Last editedMar 20223 min read
If your business accepts credit card payments, it’s likely you’ll deal with chargebacks at some point. It takes a toll on your bottom line when customers dispute their purchases and can even lead to issues with the bank. One of the best ways to avoid chargebacks is to understand their root causes, which we’ll outline below.
What is a chargeback?
Chargebacks take place when a transaction is disputed by the customer. The onus is put on the merchant to make up the loss by refunding the transaction while also paying a chargeback fee to the bank. If you want to figure out how to prevent credit card chargebacks, it helps to understand why they happen.
Here are a few common chargeback scenarios:
The customer doesn’t recognise a transaction on their card statement.
The customer’s card is stolen or used to make a fraudulent purchase.
The customer receives an item that differs from the seller’s description.
The customer receives an item that’s damaged in the post.
The customer claims the items were lost in the post or never received.
How to prevent credit card chargebacks
As you might imagine from the scenarios above, merchant chargeback prevention boils down to communication and security. You need to put security layers in place to prevent fraudulent transactions, while also maintaining strong lines of communication with customers to prevent any misunderstandings. Here are a few preventive tips to help:
Use a trading name that customers will recognise when looking at their credit card statements.
Provide detailed information about the sale on your website and at checkout.
Provide multiple photos and written descriptions of each product or service.
Pay for tracking numbers and signature-on-delivery when shipping your products to ensure products are received.
Respond to customer queries quickly. A customer will usually try to reach out to the merchant before filing a chargeback with the bank.
Offer refunds to keep customers happy before they file a chargeback.
You might also want to consider purchasing merchant chargeback prevention or protection insurance that covers your costs in the event of costly fees.
How to dispute a chargeback
While the tips above can help you avoid chargebacks in the first place, what are your options when it comes to disputing one?
Although specific timelines will vary according to the bank and the type of goods sold, in most cases the customer has 120 days to make their claim. The clock starts ticking either when the customer raises the issue with the merchant or when they receive their goods.
The best way to protect yourself during these disputes is to gather as much evidence as possible. You’ll need to prove to the bank that you sent the requested item, on time, and that it was received. Here are a few examples of the type of evidence that can help your case:
Shipping and delivery details
Tracking number for items shipped
Proof of receipt or signature
Proof of refund, if issued
Paper trail of communication between merchant and buyer
Banks will investigate chargebacks if disputed. You’ll have a better chance of reversing the charges if you are prepared with all supporting evidence.
What is chargeback fraud?
While many chargebacks are due to misunderstandings, some are fraudulent. When a customer pays for goods and then claims the goods are never received, this is called ‘friendly fraud’. A second type of chargeback fraud is committed with stolen credit cards. In either case, it costs the merchant money, to the tune of £1.70 for each £1 that the fraudster takes.
Fortunately, there are clearly defined checks in place for chargeback fraud prevention. You can take advantage of tools including Visa Account Updater, card security codes (CVV), Address Verification Service (AVS), and 3D Secure 2.0 which all help verify that the buyer is who they say they are.
In addition to the chargeback fraud prevention tools mentioned above, you can also sign up for chargeback alerts triggered by red flag buying behaviour. Examples of these red flags include things like:
Making multiple small purchases using a single card
Making a purchase from an address that doesn’t match cardholder details
Making a purchase from an IP address in a different region to the cardholder
These examples would all trigger extra checks that might help prevent chargebacks.
Finally, you can reduce your chances of chargebacks by using a Direct Debit-based service like GoCardless. Customers still have the right to dispute a purchase through the Direct Debit Guarantee, but in practice fewer than 0.2% of Direct Debit payments are refunded this way. Both merchant and customer are protected with multiple layers of security.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.