Why Companies Struggle With High Chargeback Rates

As fraud rates have increased, so have chargeback rates. So much so, ecommerce businesses are having to dedicate staff to the cumbersome task of disputing chargebacks. That, or accept them as the cost of doing business. The problem is, once chargebacks start to pile up, the direct and indirect costs can significantly threaten revenue. For any online business to avoid being mired down in chargebacks, they have to understand how criminals have come to view chargebacks as a fraud tactic. And businesses need to develop a solid strategy to prevent them from happening in the first place.

Chargebacks Were Intended to Protect Customers

The chargeback process was originally created to help consumers reverse fraudulent charges to their credit or debit cards and/or force companies to fulfill on their return/refund policies. The additional fee – the actual chargeback – helps cover the card issuers’ costs and incent businesses to adopt fraud prevention measures and better return/refund policies.

Unfortunately, many online businesses don’t have the bandwidth or the global expertise to adequately tackle fraud. In fact, online fraud is growing rapidly in the post-pandemic era and is projected to cost businesses US$40 billion by 2027. With more fraud, comes more chargebacks.

To make matters even worse, the chargeback process has now become a vehicle for fraud — or inadvertent misuse.

How fraudsters (and consumers) manipulate the chargeback process

In an ideal world, the chargeback process would only be necessary when an innocent customer legitimately deserves to be reimbursed for a charge. Sadly, we don’t live in an ideal world. Fraudsters and consumers acting in bad faith have discovered how to take advantage of the chargeback process. This typically happens in one of two ways:

  1. Chargeback fraud. This happens when a professional fraudster or criminal consumer makes a purchase, receives the merchandise and then makes a false claim pertaining to the transaction, with the intent of keeping the merchandise and receiving a full refund. The false claims can range from saying the merchandise was damaged to alleging that it never arrived.

    Chargeback fraud is rampant – 86% of chargebacks are fraudulent. Why? Because fraudsters know that the chargeback process tends to favor buyers over sellers. About 40% of people who file one fraudulent chargeback are likely to file another within 90 days.

  2. Friendly fraud. It might seem unfair to say that friendly fraud is manipulation. After all, this type of fraud is often referred to as “accidental” and “innocent.” But is it, really?

    The answer is yes and no. Some of these consumer disputes stem from honest mistakes, and others are deliberate attempts to avoid responsibility or blatant fraud. Here are a few examples:

    • 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.

It’s bad enough having to deal with legitimate chargebacks, but these fraudulent chargebacks can cause the fees to pile up for your business.

Is Your Chargeback Rate Accurate?

Chargebacks Are Expensive!

On a yearly basis, chargebacks cost online businesses around $125 billion. That translates to a loss of $240 for every $100 lost in chargebacks.

Here’s how that breaks down:

Credit card processing fees

Every time an issuer rules in favor of the buyer, it charges back to the seller the wholesale cost of the transaction plus the processor’s rate markup – plus the business loses the processing fees associated with the transaction.

Acquiring bank fees

The issuer also assesses a chargeback fee – ranging from $20-$100 – to cover the costs incurred during the chargeback process. As the seller’s chargeback risk increases, so does the chargeback fee. Note: even if the seller wins the chargeback dispute, they still have to pay the chargeback fee.

Operational expenses

The operational costs associated with a chargeback can pile up quickly. Chargebacks aren’t processed and dispositioned in a matter of a few days – it can be six weeks to six months before a decision is made. In that time, businesses are out the value of the merchandise, the labor costs associated with order fulfillment and shipping, and the reallocation of staff to collect evidence and respond to the issuer.

Chargeback monitoring programs

When a business crosses the chargeback ratio threshold – usually 1% – it risks being placed in a chargeback monitoring program and being labeled as “high risk.” The result is significantly higher fees for every chargeback and an arduous process to graduate out of the program. Often, businesses must dedicate additional resources to reduce their chargeback rate, which adds more expense.

The best way to avoid incurring these costs is to prevent chargebacks from happening in the first place.

What Mistakes Lead to Higher Chargeback Rates?

There’s no doubt that some businesses are “chargeback magnets” because they fail to shore up vulnerabilities that make them more prone to chargebacks.

Here are the most common mistakes businesses make that put them at risk:

Customers are subject to processing errors 

When customers feel a business didn’t hold up their end of the deal, it’s considered a processing error. These include late delivery or non-delivery of products, failure to process refunds after a return, and even inaccurate fulfillment of merchandise.

Fix: Evaluate and shore up order fulfillment and shipping processes to make sure they are meeting or exceeding expectations. Also, communicate statuses and manage expectations for delivery dates on the front end and throughout the process.

Customers have to work too hard to resolve issues

Today’s customers have little patience. If they can’t settle an issue, they are more likely to turn to their bank or card issuer to address a charge.

Fix: Consider expanding the ways that customers can get in touch with customer service and/or get answers to their questions. This can include FAQs specific to returns and refunds, as well as chatbots.

Return or exchange policies are unclear or hard to find

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.

Fix: Return and exchange policies should be easy to find and read. Every communication related to a purchase should have some version of return and exchange policies as well.

Product descriptions are incomplete or misleading

Customers are not happy when they receive products that don’t live up to their online billing. If their items don’t match their expectations, customers may request chargebacks.

Fix: When it comes to product descriptions, sometimes more is more. The more details provided related to color, size, and specifications, the better. Also, include ample imagery from multiple angles and be honest about defects.

Businesses don’t use anti-fraud tools

Tools such as CVV verification, AVS, 3-D secure or two-factor authentication may make it longer for customers to check out, but they also add a layer of security that protects businesses.

Fix: Don’t be afraid of fraud protection. Most customers will appreciate knowing their personal payment information is in good hands.

Businesses don’t have a fraud prevention strategy

Lastly, too many businesses don’t have a fraud prevention strategy that’s designed to avoid chargebacks. For that fix, we can definitely help.

Related Reading: Advance Strategies to Eliminate Ecommerce Chargebacks

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.

Chargeback management with ClearSale

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.


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