The Murky World of Chargebacks

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Summary: Rarely are startups aware of chargebacks but if you accept credit cards, here's the murky world of chargebacks



‘Chargebacks!’ The chiefest and the greatest terror filling phenomenon of online merchants worldwide. If you haven’t heard of chargebacks before and assumed they were just too insignificant to be mentioned, you are gravely mistaken because sooner or later you will have your chargeback horror story to tell.

Chargebacks came to existence to instil confidence and provide protection to online customers from credit card scamsters and fraud merchants. Ideally, the card networks were to play the role of big brother watching over the online customers from wrongful actions of merchants. But over the years the loopholes in this poorly framed mechanism have been exposed and what was once a tool against fraud merchants has now turned into a tool against credit card merchants.

Visa estimates fraud associated with chargeback at $11.8 billion for the year of 2012 alone.

How can it affect you?

Ideally, chargebacks are just credit card refunds and should not be affecting your business much. Where’s the difference?, Well these are forced refunds, the one where the card network twists your arm and makes you cough up the money that you thought were profit. Meaning, the cost of making the product and profit you’ve gained on it is gone, poof! Wait, it doesn’t end there remember the transaction fee you paid, say goodbye to that too and finally adding some salt to the wound, you’ll end up dishing an additional $50 chargeback fee too.
And when these chargebacks slowly add up to a decent amount(say 1% of your sales), get ready to be slapped a hefty fine(around $5000). If this slowly hits 2% of your transaction amount, you’re all set to say goodbye to credit card processing.

But not everything is gloom and doom, chargeback claims can be subject to dispute at either the payment provider or card network level.
The good part: you can contest it with appropriate proof, the bad part: it is as fun as filing taxes and the ugly: Only 21% of chargebacks lodged globally are decided in favour of the merchant.

Machine learning, Big Data and GeoLocation checks seem to provide an acceptable solution, but for bootstrapped startups some simple tweaks and tricks can actually do wonders in reducing and easing chargeback process.

Set Your Invoice Straight

Your invoice is the base point for all the chargeback related stuff and setting it straight should be the first item on your war against chargebacks. Some simple things like a recognizable name and also having clear description of all the line items in your invoice can cut down sizeable amounts of chargeback requests. A recent survey stated that about 41% chargeback related fraud is ‘friendly fraud’ i.e a chargeback issued when a customer could not identify the charge or the one who levied it or from experiencing buyer’s remorse.

This part is a bit easier to tackle for an online retailer by collecting shipping carrier and tracking code for any product that is being shipped. But for SaaS, where the individual using the product might be different from the accounts guy so having a recognizable name from that of product can do wonders. Too simple to actually work? Check out 37signals story on how they reduced chargebacks by 30%.

Address Expectations

Product, Delivery and Policy expectations, three critical things to be addressed. Have product descriptions that thoroughly explain the item in an easy to understand fashion and include all the pertinent information like dimensions or trial start and end date. If your product description is loopy, it could set off wild expectations which will later pave way for chargebacks. And if you are an online retailer, give them a good idea on when the order will be shipped out and how long it might take before reaching the customer. Returns and exchanges or refunds are not quite a bad thing either, if handled well there is a high chance the customer might end up becoming a loyal customer. Displaying your refund policy proudly on product and checkout pages increases the customers trust in you and might not take up the chargeback option.

And finally but most importantly, showcase a link to a step by step return policy in case of online retailers or a legible Terms of Service in case of SaaS industry. If you can, go a step further and ease your customers pain by providing a TL;DR version of your policies similar to that of 500px.

Support 24/7/365

Some customers are great, they are loyal and friendly and make you wish everyone’s like that! However, they aren’t and the only way you can tackle them is with valuable customer support. Pro tip: Customers who have your mails marked as spam are just an invoice away from chargeback. Imagine having a grumpy customer finding some extra pennies charged in the invoice you sent across, now imagine him not being able to get a reply out of you on time! Scary, right? Include a phone number or a specific mail address customers can contact for billing queries or else it’ll be the card networks chargeback department he’ll end up dialling. If only you were able to dish out a quick refund, customer would never bother looking into the chargeback option.

A top notch customer support with multiple access channels and having a process in place for how to go about dealing with a chargeback can save your business time, money and could bail you out of some tricky situations.

Read The Signals

Finally, look out for some red flags in your transaction types before you fall prey to the Nigerian princes of chargebacks. For example, a high velocity of retries or a large amount transaction from a newly created account are generally considered risky. Online retailers also maintain and avoid transactions originating from any of high risk countries.

But always remember, when flagging off transactions in these subcategories there is a chance of false positive(a genuine customer flagged down as fraudster). Also sometimes having a proactive Payment Aggregator(you know who!), might also lead to false positives.In such cases, make up a little white lie saying “The so and so was not able process your transaction”. Get your customer success team to dig up on the customer(Hola Facebook & Twitter!) and follow it up with that person, a genuine customer might respond but you’ll never hear a thing again from a fraudster.

Understanding  credit card related fraud is never quite easy, “Is this a fraud transaction?” will never return a boolean, but realizing the answer to this question can vary between a big spectrum is the first step chargeback related fraud.

Takeaway: Finally, it’s important not to be deterred by chargebacks even the best of startups deal with it.  Keep in mind it is next to impossible to minimize chargebacks to zero but prevention is the only way to go forward. After all few things in life are certain: Death, Taxes and ChargeBacks.

This post drew insights from Death, Taxes and Chargebacks.


Posted on December 31, 2013

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