How Businesses Can Protect Themselves from Chargeback Fraud

Imagine that a customer visits your website and places an order for 10,000 dollars through a credit card. You verify the transaction is valid after it was approved by the card operator, and proceed to send the product within the agreed period.

While you wait for the money to transfer into your account, you receive a call from the card operator stating that the order in question was fraudulent. The explanation credit card provider gives is that the purchase was made with a cloned card, and the rightful owner claimed their money back. Now you are without the product and did not receive any payment.

Have you ever experienced this situation in your online business? If your answer is yes then you will appreciate much more the advice that I am going to share with you, and if not, let me tell you about the chargeback.

What is a chargeback?

A chargeback is a procedure performed to return an amount charged to one’s credit card. Every consumer has the right to request a refund and you can request it in case of withdrawal of purchase, duplicate payments, undue charges or fraud . The refund can be made by returning cash or simply canceling the purchase.

How long does it take to make a chargeback?

In cases of fraud or undue collection, in most cases the refund is carried out within 24 hours, but the maximum period varies around 8 days. In case of withdrawal from the purchase, it is important that you know that the chargeback is not always immediate and that it can take up to two invoices for you to have this issue resolved. For example, you requested the chargeback in November, so the chargeback can come on the December or January invoice.

When to Outsource Your Chargeback Defense

Payment disputes are a growing problem for businesses today, and specifically the problem of illegitimate chargebacks. According to data collected by Acrocharge, eighty-one per cent of customers in the USA admit to filing a chargeback out of convenience. Most credit card users don’t know any difference between a standard return and a chargeback. They are also either unaware—or don’t care—about how a chargeback negatively impacts merchants. The question is how to address friendly fraud? Should you go self-serve or find a full-service solution?

The number of chargebacks a merchant receives will vary greatly based on the industry they are in and the specific policies and processes of the businesses. When first starting your business you can tackle chargebacks manually, reviewing each case, putting together evidence and writing letters to issuing banks to present your case. Your success rate probably won’t be very high, but chargebacks will represent such a small absolute sum of money that you’ll probably consider them as part of the cost of accepting credit cards.

By the time a merchant has an annual turnover exceeding at least $ 1 million, it probably means they need to get more organized and efficient in how they respond to chargebacks.

Self-service tools

When you’re still a small operation, paying for a software-as-a-service (SaaS) tool that offers pre-defined, generic templates for arguing chargeback reason codes is probably a step up in your chargeback defense game.

The benefit of going with a self-service tool is that you stay in control of the chargeback fighting process. Even with a tool, you will spend a lot of time building evidence for your cases. The silver lining is that all this time spent fighting chargebacks may open your eyes to things you can change in your business to prevent certain chargeback reason codes from occurring in the first place.

Full-service chargeback mitigation

When your company reaches a certain size in sales, you’re going to start wondering if training and tasking full-time employees with fighting chargebacks is the best use of your resources. After all, fighting chargebacks is not what you got into business to do. Using a business that specializes in chargebacks should raise your success rate in achieving chargeback reversals.

For this you can offload your chargeback fighting responsibilities to a full-service chargeback mitigation company that will take care of the problem throughout the chargeback lifecycle. The handful of companies that offer this service take care of chargebacks from the filing of the chargeback to evidence building, re-presentment up to and including arbitration. It’s a process that can take up to several months’ time.

In the narrow view, full-service chargeback mitigation companies are more expensive than self-service options. However, when you factor in saved labor and overhead costs, it may end up being the better deal.

Automated chargeback mitigation

A chargeback mitigation topic that often confuses merchants is what does an automated solution entail? Automated software solutions use rules-based formulas for determining how to respond to chargebacks. Some chargebacks services that market themselves as automated are actually semi-automated self-serve tools that require the merchant to build and upload the case evidence needed to fight the chargeback.

The market has yet to see a truly fully automated solution that provides higher success rates than a full-service solution that involves human oversight.

How to choose a solution?

Always measure the costs and benefits for each type of solution before making up your mind on how to fight chargebacks. A variety of solution features exist to choose from along with a variety of pricing models. For small and medium size businesses it is possible that they won’t have the volume of chargebacks to warrant a full-service chargeback mitigation solution. For the biggest companies self-service tools often won’t be a good use of resources, instead they will want to decide between outsourcing chargebacks and developing an internal solution. The key is finding the solution type and vendor who best fits your situation.

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Author: Peter Navarro

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