Don’t Let Chargebacks Stress You Out — Here’s How

As a subscription business owner, chargebacks are an unavoidable part of your day-to-day operations. They cost millions in reversed charges and fees every year, not to mention time and effort wasted. That’s why it’s critical to handle them effectively.

What are chargebacks?

The dispute process was created to protect consumers from unauthorized transactions. (Think: stolen credit card). A chargeback occurs when a cardholder disputes a credit card transaction with their bank. The sale is revoked, and the merchant loses the sale amount plus fees.

Truth is, only 30% of chargebacks involve criminal fraud. Most losses come from friendly fraud, or chargeback, first party, or return fraud. In friendly fraud, the cardholder authorizes the purchase, but disputes it later.

Credit card companies favor the consumer in disputes, so it’s up to the merchant (you) to challenge invalid chargebacks. It’s your word against theirs to win the sale back.

So, how to handle chargebacks effectively when they occur, without harming your business or your customer relationships? There are two options, really: Fight or ignore them.

The costs of ignoring chargebacks

It’s tempting to ignore chargebacks, especially if they have not yet impacted your business financially, but the reality is that they will. You need to do two things:

1. Take steps to protect your company from absorbing 100% of chargeback costs
2. Seek to recover as much of your money as possible.

Why? The actual cost of every dollar of fraud — including chargebacks — rises to nearly 3.5 times the sales price in industries where companies sell digital goods or function online.

“Friendly” fraud costs business owners nearly $12 billion dollars a year. For the full cost of chargebacks, see our infographic.

The risk is not just financial. Too many chargebacks — usually more than 1% of charges — can lead to the termination of your merchant account.

What is the chargeback process?

1. The cardholder disputes a credit card charge with their bank.
2. The bank sends a chargeback request to the credit card company, and takes the disputed amount from you, as well as a nonrefundable chargeback fee. A temporary credit is issued to the cardholder.
3. The credit card company asks you for evidence that the charge was valid.
4. You/your team gathers the evidence.
5. You/your team send a response with the evidence to the credit card company.
6. The credit card company reviews the evidence, a process which can take up to 120 days.
7. The credit card company resolves the chargeback.

In the simplest outcome, you or the customer wins. If the cardholder wins the chargeback, you’re out the sales price and fees. If you win the chargeback, some or all of the disputed amount is returned to you. Learn more in this in-depth look at the chargeback process.

Ideally, you prevent chargebacks from happening in the first place. Your subscription billing systems, information gathered from banks/credit card companies, and customer service should be leveraged to reduce risk, loss, and fraud. Read how to prevent chargebacks in this article, and about how to prevent fraud here.

When all else fails, however, your first defense is understanding the chargeback reason. How you handle the chargeback depends on the reason given. (If in your research you find that the chargeback reason is accurate, then you have to accept the chargeback.)

The four major credit card networks classify chargebacks across 151 reason codes, that fall into the following 8 categories:

1 – Fraudulent

The cardholder claims that they didn’t authorize the charge. This is the most common reason, and can happen if the card was stolen.

Although criminally fraudulent charges are uncontestable, it is worth investigating these chargebacks if you think that the customer is mistaken or not telling the truth. They may have forgotten the purchase, or a household member may have charged it (a possibility for many reason codes).

Potential evidence:

• Date and time the order was fulfilled
• Billing info the customer used
• IP address and location used (digital goods)
• Proof that the customer profile was activated/verified
• Proof of access/downloaded goods
• Proof that the same device and card were used in previous undisputed transactions
• Shipping and tracking info
• Documentation of a relationship between order recipient and cardholder

2 – Unrecognized

The cardholder doesn’t recognize the merchant name or location on their credit card statement.

This issue crops up when the descriptor that appears on the cardholder statement doesn’t match the business name they recognize. It can also happen if the merchant uses a payment gateway; the merchant descriptor will begin with the gateway name, such as PayPal or Stripe.

Potential evidence:

• Same as “Fraudulent”

3 – Duplicate

The customer believes you charged them twice for the same product or service. This can occur if you have different subscriptions at the same price point.

Potential evidence:

• Proof that the charges were for separate products and services
• Communication with the customer stating the same

4 – Subscription canceled

The customer believes you charged them for a subscription after it should have been canceled. Sometimes, the customer expects a reminder before each recurring charge and didn’t receive one – or forgot that they committed to a paid subscription after a free trial period.

Potential evidence:

• Your subscription cancellation policy
• Proof of when/where the customer was shown the policy
• Any communications with the customer about their cancellation
• Proof that the customer accessed the digital product after they canceled their subscription
• Proof that the customer canceled their subscription after the last charge

5 – Product not received

The customer believes they did not receive the goods or services purchased. The goods or services may never have been received due to a shipping error or loss, or more perniciously, the customer may be trying to get the product for free (also known as digital shoplifting or stealing).

Potential evidence:

• Date and time the order was fulfilled
• Billing info the customer used
• Shipping and tracking info
• Proof that the customer accessed the digital product

6 – Product unacceptable

The customer believes the product received was damaged, defective, or not as described.

Potential evidence:

• Same as “Product not received”
• Documentation or pictures that prove products were as described
• Proof that the customer didn’t try to return the product or cancel the service first
• Proof that you replaced the customer’s product or service

7 – Credit not processed

The customer claims that the purchased product was returned or transaction canceled, but you have not yet refunded or credited them.

Potential evidence:

• Proof that a refund was issued before the chargeback was made
• Explanation why the customer was not entitled to a refund
• Refund and return policies, and an explanation of when/where the customer was shown it
• Any written communications with the customer about the refund

8 – General

The chargeback doesn’t fit into any of the other seven category types.

Potential evidence:

• Date/time the order was fulfilled, and details about products ordered
• Billing info the customer used
• Customer’s IP address and country
• Documented communications with the customer
• Shipping and tracking info
• Proof of prior refunds or replacement shipments

How else can you help resolve a chargeback?

Contact the customer before contesting the chargeback

Tactful customer service can go a long way toward clearing up a dispute. Reach out to the consumer to try to resolve the issue and/or obtain more information about the chargeback reason.

Don’t refund a purchase once a chargeback has been filed, as you run the risk of losing both refund and chargeback amount. If the customer agrees that the charge was valid, advise them to contact their bank and drop the chargeback.

You should still submit evidence to the credit card company, including documentation that the customer agreed to drop the dispute.

Decide whether you’ll challenge it

RFi Group recommends that businesses set a threshold below which friendly fraud chargebacks are not contested, since the cost, time and effort of defending a chargeback can exceed the benefits.

Don’t ignore all chargebacks as a policy, however. Chargebacks that can be fought within reason, should be. Chargebacks also provide valuable information on your customer’s experience and vulnerabilities in your process.

Take the chargeback as a learning opportunity to prevent future ones

Look for red flags among your most common chargeback reasons. Is there a gap or confusion in your customer experience that is triggering unnecessary chargebacks? For more on customer experience and how you can work to improve it, head to our customer onboarding post.

The ideal is always to handle chargebacks quickly and cost-effectively, preserving both your revenue and your reputation. Now that you know how to respond to chargebacks, the next step is to work on reducing them in the first place — our guide can help: