News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Preventing Chargebacks: The Best Defense is a Good Offense

By Karisse Hendrick, Editor-at-Large,

Preventing Chargebacks: The Best Defense is a Good Offense For card-not-present merchants, chargebacks are persistent, often frustrating and costly. While the issuing bank is the party responsible for repaying the cardholder in most card-present chargebacks, the merchant bears that responsibility for CNP transactions. Also, because there is a lag between the transactions and when consumers actually receive their purchase, CNP merchants tend to rack up more service-related chargebacks. While card brands tolerate chargebacks up to 1 percent of sales , for many businesses, that 1 percent amounts to high dollar losses.

Merchants can reduce this loss by responding to chargebacks as they are received. Because not all chargebacks can be reversed, however, it is equally important to devise a strategy that reduces the volume of chargebacks issued to your company.

“Chargeback data can lead merchants to the specific steps necessary to reduce their chargebacks,” says Lisa Tennant, vice president of Business Operations at Verifi. “Analyzing chargeback details to identify common trends and locate gaps in their order acceptance and verification processes provides the best insight into where improvements should be made.”

Additional benefits of preventing chargebacks include:

  • Increased revenue retention
  • Reduction in chargeback fee losses
  • Reduced labor costs and time spent responding to chargebacks
  • Improved fraud prevention and customer service processes

Determine the Root Cause of Your Chargebacks

Understanding why cardholders contact their bank to initiate a chargeback process is the first step in preventing these disputes. This provides insight into your business and how current processes may be contributing to these financial losses.

Step 1: Determine and record the actual cause of the chargeback

The reason code used by the bank to classify the chargeback is important when responding to them and can add some insight into the dispute. They aren’t always an accurate reflection of the true reason for the chargeback, however. While “unauthorized transaction” or “fraudulent transaction” are common reason codes, merchants cannot assume all chargebacks bearing those codes were a result of deliberate fraud.

“One of the most important things to do is accurately code the chargeback in your system with the actual reason for the dispute, based on your research,” says Michael Mallon, director of global product management at Accertify. “Inside a merchant’s portfolio, it is normal to find up to 30 percent of the disputes were miscoded per the merchant when compared to their internal reason code. This is mostly because of the discussion the cardholder has with their issuing bank.  It’s important because you generally do not want to blacklist a buyer-remorse dispute and without recoding the fraud claims, you might do that if you are not careful.”

Step 2: Analyze the results of chargeback review

To determine the true cause of a chargeback, perform a review of the cardholder documents contained in the chargeback notice and the details in the original order placed by the customer. By reviewing this information, you can determine if deliberate fraud occurred and was missed, if the cardholder is committing friendly fraud or if there was an unresolved customer-service issue. After a month of reviewing all chargebacks this way, patterns generally will begin to reveal themselves. If a certain type of fraud was not stopped by the current fraud prevention system, fraudsters will continue to exploit that gap, leading to more chargebacks for the same issue. If one customer was unable to recognize a transaction, chances are many customers will have the same issue, and so on.

Step 3: Divide chargebacks into groups based on the root issue

Separating chargebacks by the true reason enables merchants to prioritize the reduction strategy. For instance, if the most common reason chargebacks are occurring is deliberate fraud, making changes to the fraud prevention system and process should be the first priority. If buyer’s remorse seems to be the biggest reason for chargebacks, consider implementing strategies to prevent this issue first.

Reducing Deliberate Fraud Chargebacks

After identifying deliberate fraud chargebacks, it is important to mark the original orders as fraud in the fraud prevention system, if you are using one. Many systems will mark all order identifiers such as name, e-mail address, shipping address, IP, etc. as fraud to prevent future orders with these data points. Because fraudsters are most likely to continue placing orders utilizing trends or identifiers that have not yet been flagged as fraud, it is important to do so as soon as possible. However, the identifiers used in orders can be changed, so it is important to also communicate the methods used to fly under the radar of the system and manual review process.

“In addition to adding this data to the system, it is important to communicate these fraud and non-fraud patterns to your team of fraud analysts,” adds Brian Killeen, product manager for reporting and analytics at Accertify. “Trends will only be presented to the analysts if the system is set up to do so (alerts, messages, etc.), but valuable time-sensitive data can be missed.  Moreover, if your business is staffed by a Decision Sciences team, this data can be extremely valuable when used for statistical modeling, regression analysis, etc. If you do not have these employees available within your business, you can also have your system analysts use this data to optimize your current solution(s).”

