High Risk Chargeback Management: How to Avoid Common Issues

If you’ve ever bought something online that wasn’t quite right, and then returned it while asking your bank to refund your money, you know what a chargeback is. 

For businesses, especially those in high risk industries, chargebacks can be a big problem. In this article, we’ll talk about why and how  these businesses can avoid them applying the right high risk chargeback management strategies. Keep reading. 

What Are Chargebacks and Why Do They Matter?

A chargeback happens when a customer asks their bank to reverse a charge on their credit card. In the U.S the Fair Credit Billing Act (FCBA) is the law that gives customers the right to dispute charges. The process and conditions under which it applies can vary depending on the credit card issuer’s policies and the nature of the dispute.

A chargeback can happen for many reasons, like:

• The customer thinks the charge is fraud.
• They’re not happy with what they bought.
• They don’t recognize the charge on their statement.
• Sometimes, people even do this on purpose to get free stuff.

Chargebacks are an issue for businesses because:

1. They lose money on the sale.
2. They have to pay extra fees.
3. If it happens too much, they might lose their ability to accept credit cards.
4. It can hurt their credibility and reputation.

For high risk businesses, these problems can be even worse. 

What Are High Risk Industries?

Some industries are more likely to have problems with unhappy customers and fraud than others. They are called “high risk industries”. Examples include:

1. Online gambling and gaming.
2. Adult entertainment websites.
3. Companies that sell health supplements.
4. Travel agencies and timeshare companies.
5. Subscription services (like monthly box deliveries).
6. Businesses that sell digital products (like e-books or software).
7. Firearms and ammunition retailers (including FFL merchants), and more.

One of the reasons these industries are considered high risk by banks is indeed that they often deal with more chargebacks. 

Why Do High Risk Businesses Get More Chargebacks?

There are a few reasons why businesses in high risk industries face more chargebacks:

1. More fraud happens in these industries.
2. Customers might not be sure about what they’re buying.
3. The products or services can be complicated.
4. Sometimes, people regret their purchases (like with gambling).
5. The charges might look strange on a credit card statement.

Spotlight on FFL Merchants

FFL, or Federal Firearms Licensed, merchants are businesses that are licensed by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) to engage in the business of manufacturing, importing, or dealing in firearms. 

These merchants face their own set of challenges in the high risk category because:

• They operate in a heavily regulated industry with strict compliance requirements.
• There’s a higher risk of fraud or misuse of products due to the nature of the items sold.
• They may face sudden changes in regulations that affect their business operations.
• Many payment processors and banks don’t work with firearms related businesses.
• They often deal with high value transactions, which can increase the risk of chargebacks.
• There’s potential for heightened scrutiny from both regulatory bodies and the public.

These factors contribute to FFL merchants being classified as high risk by many financial institutions and payment processors. As a result, they often face higher fees, more stringent security measures, and a greater need for working chargeback prevention strategies.

Why Do Fraudsters Target High Risk Industries?

Fraudsters often go after high risk businesses. Here’s why:

1. More money: High risk businesses often deal with expensive items or services so criminals can steal more in one go.
2. Easier to hide: Some businesses, like online gambling or digital products, don’t need physical delivery. This makes it easier for fraudsters to hide their tracks.
3. Faster transactions: Many businesses need to process payments quickly. This can make it harder to spot fraud before it’s too late.
4. Less trust from banks: Banks are often more suspicious of charges from high risk businesses so their reputation is lower. This means real customers might ask for chargebacks more often, making it easier for fraudsters to blend in.
5. Complicated products: Some merchants sell products that are complicated and hard to understand. Fraudsters can use this confusion to trick people.
6. New technology: Many businesses use new tech to sell their products. Fraudsters like to exploit new systems before everyone understands how to protect them.

