Updated September 19, 2024

What is a Chargeback?

A chargeback occurs when someone, usually the cardholder, finds a charge on their credit card that they did not make (these are often called unauthorized transactions). The cardholder disputes that charge by reporting it to the credit card company and requesting a refund. The credit card issuing bank then goes through the chargeback process, investigating to determine if the chargeback is correct.

Chargebacks differ from refunds because they are initiated by the credit card company, meaning the bank will typically take the funds for the chargeback from the business and place a hold on their account during the chargeback process. Once the chargeback has been proven to be legitimate, the issuing bank will refund the money from the business to the customer.

Why Do Chargebacks Occur?

Chargebacks typically occur because of two main reasons:

1. Duplicate transactions as a result of clerical merchant error
2. Fraudulent transactions

However, while chargebacks were originally invented as a way to rectify fraudulent transactions, many customers have learned how to take advantage of this policy and use it for multiple reasons beyond suspicious transactions. Many of these apply specifically to online merchants. You may also be forced to issue chargebacks for these reasons as well:

1. Ordered items never arrived
2. A customer received the wrong items in an order
3. The product arrived but was different than it looked online
4. The customer was disappointed with the item quality
5. The customer wanted a refund, but the refund process took too long

No matter the reason, chargebacks are frustrating for the merchant, resulting in account freezes, lost revenue, and being qualified as a high-risk merchant. That's why it is so important to put steps in place to prevent excessive chargebacks.

While you can't completely prevent chargebacks, you can reduce chargeback risk by taking specific steps that help you avoid many of the reasons on the list.

How to Reduce Your Chargeback Ratios

Each month, your bank or payment processor adds up all the chargebacks initiated toward your business' account that month and divides it by the total of all transactions. The resulting percentage is called the “chargeback rate.” Banks set a certain level of chargebacks that they view as acceptable, typically about 3% or less. If your business' chargeback rate exceeds that amount, your merchant account may be suspended temporarily or canceled outright. That could result in a significant loss of time and money, so it's important to think about how to reduce your chargeback rate.

Chargeback rate is one of the main factors that banks, etc., use to determine whether a business is high-risk or not. That means that if your business is in a high-risk industry, you will be on an even shorter leash if a bank even opens a merchant account for you at all. The threshold for acceptable chargeback rates will be even lower than the already low 3% mentioned above.

Clear and Easily Understood Policies

It's always better to prevent chargebacks than to deal with them after they occur, and the best time to do that is before a purchase is finalized.

One important step to take to reduce chargebacks is good customer communication. Even if you are an online merchant, you can still communicate clearly. Ensure you have detailed product descriptions for each product on your site.

Good customer service and customer communication needs to continue after purchase as well. Ensure your customers immediately see a detailed order confirmation once purchasing. Include estimated shipping dates

Another way to do that is to have a refund and return policy that is clear and easy to understand and to bring it to the customer's attention early in the process, or even multiple times prior to finalizing the purchase. Clear return and refund policies may mean the customer may ultimately decide not to make the purchase, but it should decrease the risk of chargebacks and save you both time and money in the long run.

Ensure Your Company Name Always Shows Up on Customer Statements

This may sound obvious, but it is a common issue. You'll see many more customer disputes if your full company name is not what a customer sees on their statement. This is true for both singular and recurring transactions. Reduce customer disputes and ensure chargeback prevention by simply ensuring your business name shows up in full for every type of transaction.

On top of this, many chargebacks can be avoided by simply including the title of the product next to the company name on billing statements. This helps the customer remember what they ordered from you and prevents disputed transactions.

Keep Inventory Up-to-Date

Part of an effective chargeback management strategy is ensuring you can deliver on every order placed. When a customer orders a product that is out of stock, you are immediately at risk for an e-commerce chargeback. Reduce processing errors and make sure every order can be immediately fulfilled. When that is no longer possible, make sure that the item is marked as out of stock.

Clear Product Descriptions and Photos

An easy way to reduce e-commerce chargebacks is to make it extremely clear what the product looks like, its material, and any other important details. This type of clear and transparent communication will help you avoid chargebacks as customs are less likely to use a chargeback as a tool to get a refund.

