News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Chargebacks Can Kill Your Online Business – What You Need to Know

Chargebacks Can Kill Your Online Business – What You Need to Know

By Rafael Lourenco, Vice President of US Operations, ClearSale

When you think of threats to your online business, you probably think of price-cutting competitors and negative customer reviews. There’s another threat you may not know much about: chargebacks. Card companies allow customers to make refund requests to protect them from fraud, but 86% of chargeback requests are “friendly fraud.” That means the customer bought something and then claimed they didn’t make the purchase or never received the goods. The merchant is left holding the bag.

If you think this is rare, think again. Friendly fraud costs retailers more than $11 billion per year and it can cause small businesses to fail, often before the owner knows there’s a problem. What exactly are chargebacks, and how can you fight them?

When can a customer request a chargeback?

Each card company allows chargeback requests for dozens of reasons. For example, Visa’s Reason Code 83 indicates the customer claimed “fraud in a card-absent environment,” while Reason Code 30 is for claims of merchandise not received. There are other reason codes that fraudsters abuse, and unless you can prove that their claims are false, your business will suffer.

What happens after a customer chargeback request?

If you get a chargeback notice or a request for more information from your acquiring bank, respond quickly so you don’t lose your chance to dispute the chargeback. Send your acquirer the documentation that proves the customer did make the purchase and received it. Transaction data in addition to the receipt—like the customer’s email, IP address, and order history—as well as shipping, tracking, and delivery confirmation, are the keys to winning these disputes.

If you lose your appeal or don’t contest the chargeback, you are required to issue a refund. Your business also loses any physical goods that you shipped and pays a chargeback fee of anywhere from $20 to $100 per transaction.

How fraudulent chargebacks hurt businesses over the long term

The real risk isn’t the immediate financial hit. It’s the risk of losing your business. That risk begins to grow as soon as fraudsters discover your business is vulnerable, because they may target you for purchases that are more expensive and share your shop information with other criminals. The subsequent rise in chargebacks will negatively affect your chargeback ratio.

Banks and card companies monitor the number of chargebacks your business incurs compared to your total number of transactions. The high-risk threshold varies by industry, but if your chargeback ratio reaches or passes that limit, your account will be branded “high risk.” At best, that means you’ll pay more for payment processing. At worst, your bank will no longer do business with you, something many novice merchants learn the hard way.

In these cases, the bank adds the business to the industry’s MATCH list, where the information stays for up to five years. This listing makes it very expensive or even impossible to open another merchant account during that time. Preventing chargebacks is a must for businesses that want to survive.

How can businesses reduce their chargeback risk?

To cut down on legitimate chargebacks, good communication is key. Your product descriptions, refund and return policies, and customer service contact information should be easy to find on your Website and easy to understand. Your customer service team should respond quickly to customer questions and refund and exchange requests.

Proper record keeping is important. For each card network you participate in (Visa, MasterCard, etc.), you need to know the chargeback codes and documentation required to dispute chargebacks successfully.

To prevent fraudulent chargebacks, your business needs to weed out fake orders from valid ones without slowing down order processing or alienating good customers. This requires knowledge of fraud methods, high-risk billing and shipping zip codes, fraudulent card numbers and identities, the types of purchases that can signal fraud, and more. Even shipping speed can be a flag for possible fraud, depending on the type of purchase and the customer’s purchase history. On top of all that, fraud indicators and risks are constantly evolving as criminals refine their methods.

Because the indicators of fraud are complex and dynamic, DIY fraud screening can be time-consuming and ineffective. Some business owners opt to approve some orders in-house and send flagged orders to an outside service for verification. These businesses are still vulnerable to chargebacks on orders approved in-house, while their outside fraud-prevention service gets an incomplete dataset to improve and customize fraud protection. Other businesses turn all their order screening over to an outside fraud prevention service that also assumes responsibility for any chargebacks, to save time, save friendly fraud costs, and get better protection over time built on a complete transaction dataset.

Whatever fraud-prevention path you choose for your business, review it regularly to see how it’s performing, whether your chargeback ratio is rising or falling, and how much time and money you’re losing on disputes and chargebacks. These numbers will let you know if your current solution is working or if you need to find a more effective way to fight fraud and stop chargebacks.

Rafael Lourenco is the VP of US Operations at ClearSale, a Card-Not-Present fraud prevention operation that protects e-commerce merchants against chargebacks. The company’s flagship product, Total Guaranteed Protection, is an end-to-end outsourced fraud detection solution for online retailers. Follow on twitter at @ClearSaleUS or visit