How to Prevent Chargebacks in 2022

The industry has seen a surge in chargebacks over the past few years and as consumers grow more tech-savvy, that number is only expected to continue increasing. There are many reasons for this spike, which include but aren’t limited to fraud and identity theft.

Chargebacks are a problem that many companies have to deal with. This article will discuss how to prevent chargebacks in 2022.

When a consumer demands a refund via their bank or credit card provider to reverse a transaction, this is known as a chargeback. If a customer does not recognize a transaction or cannot reach an agreement with the merchant, they will request a refund via their bank rather than through the company.

Chargebacks may occur for a variety of reasons, including logistical problems, inventory or clerical mistakes, and even fraud. The majority of chargebacks, on the other hand, may be avoided. We’ll look at how to avoid chargebacks in your small company in this post.

Chargebacks may be avoided in four ways:

1. Establish a clear expectation

To prevent upset or confused consumers, be clear about what customers should anticipate from your goods or services.

Make sure your product descriptions are very clear.

Be upfront about what your consumer is receiving to prevent buyer’s regret or complaints that the goods aren’t what they anticipated. Write clear and thorough product descriptions that contain measurements or size information, many product photographs, and even a bulleted “what’s in the box” list of what consumers should anticipate.

Tip: If you’re selling secondhand things, be sure to mention any functional flaws or aesthetic damage.

It’s also a good idea to have a reviews area on your product pages so that shoppers may see the item from another user’s viewpoint before making a purchase.

A clear product description, useful product photographs, and a reviews section are all included in J.Ing’s women’s clothes shop. (image courtesy of J.Ing)

Itemized Receipts should be provided.

You should provide your consumers an itemized receipt documenting everything they purchased, whether physically or digitally (through email/text). This will stop them from saying they bought something they didn’t. You should also save a copy of the receipts for your own keeping.

You should provide specific payment descriptors on your receipt in addition to an itemized summary of what clients bought. Include it on the receipt of payment acknowledgment to let your consumers know what to anticipate in their accounts.

Better still, collaborate with your payment processor to alter the charge’s appearance. You may be especially vulnerable to this problem if you operate under a DBA or trade name that is notably different from your LLC or what is displayed on your merchant account.

On receipts and charges, provide your customer service phone number and/or email address so customers have somebody to reach before filing a dispute.

Be Clear About Your Return Policy

You may also prevent chargebacks by explicitly stating your return policy on your website, receipts, and in your shop. It’s also a good idea to inform folks at the check-out counter. Before swiping a customer’s card or taking money at my shop, we would tell them of our return policy. Then we’d sign the receipt, which had the policy written on it, to show that we’d informed the client about the return policy.

Customers should be required to sign contracts for subscription services.

Contracts are a great method to define expectations, particularly when it comes to services and subscriptions, or when you employ recurring payments. Chargebacks may also be resolved with the use of contracts. Your contract should spell out the conditions of service, including any rate charges or adjustments, as well as when costs will be charged (first of each month, for example). They should also provide instructions on how to cancel. Specific services, pricing, and timeframes should all be included in service contracts.

Tip: For each installment, subscription services should provide charge reminders and payment confirmation emails, as well as advice on how to amend or cancel the subscription.

2. Describe the mode of transportation.

Logistical blunders or errors are another important cause of chargebacks. Make sure you protect your consumers by giving logistical information and partnering with a reputable shipping and fulfillment firm.

Be Upfront About Fulfillment & Delivery Times

Tell your consumers how long it will take to finish the purchase before sending it, as well as estimated delivery dates if you have them. Some fulfillment businesses even provide consumers the option of choosing alternative delivery timeframes according to their schedule. In your confirmation email, you should also mention your estimated shipment and delivery dates.

Provide Shipping Notifications & Tracking Information

Customers should be notified when their order is on its way and should be able to monitor it themselves. Send your customers a delivery notice by SMS or email when their items have shipped, along with their tracking information. You should also tell your customers and offer an updated timetable if there are any delivery delays or fulfillment issues.

