How to Avoid Chargebacks [101 Business Guide]

Chargebacks are an inevitable part of business, yet they can be expensive for merchants. While it is not possible to completely eliminate all disputes over payments, you should always reduce the probability of chargebacks happening.

Keep in mind that a 1% chargeback rate is typically the accepted maximum, although that can vary by industry. This means that everything above that percentage could result in your business having to deal with very high payment processing fees. 

Without further ado, let’s learn how to avoid chargebacks, why they are necessary, and why they happen.

What Is a Chargeback?

• Think the payment was fraudulent.
• Have not been provided with the services/products.
• Do not recognize the transaction.

In such cases, the cardholder’s bank issues back the amount of the transaction, while the merchant is charged a fee.

Furthermore, merchants who receive too many chargebacks increase their chargeback ratio and are potentially subject to more fines, fees, penalties, and even the loss of processing privileges.

It is possible that a merchant may fight the chargeback, but they must prove that the dispute is invalid. Be aware that if the case goes to arbitration, the losing party may have to pay hundreds of dollars in fees.

Why Are Chargeback Fees a Good Thing?

Despite these drawbacks for business owners, chargebacks are actually a good thing for consumers. You see, through them, customers feel safer, knowing they can dispute payments when the products they’ve received do not match their advertised quality, or to prevent unauthorized transactions altogether.

This form of chargeback protection dates back to 1974 when the Fair Credit Billing Act was enacted to safeguard consumers from unfair credit billing practices.

Aside from the consumer’s point of view, chargeback fees are also an incentive for merchants to provide quality goods and services, and to stop disreputable sellers from taking advantage of people.

How to Avoid Chargebacks: 8 Approaches

1. Establish Clear Return and Refund Policies
2. Ask for Order Confirmation
3. Delay Billing
4. Collect Evidence of Customer Participation
5. Apply Strong Customer Authentication
6. Check for Expired Cards
7. Optimize Quality Control and Marketing
8. Great Customer Service

1. Establish Clear Return and Refund Policies

Setting clear requirements about returns, refunds, and cancellations can greatly reduce your chances of chargebacks. Make sure to include your terms and conditions next to your payment button, or as a separate tick box in your checkout process.

If you’re running a physical store, sales staff can give verbal instructions to customers, or you can have them written on receipts.

2. Ask for Order Confirmation

Order confirmation can help both clients and businesses avoid any unwanted payment disputes.

From a business perspective, it is also vital to properly manage customer expectations. Let them know if their order is going to be delivered late, and follow up by giving them order tracking information. 

Offer alternatives to products that are out of stock or no longer available, and even give users the option to cancel their order. These choices can decrease chargebacks, due to “services not provided” and “merchandise not received”.

3. Delay Billing

Another good practice on how to prevent chargebacks is to delay your billing, and only charge clients when their goods have been shipped. 

Quite often, customers get confused when they see they have been charged for something, i.e., a transaction on their credit card for example, before their purchases have arrived, leading to disputes. 

Ultimately, this can be avoided by delaying charges. However, you also don’t wait too long. Finding the right moment to process transactions will help you eliminate a lot of disputes.

4. Collect Evidence of Customer Participation

To defend yourself from chargebacks, you need to provide proof of the customer’s participation in the transaction. This includes keeping track of the user’s order history, which should display all their transactions with your company.

Additionally, you should retain all signed delivery receipts from the customer, as well as, courier tracking documentation. Alternatively, if you sell digital services, seek the customer’s IP address, description, date, and time of download.

5. Apply Strong Customer Authentication

Verifying customer identity is very helpful for customer’s security, as it prevents identity theft and fraudulent transactions. The latter being among the most common reasons for chargebacks.

Strong Customer Authentication (SCA) adds an extra layer of security to online payments, making them easier and safer. Essentially, SCA is a two-factor authentication system that requires users to prove their identity by providing their password, unique PIN, as well as a code sent to their mobile device.

It can ultimately help you battle against unauthorized transactions, not to mention it increases the comfort of users, who’ll feel safer shopping from you.

6. Check for Expired Cards

A very easy way to cut down on chargebacks is to monitor and update expired customer cards. Keep in mind that Visa and MasterCard update their details whenever a card is stolen, lost, expired, or upgraded.

You can either manually prompt your customers to update their cards or use automation software that can automatically update credit card details.

7. Optimize Quality Control and Marketing

Make sure that your products and/or services match their description, and deliver on what you promised – this will decrease the number of chargebacks, it’s as simple as that.

Don’t try to market your product as something it is not. Initially, you may attract more customers and make more sales, but it will turn out to be problematic when chargebacks from misled customers start appearing. Retail chargebacks, in particular, can lead to serious financial penalties.

Instead, only advertise what you can provide, as this will also increase your chances of getting repeat purchases and more sales. Address any quality control and refund request issues you may encounter. You should also look for any other reasons that might be causing customer dissatisfaction.

8. Great Customer Service

Last but not least, hire and train customer service representatives who will be able to quickly and professionally resolve customer complaints; especially those that could otherwise escalate into chargebacks later on.

Also, make sure that your customer service team’s contact details are visible or easy to find on your website. Include this important contact information on your printed receipts, delivery dockets, etc.

It’s better that your clients take their concerns to your company, where you can resolve them, instead of going straight to their bank or a refunding process.

Conclusion

Dating back to Ancient Times, financial frauds have always been a part of our lives. So, you can say that chargebacks are a good way of protecting customers from being scammed.

From a business perspective, while it is not possible to eliminate chargebacks completely, you now know some of the best approaches on how to avoid chargebacks, or at the very least reduce them measurably.

If you are looking for a reliable credit card processing solution then you should look no further – Electronic Transfer, with its over 30-year-plus history, and proven track record of helping over 50,000 merchants, is the perfect partner for you and your business.