How to manage and optimize returns to reduce disputes and chargebacks

In 2024, there’s only one thing as important to shoppers as the ability to buy items online – the ability to return them!

Almost two thirds (63%) of shoppers expect to be able to return goods up to 30 days after purchase. And the fact that around 20 to 30% of all purchases made online are sent back suggests that returns aren’t merely a side effect of selling online – they’re a major part of it.

With that in mind, how you optimize and manage returns for your own store will play an equally major role in your business’s success. Handle returns well, and you’ll enjoy more loyal, engaged customers who enjoy interacting with your brand and buying your products. Handle returns poorly, and you expose your business to the threat of costly chargebacks, lengthy credit card disputes, and avoidable damage to your reputation and bottom line.

Below, we’re explaining the link between returns and chargebacks, and what both mean for your business. We’ll also provide our top tips for creating a returns policy that’s both balanced and effective, as well as how to sidestep the risks of an overly lenient approach, before exploring how Checkout.com can help you optimize your business’s returns in 2024.

Understanding returns and chargebacks

First up – what is a chargeback?

A chargeback is when a customer, having made a purchase with a credit or debit card from your business, raises a claim disputing the transaction.

When this happens, you’ll have time to prepare evidence to support the legitimacy of the transaction (such as details around how you authorized the card payment, plus proof that the goods were shipped on time and in the promised condition), before the case is heard by the issuing (that is, the customer’s) bank. 

If the bank rules in favor of the customer, you’ll be eligible for a chargeback fee – as well as the loss of both the product or service provided, and its cost.

Why do chargebacks happen? There are several reasons, including:

• Chargeback fraud. This occurs when the customer denies knowledge of the transaction – or claims, incorrectly, that your business failed to meet its obligations – in order to claim a refund, while retaining possession of the items they’ve purchased from you.
• Friendly fraud. This is a form of ecommerce fraud in which the customer has simply forgotten about (or doesn’t recognize) the transaction on their statement. Unlike chargeback fraud, ‘friendly’ fraud isn’t committed with malicious, or even fraudulent, intent – but for merchants, it unfortunately still amounts to the same thing.
• Customer dissatisfaction. If a customer isn’t happy with the product or service you have provided, they may choose to raise a chargeback, rather than seek a refund from your business.
• Customer confusion or impatience. Sometimes, customers raise a chargeback while they’re waiting for a refund to process. This may be down to confusion about the refund’s status (which can be a result of poor communication on your business’s part), impatience to get their money back, or simply a lack of understanding of the process.
• Poor communication on your business’s part. If a customer has raised a complaint or requested a refund – and your team has been too slow to address it – a frustrated consumer may choose to seek compensation from outside your business’s customer service channels, and dispute the transaction with their bank instead.

What’s the connection between chargebacks and refunds?

Well, both are, in essence, a form of customer dispute. And, since both involve the reversal of a sale, both have the ability to impact your brand’s bottom line and reputation – meaning both processes must be handled with care.

But, while a refund request is often perfectly legitimate – perhaps because the goods were faulty, arrived late or in poor condition, or simply because the buyer had a change of heart – chargebacks are often predicated on fraudulent intentions.

Still, there are situations – as we’ve outlined above – in which chargebacks aren’t inherently fraudulent, but simply a result of a disgruntled customer being unable to reach or reason with your business. Which is why having a transparent returns policy (and a similarly open and responsive customer service team) is so vital to minimizing chargebacks, and mitigating their financial and reputational consequences on your business.

Why are returns so important?

Whether you sell online, in-store, or both, providing your customers with the option to return items they’ve purchased from your business is vital.

Firstly, because it’s an expected part of the customer experience. Failing to offer refunds after a purchase – particularly if your customer is dissatisfied with the goods or services you’ve provided – can lead to negative reviews and unwanted consumer furore. Similarly, refusing to accept returns outright can lead to customers simply walking away from your business without making a purchase – often straight into the waiting arms of one of your direct rivals.

Offering refunds – particularly if your returns policy is flexible and forgiving – acts as a safety net for customers. It works in the same way as a money-back guarantee: removing the risk associated with buying online, and encouraging them to follow through with the purchase.

Plus, there may (and this depends on your jurisdiction) be legal requirements or consumer protection regulations that mandate a level of flexibility in your returns policy. So in addition to being good practice from a consumer perspective, it’s important for ticking the boxes of legal and regulatory compliance.

Why is it vital to avoid chargebacks?

