Chargebacks cost merchants beyond the lost sale and merchandise and in many cases it is in a merchant’s best interest to resolve customer complaints directly to avoid dealing with a more costly chargeback. The Fraud Practice discusses return policies and messaging that can help prevent chargebacks from occurring as well as proactive measures merchants can take to resolve customer issues outside of the chargeback process.
A common problem all eCommerce merchants face is dealing with chargebacks. Chargebacks can result from many different causes including third party credit card fraud, damaged or defective merchandise and even from dishonest customers. When a merchant receives a chargeback they not only lose the funds from the sale, but they are also charged an additional fee for processing the chargeback and in many cases are not able to recover the goods sold. Furthermore, as merchants start to receive chargebacks for more than 1 percent of the total credit card transactions they process, they can be placed on card association high risk programs which include higher fees for chargebacks and could result in termination of the merchant account if the chargeback problem is not remedied. In short, chargebacks are costly beyond the cost of the lost sale or merchandise, and in many cases there are steps merchants can take to prevent disputes from becoming even more costly as chargebacks.
Two important factors for reducing chargebacks are to be proactive about resolving customer issues to avoid them from becoming a chargeback and to have clear messaging about refund policies and returns so customers will contact the merchant for an issue before initiating a chargeback. A merchant that lists a strict no refund policy, does not post a customer service phone number or is otherwise difficult for customers to reach is likely to receive many chargebacks that could have been resolved directly between the merchant and the customer. However, if a merchant clearly lists a toll-free customer service number on their website and/or on the receipt included with the shipment, as well as maintains a reasonable return policy, than the customer is more inclined to contact the merchant first if there is an issue.
There are many legitimate reasons for customers to initiate chargebacks, and these are designated by reason codes, but if the merchant can correct the problem promptly a chargeback can be avoided in many circumstances. A prime example is shipping tangible goods where common chargeback reasons include defective merchandise, goods damaged in shipment and non-receipt of delivery. In these cases the merchant has already shipped the goods and this is considered a sunk cost. Unless the merchant has a strict return policy or is difficult for the customer to reach, most consumers will attempt to contact the merchant before initiating a chargeback. If given the opportunity to deal with the customer directly, the merchant can offer re-shipping the items purchased or refunding the sale to appease the customer and prevent a chargeback. When merchants practice proactive refunding and re-ship goods in response to customer issues they avoid the additional costs associated with chargebacks and retain a customer.
No discussion on chargebacks would be complete without mentioning fraud. eCommerce credit card fraud against merchants result in chargebacks and comes in two main forms: third party fraud and first party fraud, often called friendly fraud. First party, or friendly, fraud can become an issue with customers abusing a merchants return policy and/or the chargeback process. A customer will use their real information but falsely claim that goods were never received, damaged, were returned, or other stories to keep the merchandise and receive a refund. Friendly fraud is difficult to detect, and merchants that practice proactive refunding may find themselves victim to dishonest customers. But when issuing returns or re-shipping goods merchants should maintain records to keep a warm list and track the number of disputes from a single customer, payment card, address, and other data points. Maintaining a warm list of customers who requested a refund or re-shipment in recent months and checking new customer complaints against this warm list can recognize and prevent such first party fraud techniques. Some customers you just can’t afford to keep.
With third-party fraud a legitimate customer’s credit card information and at least partial identity information are compromised and used by a fraudster to make purchases. Often when consumers see the fraudulent charges they contact their issuing bank immediately, but in many situations may contact the merchant because they do not recognize the charge. In the event that a consumer calls about a transaction they didn’t place, and the shipping address is not an address they are familiar with, then a chargeback can likely be avoided by refunding that customer for the transaction and telling them to contact their issuing bank because their card may be compromised. Merchants using shared data networks and compromised card alert services may become aware of an accepted transaction that is fraudulent before the real cardholder does. In these circumstances if it is too late to cancel the transaction the merchant can issue a refund instead.
Whether or not to proactively refund customers for issues with legitimate orders or with issues of fraud is contingent on the order at hand and the merchant’s business model. Take into consideration that payment service providers and merchant acquirers charge a fee for chargebacks that can be $25 or more per chargeback. When selling low cost goods it usually makes sense to reship the good to avoid the chargeback, especially when the cost of the merchandise is less than the chargeback fee. However, for merchants selling luxury and high dollar goods this is likely not the best option. In this case signed delivery confirmation and other techniques can be used to ensure evidence is on hand to successfully dispute friendly fraud chargebacks. Depending on the type of goods or services sold and other business factors, proactive refunding may or may not be a reduced-cost alternative to chargebacks, but when struggling to keep chargeback rates below industry high risk thresholds it can be helpful. It is also important to consider each case on an individual basis, and to perform velocity checks and linkage analysis related to the warm listed maintained of customers requesting refunds and re-shipments to ensure friendly fraudsters aren’t abusing return policies or business practices.
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