Tools to Reduce Chargebacks

There are a number of other measures and policies that you can implement as part of your daily operations. In addition, there are various tools available to help you reduce your chargeback rate. These tools help you deal with chargeback threats through fraud detection tools, as well as reduce the time it takes to dispute chargebacks. Two great options are 3-D Secure and Rapid Dispute Resolution. Let's take a brief look at them.

3-D Secure

An important way to reduce chargebacks is to put strong fraud prevention measures in place and ensure you are selling to legitimate customers. One tool that can be very useful in combating chargebacks in this way is 3-D Secure. 3-D Secure (3DS) is a protocol that adds a layer of security for online credit card/debit card transactions. It utilizes the following three domains (the “3-D” in “3-D Secure”).

3-D Secure makes it easy to verify customer identities. When you use it, the payment information and the identity of the customer (the cardholder) must be verified before the transaction can be completed.

Because 3DS is aimed at tackling fraud, it does not necessarily make a transaction “chargeback-proof.” There are a variety of reasons—both legitimate and illegitimate—for initiating a chargeback that are not related to fraud. However, chargeback fraud (including “friendly” fraud , etc.) is a serious problem that can be very damaging to a business. Friendly fraud chargebacks are when a customer disputes a transaction that they or another family member made as fraud to their credit card company, resulting in a chargeback. Friendly fraud is often an accident but still impacts the merchant, leading to holds and chargeback fees. With 3DS, if a customer claims that a purchase was fraudulent but there is a record that 3DS was used to verify the customer's identity, your business is protected.

Rapid Dispute Resolution

To help answer the question of how to reduce your chargeback rate we need to get into some new tools which are available for you to use. In April 2021, Visa partnered with Verifi to launch Rapid Dispute Resolution (RDR), an upgrade of Visa's original Chargeback Dispute Resolution Network. In October 2021, Visa made it mandatory for card issuers to offer the service.

The purpose of RDR is to automate dispute resolutions at the pre-dispute stage of a chargeback, making it possible to resolve disputes, avoid the dispute process, and prevent chargebacks. When a customer contacts the card issuer to request a chargeback, the information is entered into Visa's dispute submission platform. The system then determines whether or not to authorize a refund based on rules that are predefined by the seller.

If it is authorized, your acquirer is notified through Visa's network, and a credit is provided to the customer on behalf of the issuer. Not only does this prevent a chargeback, but since the process is automated, little extra time is required to handle the issue. Together, these factors can help significantly to minimize the loss of time and money that ordinarily results from a chargeback.

Cases that do not meet the seller's pre-defined rules are handled in the standard chargeback process. Like 3DS, RDR is not a cure-all for chargebacks, but it can be a great tool for reducing and controlling the risk of chargebacks as well as the damage that results when chargebacks do occur.

Controlling Chargebacks with a High-risk Payment Processor

Good high-risk payment processors have the knowledge and experience to minimize the impact that chargebacks have on your business. Most also offer a variety of chargeback protection programs that can add another layer of security. They can also help you navigate the various tools available to combat chargebacks.

High-risk payment processors operate with the knowledge that your business is likely to have a higher chargeback rate than in other industries. They can set a reasonable and realistic threshold for allowable chargeback rates that takes that fact into consideration. As a result, you can have a bit more peace of mind without being in panic mode over the smallest increase in your chargeback rate.

Be sure to ask questions and discuss any concerns, whether you're currently looking for a high-risk payment processing system or you already have one. While it is true that they specialize in these issues, there are limitations to what they can do, even in the best of circumstances. Measures against chargebacks are most effective when you and your payment processor work as partners. Don't forget to use that valuable resource.

Why Choose Zen Payments to Help You With Chargeback Prevention?

At Zen Payments, we are a high-risk payment processor that is experienced with chargeback prevention, recurring transactions, and chargeback fraud. We have years of experience with high-risk transactions, and we'll help you deal with potential fraud and evolving fraud tactics.

Prevent the additional fees that come with e-commerce chargebacks with a merchant account from Zen Payments. Our team would be happy to speak with you and find ways to help your business prosper, so please don't hesitate to contact us.