According to Chargebacks911, the average cost of a single chargeback is expected to be $190 this year, based on a $90 average transaction value. Chargebacks and related fraudulent activities are all too common and increasingly costly challenges eCommerce merchants face daily. Once a fraudulent chargeback is successful, it is likely to happen again by the same user, as reported by many merchants.
To safeguard their businesses, online merchants must understand credit card chargebacks, identify fraudulent chargebacks, and adopt emerging and highly effective ways to prevent them. This article provides an overview of credit card chargebacks and best practices for eCommerce merchants, and explains how device intelligence can be a game-changer for them.
Understanding credit card chargebacks
Chargebacks occur when customers dispute a credit card transaction, which the merchant must refund. This mechanism is designed to protect consumers when their credit cards are used illegally. Unfortunately, while it’s nice for the consumer, it ultimately costs businesses money. Chargebacks cost merchants fees and cause them to lose out on the cost of the goods they provided to their customers.
How does a chargeback work?
Chargeback fraud can occur in a few different ways. Common reasons for chargebacks include unauthorized transactions, incorrect billing amounts, and unsatisfactory products or services. Some are elaborate scams involving cybercriminals, while others can be everyday consumers exploiting the system.
Examples of chargeback fraud include:
- A fraudster uses a stolen credit card to make an online purchase, also known as a “card not present” (or CNP) transaction.
- The purchaser regrets making the purchase, which is one of many instances of “friendly fraud” where the purchaser authorized the purchase but still disputes the transaction.
- A person who knows the credit card holder uses their card to purchase on their behalf.
- The purchaser didn’t understand the purchase process.
Best practices for eCommerce merchants
To prevent chargebacks and protect businesses from fraud, eCommerce merchants should implement best practices including regularly monitoring transactions and employing services that aid end-to-end order management. Below are several suggestions for preventing some of the most common causes of chargebacks.
A fraudulent transaction occurs when someone uses a person’s credit card illegally. Credit cardholders often have their details stolen, leaving retailers open to chargeback fraud without measures to detect and prevent fraudulent transactions. For example, a fraudster may use credit card details obtained in an online data breach to make a purchase. The cardholder would initiate a chargeback through their bank when they see someone else using their card illegally.
The best way to prevent chargebacks from fraudulent transactions is to avoid fraud in the first place. A few things to keep in mind:
- Check if the purchaser’s IP address is unusual, such as if it originates from a country you’ve never sold to before or doesn’t match the credit card’s issuing country or region.
- Monitor if the fraudster uses the same credit card for multiple smaller transactions quickly.
- Implementing checks and fraud detection software during the checkout process can help flag potentially fraudulent patterns of usage and purchases.
A customer may initiate a chargeback on a credit card if they don’t receive their purchase within the expected time frame, even if the package is on its way. Retailers should ship purchased goods as soon as possible, except for backorders, pre-orders, or similar circumstances. Shipping delays can occur that are out of the retailer or recipient’s control, but sometimes they result from human error, where you risk losing the item or revenue altogether.
- Ensure the most accurate shipping address using an auto-fill service, like Google.
- Clearly state the expected delivery date and track deliveries.
- Regularly check your shipped orders for issues or anomalies, such as outstanding deliveries.
- Establish standard customer communication processes if a package gets delayed, lost, damaged in transit, or returned.
Even if a package isn’t delivered as expected, you can increase your chances of not having to issue a chargeback by showing the bank that you’ve done all you could in the dispute process.
There’s also software that can help small and mid-sized businesses save time and protect their revenue. You can use a third-party provider for shipping protection that covers the company and the consumer. It will reimburse shipping costs if anything is lost, stolen, or damaged during transit.
Incorrect charges from the account
Chargebacks can occur when the purchase value differs from what the consumer expected. For example, customers may remember buying a shirt for $50 but may not consider shipping and credit card fees. When they see that the purchase was $60 on their credit card statement, they may want their money back. These merchant chargebacks illustrate the importance of communicating the final value of purchases, including any additional charges or fees.
A bank may side with the consumer in a chargeback dispute if you cannot show that you did all you could to convey the total purchase amount. Follow these steps to ensure customer clarity:
- Make additional fees or charges clear on invoices.
- Bold and enlarge the final value.
- Offer different shipping options so the consumer can select their preference.
- Send a purchase email confirmation that includes the total amount charged, and a breakdown of any fees, including applicable taxes and shipping costs.
Unrecognized business name
A chargeback may occur when a consumer reviews their credit card statement and doesn’t recognize a business name. This may indicate that their card was used without their knowledge or permission. However, it’s also possible that it was a legitimate transaction, especially if you use a third-party shipping service, sell on a marketplace like Amazon, or use other outsourced inventory management solutions.
- Ensure that your business name appears clearly and prominently on your customers’ statements.
- Use your business’s trading name.
- Don’t disguise your business name with random sequences of letters and numbers.
- Register your business under the same name that your customers would use to identify you.
These measures will help your customers to associate their purchases with your business.
Recurring payments due to failure to cancel subscriptions
A customer may request a chargeback if a transaction is processed as part of a subscription they wanted to cancel but didn’t. Automatic renewal may be suitable for businesses but may also lead to chargebacks.
For example, customers may wait until after the subscription payment is processed before going to their bank to claim they forgot to cancel it. The bank may side with the customer if you can’t show that you reminded them about the upcoming payment.
- Send a reminder to customers when their subscription is about to renew each month.
- Send a confirmation email or receipt when a subscription renews to confirm the purchase.
- Mention in your terms and conditions that you won’t be liable for unintended subscription payments.
- Offer an easy and automated process to pause or cancel a subscription altogether to avoid refund requests or chargebacks.
Using device intelligence to detect fraudulent activity
Device intelligence gathers and analyzes information about the devices visitors use to access a website, especially eCommerce websites. This information helps eCommerce merchants identify potentially fraudulent transactions and flag unusual patterns, such as multiple transactions from the same device or devices with known fraudulent histories. By taking action based on this information, merchants can reduce the risk of chargebacks.
Preventing chargebacks with device intelligence
eCommerce merchants can use device intelligence platforms, such as Fingerprint, to prevent credit card chargebacks by identifying and blocking fraudulent transactions, and preventing repeat instances of fraudulent behavior. This proactive approach helps protect businesses from the financial and reputational consequences of chargebacks.
Fraudsters are constantly developing new tactics to create false accounts or make fraudulent purchases, such as using bots, incognito mode, VPNs, or other methods. With solutions like Fingerprint and their highly accurate Smart Signals, merchants can reveal the intentions of every user, including anonymous ones. In one month alone, Fingerprint identified 4.3 million malicious bots and over 21 million visitors using a VPN. Get real-time actionable intelligence on those using malicious bots, VPNs, blocklisted IPs, and more. Try it out for yourself free for 14 days here.
Credit card chargebacks provide important customer protection, but they can also pose significant business risks. eCommerce merchants can minimize the risk of chargebacks by following best practices for receiving online payments and communicating with customers. By using device intelligence platforms like Fingerprint, merchants can proactively protect their businesses from fraud and chargebacks.