For each purchase, Roden Gray, a Canadian corporation, sends out confirmation and shipment notices. (Photo courtesy of Roden Gray)

Out-of-Stock Listings are explained.

If you decide to show an out-of-stock item, make it very obvious to consumers that they must control their delivery expectations. You should identify out-of-stock products as sold out and indicate projected replenishment, dispatch, and delivery dates. Depending on your website, you may also include a section where customers can enter their email addresses to be alerted when a product returns to stock. You might alternatively choose not to show goods that have sold out. Keeping track of your inventory might help you avoid collecting payments for items that are out of stock.

This merchant clearly marks their goods as out of stock and provides a place for customers to enter their email address to be alerted when it returns. (Image courtesy of Baymard Institute)

Tip: Using a point-of-sale (POS) system with inventory management is the easiest approach to manage your inventory and receive real-time stock tracking. We recommend Square since it’s a free choice with a lot of fantastic features and capabilities, but you should compare all of the top POS systems to choose the one that’s right for you.

3. Defend Yourself Against Fraud

Chargebacks are caused by either friendly or criminal fraud, accounting for up to 85% of all chargebacks. Customers will sometimes attempt to acquire something for free. In certain situations, criminals or fraudsters may use a stolen credit card to make online purchases. When it comes to fraud, there are several possibilities.

True Fraud Chargebacks: These are chargebacks that occur as a consequence of hacking or identity theft, and indicate that a transaction was made using a stolen card (or card information) without the approval or knowledge of the card owner.

Friendly Fraud Chargebacks: When a consumer rejects a transaction that they made deliberately, this is known as a friendly fraud chargeback. This might be because the consumer was dissatisfied with the goods, didn’t think it fit the description, didn’t want to deal with the inconvenience of returning it, or just didn’t recognize the transaction on their bank account.

While it’s easy to believe that fraud only occurs with expensive things, the Federal Trade Commission finds that the average amount paid in fraud complaints is just $311. However, there are steps you may do to avoid bogus chargebacks.

Keep an eye out for red flags.

When attempting to identify fraud, there are a variety of things to look for, including:

• Security codes that are incorrect
• Inconsistent billing and shipping addresses
• A P.O. Box, shipping firm, motel, or abandoned building is used as a shipping address.
• Several orders from various cards are sent to the same location.
• A phony email address
• Shipment to a high-risk country
• After entering a valid shipping address, make a request to alter it.
• Orders that seem strange (50 pairs of shoes in 30 different sizes)
• Overpaying and then asking for a refund by wire transfer or to a third party (always refund to the original card or bank)
• Particularly for overseas purchases, request immediate/next-day shipment.

Require Customer, Payment & Order Verification Information

Chargebacks occur when a client challenges a charge with their bank or credit card company, but merchants may also attempt to avoid fraud through regular returns. Customers should be required to complete verification questions before submitting a return request. Customers should be required to enter their first and last names, their payment method’s last four digits, and purchase confirmation information such as an order number. This can assist you to confirm that the consumer you’re conversing with placed the purchase, eliminating any fraudulent requests.

Shipping Delay

Fraudsters, according to PayPal, want overnight shipment so they may rapidly resell the product. For pricey and in-demand purchases, it advises a 24- to 48-hour wait time. Customers may also make changes to their orders before they are sent, such as changing the size or color.

Use fraud-detection technology in your processing.

Chargebacks from purchases made using stolen credit cards might be considerable. Using a reliable payment processing platform is the best approach to prevent this and other circumstances involving fraudulent payments.

You’ll also want to use a chip reader or contactless payments whenever possible—these are the safest options. If you must utilize the magnetic stripe, get a signature and, if feasible, create an imprint of the card. (In a fraud inquiry, this may be used as evidence.)

For any online transactions, you should also utilize payment verification techniques. Three parties are involved in the verification process using 3-D Secure, for example (the customer, the issuing bank, and the payment processor). While it is obligatory in Europe, it is still optional in the rest of the world. Address Verification Services (AVS) and card security codes, such as the Card Verification Values (CVV) code found on the back of most credit cards, are two further verification methods.

4. Preventing Errors in the Backend

Chargebacks are caused by a variety of factors, including consumer fraud and clerical mistakes. In fact, as seen in the graph above, up to 35% of chargebacks are caused by backend errors. Inaccurate inventory counts, unprocessed credit, duplicate charges, shipping the incorrect things, and inadequate recordkeeping are just a few examples. Keeping your records in order and amending any order difficulties swiftly and clearly with clear communication is the greatest approach to prevent clerical issues that might result in a chargeback.

Keep meticulous records

Ideally, you will never make an order or payment error, and you won’t face clerically induced chargeback disputes. The best way to do this is to keep meticulous records of your sales or orders so you don’t make backend mistakes and have a detailed record of all your transactions that you can turn to when disputes arise.

I suggest reconciling your POS system on a regular basis so you can remain on top of your transactions and catch and correct any errors quickly. Furthermore, you won’t be able to be in your business at all times, and your employees will most likely handle many of your transactions and customer disputes.

Make sure your personnel is well-trained and aware of all credit card payment methods. If you routinely accept orders over the phone, take additional precautions here. Verifying addresses, obtaining the CVV off the back of the card, and validating the expiry date may all be part of your procedure. You’ll also want your employees to do the following:

• Check everything they typed in by hand.
• Before continuing, double-check that any canceled purchases/items have been entirely nullified.
• Recognize bogus orders.
• Check signatures
• Ensure that contracts are signed.
• Customers should be informed about the return policy.
• Make sure clients are aware of what to anticipate (such as delivery dates and the name to expect on the credit card statement)
• If they have to contact to receive authorization, keep track of the date, time, representative’s name, and dollar amount.

Resolve issues as soon as possible.

At the end of the day, errors happen when you’re operating a small company. There are several options, such as charging a consumer twice or sending the incorrect item. In these cases, the best thing you can do to prevent a chargeback dispute is to contact your clients as soon as the issue develops.

It’s ideal to contact your consumers personally, whether via phone, text, or email and give them a thorough summary of the problem. You should then provide them with simple alternatives, such as a free return label or a customer service number, so customers can settle their difficulties without having to file a chargeback dispute.

The Effects of Chargebacks on Small Businesses

While it is comfortable to believe that chargebacks have little effect or are a rare occurrence that you should not be concerned about, this is regrettably not the case. Chargebacks may wreak havoc on your profit margins. In reality, in 2020, the average chargeback ratio, or chargebacks per number of sales, was 1.94 percent, equating to 3.81 percent of yearly revenue for merchants.

Here are some more chargeback statistics that every small company owner should be aware of:

• Chargebacks are often the first option for consumers: on average, only 4% of customers will contact to complain about a problem; the other 96% are at danger of submitting a chargeback.
• Chargebacks will cost you: Every $1 lost to fraud in the United States costs $3.36 in 2020, and that amount is expected to rise (to $3.60 in 2021).

The cost of each dollar lost to fraud is increasing, and it is approaching $4.

• Ecommerce businesses are the most vulnerable to fraud: Fraudulent behavior is expected to cost online merchants $20 billion by 2021.
• Gift cards are becoming more common in chargeback fraud: According to a recent Federal Trade Commission data focus, businesses reported losing $148 million in gift card frauds in the first nine months of 2021.

Conclusion

If you’re experiencing chargeback issues, conduct an analysis to determine the most common causes and then look for targeted solutions. Remember to maintain precise records, teach personnel about operational compliance, use clear payment descriptors, establish correct product and delivery expectations, and keep a look out for fraudulent activity to avoid chargebacks.

If fighting chargebacks is too much effort for you, there are chargeback management services that may help. While they are experts in this field, the expense of their services should be weighed against what you can perform on your own.