Above, we touched on some of the reasons why your business needs to avoid chargebacks. First, there’s the loss of revenue on three fronts: the chargeback fee, the item you don’t get back, and the cost of the purchase, which the issuing bank refunds to the customer.

With repeated chargebacks, though, there’s even the chance you might lose something even more valuable than money – your relationship with your payment service provider. This could stop you from being able to accept credit and debit card payments altogether, or having to settle for the extortionate fees of a less reputable provider – a doom cycle with ever-widening repercussions for your brand and bottom line.

Worse still, excessive chargebacks could result in your business falling foul of a dispute monitoring system – such as the Visa Dispute Monitoring Program (VDMP) – and facing hefty fees and restrictions on how you operate.

With chargebacks, prevention is almost always better than the cure. And, while it’s possible to address and overturn chargebacks after they’ve happened – especially if you’ve been collecting the right documents, and performing the correct verification checks at the point of sale – it’s far better to stop chargebacks happening in the first place.

To this end, your return policies play a crucial role. Let’s find out how.

How merchants can optimize their returns policies

When it comes to preventing chargebacks, there are two aspects of your business’s returns setup to consider:

• Your returns policy (what you offer)
• Your returns process (how you offer it)

Both these aspects have a massive bearing on the customer experience at large, as well as on your business’s chargeback numbers.

So read on for our top tips on how to optimize your approach to returns.

Offer good customer service

We noted earlier how poor communication on the merchant’s side can lead to irritated, confused, or impatient customers – and how this, in turn, can result in chargebacks.

The solution? Communicating with speed, efficiency, and – perhaps most importantly – empathy.

In other words, providing excellent customer service. If a customer complains, get back to them quickly. If they request a refund – and the stipulations of your return policy are met – then process that refund for them, letting them know how long it’ll be until they can expect to see the funds back in their account.

Of course, this underlines the importance of having the right customer service channels. Offering real-time customer support, such as a live chat tool or chatbot for after-hours queries, is vital – and if you can offer phone-based support, your customers will thank you!

Provide refunds only to the original payment method

When you provide a refund, do so only to the customer’s original payment method. This helps prevent fraudulent activity, such as money laundering, by the cardholder, and ensures a compliant, traceable refund process.

In addition, refunding to the original payment method reduces your risk of further chargebacks. 

Let’s say, for instance, that a customer – who purchased an item from your business with a debit card – visits your store to complain, and you end up refunding them with petty cash from the register. In this case, the customer could still initiate a chargeback with the issuing bank, as there’s no concrete evidence of you refunding the purchase. Should this happen, you’d be out of pocket for double the item’s value, plus the item itself, on top of a chargeback fee.

Set up chargeback notifications

Should a chargeback occur, you’ll want to know about it instantly. So get in touch with your payment processor – the company, like Checkout.com, responsible for processing credit and debit card payments on your business’s behalf – to request these.

With early knowledge that a chargeback has been raised against you (and thanks to chargeback reason codes, some idea as to why), you can move faster and more strategically to address it. Considering how taxing and time-consuming the representment process is if you do decide to fight the chargeback – and how much evidence you’ll need – this headstart is vital.

Establish return windows and conditions

Your returns policy should have clearly stated return windows, which denote how long the customer has to send the item back – and in what kind of state it must be in – to be eligible for a refund. This puts you and your customer on the same page, and helps prevent arguments.

What’s more, these return windows, and any other conditions, must not only be transparent – they should be customer-friendly, too.

Ideally, give your customers 30 days – or even a little longer – to allow them ample time to evaluate the item. Plus, thanks to a psychological phenomenon known as the “endowment effect” (which states that the more time a person has with an item, the closer the attachment they form with it), there’s every chance a longer return window can work in your favor, too.

How to reduce the risks linked to generous return policies

While generous return policies can engender greater customer loyalty and satisfaction – plus, if we consider the endowment effect, a reduced return-rate likelihood – they do come with some drawbacks. And, while in principle all merchants would love to be able to offer the friendliest, most flexible return terms, it’s not always feasible in practice.

That said, there are several strategies your business can employ to reduce the risks of a generous return policy and develop a buffer against return abuse. And, in doing so, strike the right balance between customer-friendliness and business sense.

Let’s take a closer look.

Use systems and processes for detecting return abuse

Return abuse (also known as return fraud) can take a number of forms, including:

• A customer returning an item that they’ve damaged or altered
• “Wardrobing”, when a customer wears or uses the item several times before returning it: essentially treating the purchase as a short-term rental, without the fees
• A customer falsely claiming issues with the purchase to facilitate a refund they’d otherwise have been ineligible for

Sometimes, return abuse can be as simple as a customer returning items again and again, without a legitimate reason, to take advantage of a merchant’s goodwill. In more extreme cases, it can involve generating counterfeit receipts, then using these to “return” goods stolen from a bricks-and-mortar store.

How do you stop it? Fortunately, there are several processes and systems your business can use to combat return abuse, including:

• Maintaining a blacklist of repeat return abuse offenders to stop them transacting with your business in the future.
• Charging restocking fees for returned (non-defective) items to discourage frivolous and fraudulent returns.
• Utilizing Checkout.com’s fraud detection tools. These equip you with all the data you need to monitor and understand your returns, and flag transactions associated with previous fraudulent cardholders or activity (such as refund abuse).
• Training your staff to recognize return abuse’s red flags, and ensure they’re intimately familiar with your business’s return policy.
• Educating your customers – through emails, blogs, or announcements on your website or social media – about your return policy to avoid unintentional return abuse.

Request proof of purchase requirements for returns

Any return request that comes your way must be accompanied by proof of purchase – period.

This helps deter fraudsters from passing off stolen goods as purchases from your store, and – providing you have a comprehensive order management and sales system – makes it difficult for forgers to replicate your receipts.

Requiring proof of purchase also improves the accountability of the return process. This ensures that the onus is on the customer to provide evidence of their original purchase, which makes the return process more fair and transparent.

Plus, by maintaining these records you make it easier for your business to monitor and manage returns. (Which, as we’ll see shortly, is a must.)

Implement identity verification (IDV) for return initiators

Verifying the identity of the return initiator helps you confirm that the person attempting to request the refund is the same person that made the initial purchase.

This helps you prevent account takeover fraud (whereby a hacker gains unauthorized access into the cardholder’s account with your business, and attempts to gain credit by returning items in their name), as well as mitigate against future fraud. For example, if a customer’s account has been associated with multiple cases of similar types of return abuse, IDV can help you make these links, and take steps to block that customer from making future purchases.

And it’s not just when they’re returning an item that you should be verifying your customer’s identity – it’s when they’re buying one, too. Authentication at the point of sale (which includes processes such as two- or multi-factor authentication) helps prevent fraud. And, should a chargeback arise, proof of IDV counts as all-important evidence to help you win that credit card dispute.

Inspect returned items

By inspecting returned items, you can verify that the goods are still in saleable condition, and ensure that the customer has respected your business’s return policies.

This can inform your decision to issue a refund, and – in the case that the goods have been returned without good reason, or with customer-inflicted damage – can be used to build up a data bank about return abusers and their strategies.

Maintain detailed record-keeping of return transactions

One of the most effective weapons in your return abuse-fighting arsenal? Data.

Developing, and constantly updating, a log of return transactions – whether return abuse took place or not – makes it easier to spot and stop return abuse going forward.

You can use data to tackle return abuse by: 

• Reviewing historical data to pinpoint trends in previous known cases of return abuse. Combine this with a machine learning fraud detection system – a series of AI-powered algorithms that learn from your business’s past transactions to make fraud-fighting decisions in real time – and you can spot scams before they impact your business.
• Regularly monitoring your returns to spot trends. A sudden spike in return numbers could, for example, suggest that fraudsters are targeting a particular product or retailer.

Of course, the effectiveness of such a data-led approach is only as good as the data you’re feeding into it. So in order for your customers to submit a return request, make it mandatory for them to supply detailed reasons for the return, and a description of their issue(s).

How to optimize your returns with Checkout.com

At Checkout.com, we don’t simply process your business’s payments; we help you manage all aspects of ecommerce retail.

We put all the data you need to analyze, understand, and act on your business’s returns at your disposal, through a simple, intuitive payments dashboard. With us, you can capture, authorize, and settle payments, while safe in the knowledge that refunding – or even, in some circumstances, voiding – them is user-friendly and uncomplicated.

What’s more, we can help safeguard your business from fraud by implementing identity verification checks at opposite ends of the customer journey: the purchase and the refund. Our Identity Verification solution is 24/7, and has been proven to reduce operational costs by up to 50%.

Finally, our Fraud Detection Pro utilizes advanced machine learning techniques to protect your business from the myriad types of payment fraud out there. By continually learning from and adapting to your transactions – as well as trends from across our entire network – it’ll bolster your business against bad actors. 

Piqued your interest? Get in touch with our team of experts today to discuss how Checkout.com can help you prevent fraud, and sell online with confidence.