High Risk Chargeback Management Strategies

Now, let’s talk about ways businesses can stop chargebacks from happening:

Fight Fraud

Spotting fraudulent movements might be challenging without investing in fraud detection and prevention software tools. There are several solutions available, for instance: 

• Kount: Uses AI and machine learning to detect and prevent fraud in real-time.
• Sift: Offers digital trust and safety solutions to prevent various types of fraud.
• Signifyd: Provides guaranteed fraud protection for e-commerce businesses.
• Riskified: Uses machine learning to instantly identify and block fraud.

How Electronic Transfer Inc. Can Help

ETI’s card processing solution is designed to improve your shopping cart system. It integrates smoothly with your e-commerce website and includes powerful tools for detecting and preventing fraud, helping to reduce chargebacks and protect your business from fraudulent transactions.

Talk to Customers Better

Constantly improving communication with customers is of utmost importance. Here are a few tips:

• Explain products clearly with detailed descriptions and high-quality images: For example, if you’re selling a gadget, include close-up photos of all its features and a video showing how it works.
• Be transparent about pricing, including any recurring charges: Always show the full price upfront, including shipping and any subscription fees, so customers aren’t surprised later.
• Offer responsive customer support through multiple channels (phone, email, chat): Aim to respond to customer inquiries within 24 hours, and consider using a chatbot for instant responses to common questions.
  

Make Buying Easier and Clearer

 To build client trust, simplicity is key:

• Use clear, recognizable billing descriptors on credit card statements: Instead of using a parent company name, use your store name that customers will recognize, like “JOES ELECTRONICS STORE” instead of “JE HOLDINGS INC.”
• For subscriptions, send reminders before each billing cycle: Send an email 3-5 days before charging for a subscription renewal, giving customers time to cancel if they want.
• Implement a clear, easy-to-find cancellation process: Put a “Cancel Subscription” button in your customer account area and make sure it works with just a few clicks.

Sell Good Product

Are your products really as good as described? Be sure to:

• Maintain high quality control standards for products and services: Regularly test your products or services yourself, and ask for customer feedback to continuously improve.
• Deliver on time and as promised: If you can’t meet a promised delivery date, proactively reach out to customers to explain why and offer options like cancellation or a discount.
• Offer warranties or guarantees to build customer confidence: Consider offering a 30-day money-back guarantee to show you stand behind your products.

Have a Fair Return Policy

Be honest about your return conditions:

• Create a clear, reasonable return policy: Clearly state your return window (like 30 days) and any conditions (like “unworn with tags”) on your website and order confirmations.
• Train staff to handle returns and complaints effectively: Create a script for your customer service team that empowers them to resolve issues quickly, like offering refunds or replacements without needing manager approval for every case.

Working With Payment Companies

Businesses in high risk industries should:

1. Choose payment processors that specialize in high risk industries.
2. Maintain open communication with their bank and payment processors.
3. Consider using multiple payment processors to diversify risk.

Electronic Transfer Inc.: A Solution for High Risk Merchants

Electronic Transfer Inc. is a payment processor that specializes in serving high risk industries. It services help prevent fraud and reduce chargebacks through:

1. Advanced fraud screening: They use sophisticated tools to detect potentially fraudulent transactions before they’re processed.
2. Chargeback alerts: Electronic Transfer Inc. provides real-time notifications of chargebacks, allowing merchants to act quickly.
3. Descriptor optimization: They help businesses create clear, recognizable billing descriptors to reduce confusion on credit card statements.
4. Decades of high risk expertise: ETI’s team understands the unique challenges faced by high risk industries, including FFL merchants, and can provide tailored advice, and more!

Wrap Up

Avoiding chargebacks is about creating a better experience for everyone involved and building a sustainable business in challenging markets. By implementing high risk chargeback management strategies and partnering with the right service providers, businesses can reduce risks, build trust with their customers, and thrive. 
If you need guidance and stable solutions for your high risk business, don’t hesitate to reach out to Electronic Transfer Inc. – we’re here to help you succeed in the face of chargeback challenges.