’s mind between deliveries, causing them to assume it is a fraudulent charge. For recurring charges, businesses should inform the customer well in advance of each billing event and provide instructions for cancelling or changing the subscription. 

3. Establish a Refund Policy

Some businesses 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. In fact, some customers see chargebacks as “self-service” refunds when they can’t figure out how to return an item or exchange it with a business. 

What Is a Chargeback? Everything Merchants Need to Know

From there, the business has to issue the chargeback plus a chargeback fee. Additionally, the higher the business'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 business 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 business, 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.

5. Ship a Physical Product

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

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

Second, businesses 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).

Third, as proof of delivery, see whether the IP address location of a download matches the physical address of the payer’s shipping address. 

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. Businesses who require this number increase the likelihood that they’re making a sale to the legitimate cardholder.

Nova call to action


7. Send Trackable E-mails

Businesses 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.

Many email services can confirm an email has been opened and with extensions like Streak, sellers can get additional identifying info like:

  • Clicks on links in the email
  • Time of day the email is opened
  • Devices the email is opened on
  • The location of the email open
  • The IP address of the recipient

Bolster Chargeback Defenses With a Fraud Protection Solution

Plenty of companies and ecommerce platforms offer chargeback protection. Their approaches combine restrictive fraud filters, which either decline or flag potentially “bad” orders, with an additional review of those flagged orders by a trained fraud analyst or whoever is available. Other companies lean on purely automatic solutions to screen transactions. And another subset of businesses only reviews orders one by one.

All of these scenarios present issues for those businesses. These approaches to fraud prevention can be resource-intensive and time-consuming. Fraud filters and purely automatic solutions create a false sense of security because companies aren’t necessarily “seeing” the fraud.

Then there is the impact on the customer. If your fraud filters and automated rules are too strict, you’re undoubtedly declining orders from good customers. Declining good customers, especially new customers who aren’t so sure about online shopping, creates an even bigger problem for ecommerce businesses.

Hybrid Approach to Fraud Protection

At ClearSale, we use a hybrid approach that leverages the benefits of approving almost all valid transactions and declining clearly fraudulent transactions with precise accuracy. In fact, our AI-enabled technology uses an auto-approval algorithm that clears 97% of orders. Only about 3% of orders (at a maximum) are flagged for secondary review by our team of fraud analysts, who compile what they learn from those reviews and feed that intelligence into our approval algorithm to teach it to be even more accurate over time.

This allows us to deliver immediate decisions to our clients. In other words, we leverage secondary reviews for better accuracy and faster decisions – which actually improves the customer experience. And our clients see lower chargebacks, lower false declines and higher approval rates.

Secondary reviews help protect the rest of your customers who rely on you for safety and security when they’re shopping on your site. By following these tips, you can conduct secondary reviews in a relatively frictionless way that actually benefits your customers and your company.

ClearSale Chargeback Prevention and Management

Even with a highly effective fraud prevention solution, your business may experience some chargebacks. For those instances, you should consider a comprehensive chargeback protection and management solution.

By choosing a customized chargeback management approach, ecommerce businesses can also breathe a little easier knowing they’re protected against the increase in fraud attempts and poised for long-term financial success. 

Businesses need to be able to protect their revenue against costly chargebacks while preventing costly false declines — and they don’t have a moment to lose. Thankfully, ClearSale’s solutions integrates quickly and easily with Shopify. And we have the proven experience to let you confidently accept more transactions without the risk of business-damaging chargebacks. Contact us today to learn how easy it is to get started.

New call-to-action