Every merchant or organization that sells a good or service will experience a chargeback. Since they can cost the merchant up to three times the cost of the transaction, they must have an effective process in place to deal with them.
This article will discuss some of the issues related to chargebacks and present a few solutions that exist to solve them.
What is a Chargeback?
A chargeback is a dispute made by cardholders with their bank that enables them to receive a refund for a product or service. Although most chargebacks are legitimate, they can still significantly drain a merchant’s time and resources. The chargeback system protects customers, but it hurts merchants who must use their own resources to prove their innocence with every chargeback.
The Different Types of Chargebacks
Chargebacks are classified into a few distinct categories:
- Criminal Fraud – Chargebacks resulting from stolen credit cards and identity theft are the least common but most dangerous. Changes in chip cards that include EMV and tools such as identity verification and fraud scoring have also helped minimize criminal fraud and make it easier to detect.
- Friendly fraud – This type of chargeback can be deliberate or unintentional. It can include intentionally returning an item due to legitimate customer dissatisfaction (e.g., wrong size) with the product, or malicious intent (e.g., the customer wanted a new dress for a specific occasion but didn’t want to pay for it). Or a customer may not have intended to make the chargeback, but they legitimately forgot to cancel a subscription. As the most common type of fraud, it accounts for 76% of disputes. It is most difficult to prevent since it happens only after the delivery of the product.
- Merchant errors – Experts estimate that this source is responsible for up to 15% of all chargebacks. It includes errors in fulfillment, processing, or delivery. Merchants can minimize this type of fraud by publishing clear policies to customers on their websites and establishing quality control of their payment process.
A Quick Summary of the Chargeback Process
The chargeback review process can be complex and time-consuming. Although solutions exist to automate and outsource the process, the complexity of the process makes manual intervention necessary.
Step 1. After a customer makes a purchase and reviews their credit card statement, they discover a suspicious transaction. They notify their bank immediately.
Step 2. The customer’s bank investigates whether or not the chargeback is valid by reviewing evidence of the purchase through the merchant’s bank. While the bank reviews the transaction, the cardholder receives a temporary refund. If the chargeback is valid, the refund is permanent.
Step 3. If the chargeback is disputed, the merchant bank and customers’ bank try to come to an agreement.
Step 4. If the customer’s bank and the customer still do not agree on whether or not the chargeback is valid, they enter into an arbitration process overseen by the credit company.
Step 5. The credit card company determines the final decision regarding the chargeback.
Step 6. Additional disputes over the chargeback by the merchant can be taken to court.
What is Chargeback Management?
Each chargeback incurs a fee to the merchant by the credit card company. That’s on top of the revenue loss from refunds distributed to customers.
The goal of chargeback management is to minimize revenue loss and chargeback fees. Merchants – especially those in eCommerce – can also improve their security, customer retention, and satisfaction through chargeback management.
What is Chargeback Management Software?
For many large merchants, chargeback management cannot be effective manually. Chargeback management software helps merchants automate the process through tracking, reporting, analyzing chargeback data, and managing internal records.
Chargeback management software solutions are typically in-house or self-managed, outsourced to a company, or a combination of both. In-house solutions can be a good choice for many merchants with a limited budget who want complete control of the chargeback process.
However, there are downsides. When you rely on in-house management, you don’t have anyone to turn to for questions or support. On the other hand, building an in-house system to deal with these chargebacks can be costly and drain human resources that might be better to spend on revenue-driving initiatives.
What is Chargeback Automation?
Smaller merchants can categorize most of their chargebacks as specific types may benefit more from automated, rule-based alerts and processes to deal with them rather than a full-blown software solution. These processes can often match the win rate of an in-house team. It is critical to regularly review these processes to ensure their efficiency, especially since chargebacks are subject to many dynamic forces in the marketplace.
Should You Outsource Your Chargeback Management?
Even though chargeback automation can be cheaper than a software solution or an outsourced chargeback management company, it may not be the best approach for merchants who experience chargebacks in different categories. New types of fraud can also be a challenge to fight with automated solutions. In these cases, human expertise is necessary. That means that merchants that lack the resources to have in-house chargeback experts often need to turn to an outsourcing company for their chargeback management.
The Pros and Cons of Outsourcing Your Chargeback Management
A chargeback management outsourcing company might be the best solution for merchants with large numbers of chargebacks or those looking to scale.
The Pros of Outsourcing Your Chargeback Management
There are various benefits of outsourcing chargeback management for a merchant.
- Objectivity. If a merchant has become blind to systems or processes that lead to chargebacks, a third party can identify them more easily.
- Efficiency. Since an outsourcing company has more experience with different chargebacks, it is often more efficient than in-house solutions. Chargebacks can often be minimized, reversed, and even prevented.
- Expertise. Outsourcing management companies keep up with the latest trends and implement systems to deal with them before a merchant’s in-house solution can. These might be new methods for data analysis or sophisticated new types of fraud often before an in-house solution does.
The Cons of Outsourcing Your Chargeback Management
Although outsourcing chargeback management might be the right choice for some merchants, it does have certain drawbacks.
- Control. Many merchants feel that an in-house solution is a better choice since they can best deal with chargebacks related to their product. Outsourcing means giving up this level of control over their sales process.
- Economics. Outsourcing can be expensive, particularly for companies with fewer resources. But a good outsourcing company should be able to demonstrate the ROI a merchant saves with their solution.