Additionally, merchants may need to put other fraud prevention efforts in place. If a high volume of fraud continues to occur, it may be beneficial to consider additional layers of fraud prevention tools such as AVS and CVV2 (if your payment processor does not already use them), 3D Secure, behavioral analytics or additional verification services during manual reviews. Understanding how fraud is continuing will help determine which layer will benefit your business most.

Preventing Friendly Fraud

By reviewing cardholder behavior at the time of sale, as well as any communication a customer had with customer service, the true cause of a friendly fraud chargeback should become clear. Common reasons for friendly fraud chargebacks can be: the consumer does not recognize the transaction, the customer believes a refund is due or has buyer’s remorse. By separating these reasons and prioritizing the most common ones, your business can begin to form a chargeback reduction strategy. The best way to prevent cardholders from filing chargebacks is to put policies and procedures in place that address each reason and discourage disputes.

Other ways to prevent chargebacks that stem from common friendly fraud issues include:

  • For chargebacks due to customers not recognizing the charge, remind the buyer about the purchase. On your order confirmation page and again in an e-mail confirmation, provide the customer with the name and contact information of your company as it will appear on their credit card statement. This will make it more likely they recognize the charge when they see it weeks later.
  • For cardholders who claim a refund is due or that their child made a purchase they should not be responsible for, clearly specify all terms and conditions on your Website. This includes your return and cancellation policies, as well as any policy regarding a minor’s use of a parent’s credit card. Require customers to read the policy before completing their order. A “click-to-accept” process on your Website is required by most processors and results in a better chance of reversing a chargeback.
  • For claims that the goods or services were not as described, accurately describe products on your Website. It will help minimize bad purchasing decisions, which often result in chargebacks.
  • For claims that orders were returned or services were canceled, simplify the process. Establish a simple way to cancel goods or services on your Website and establishing a clear and fair refund policy internally with customer service. Keep in mind that if a customer believes they are due a refund and does not receive one, they may contact their card issuer to file a chargeback.

Preventing Other Chargebacks

It is also important to note that not all chargebacks are caused by negative cardholder behavior. It’s not always clear what motivates a customer to initiate a chargeback. What is clear, is that if the customer never contacts the merchant in a dispute, a chargeback is inevitable. Merchants must provide disgruntled customers the motivation to make merchants the first point of contact in a dispute, says Scott Stone, chief marketing officer at

“Ensuring there is a clear call to action for cardholders to first contact the merchant to resolve any billing issues is a strong way to prevent chargebacks,” Stone says.

But just providing a method to contact customer service is not always enough. Stone emphasizes that, regardless of the interaction, responding and resolving issues in less than 24 hours is vital.

“When customers feel like they tried to resolve an issue and didn’t get the desired result, they will quickly call their bank.”
Technical issues that customers are completely unaware of also affect chargeback rates, according to Accertify’s Mallon.

“The most common non-fraud issue we see that contributes to chargeback volume today that could be avoided is related to the setup of payment processing at the merchant,” he says. “Usually, processing issues fall into two categories, stale authorizations or cardholder refunds which though processed correctly are not tied to the original transaction.  Both of these items can be rectified by working with your IT team and payment processor to identify the issues and then ensuring the correct process is used go forward.”
Free trial periods ending in an automatic sign up or subscription are another source of chargebacks that can be avoided with more transparency.

“A lot of companies may think that not being clear when a free trial is expired or when customer has been enrolled in a recurring service will convert more full-paying customers,” says Stone. “However, if a customer is charged without their full knowledge, that full-paying customer may quickly file a chargeback and proceed to post negative reviews about your company to social media and consumer forums. Sometimes the quality of sales is more important than the risk of focusing on quantity.”

Get to the True Reason

By reviewing chargeback details and analyzing the true reasons for chargebacks, merchants can significantly lower their incoming chargeback volume. This can seem like a daunting task, however the benefits of preventing lost revenue and excessive fees, as well as improving internal processes to improve customer satisfactions are immense. Tracking and measuring these metrics and reporting any reduction in revenue losses to your management team will demonstrate value the fraud team can contribute to the business.[/hide]

Daniel Leibovitch