Guide to Chargeback Mitigation: Strategies to Protect Your Business

Chargebacks occur when a consumer disputes a charge on their credit or debit card and asks their bank or card issuer to reverse the transaction. Chargebacks are primarily used to protect consumers from fraudulent activity, as well as to resolve disputes with merchants. For example, a cardholder might initiate a chargeback if they notice an unfamiliar transaction on their bank statement, or if a merchant fails to deliver goods or services that they’ve purchased.

When a customer initiates a chargeback, their bank investigates the claim to determine its validity. If the dispute is valid, the bank will reverse the transaction and credit the cardholder’s account with the disputed amount. The bank then debits the same sum from the merchant, effectively transferring the funds back to the consumer. 

How payments data can mitigate the risk of chargeback fraud

As you know, the chargeback was primarily designed by credit card companies to protect customers. It’s how shoppers get their money back if the product is sub-standard, doesn’t arrive, or it wasn’t them who bought it at all. 

Each year billions of dollars are refunded by merchants - typically between 0.7% and 1% of all their sales - in the form of chargebacks to customers. The vast majority of these claims are not disputed, so it’s hard to get an accurate picture of how many are genuine. But growing evidence reveals that chargeback protection is increasingly being subverted.

What is chargeback mitigation

Chargeback mitigation refers to any strategies or measures that your business puts in place to reduce the risk and impact of chargebacks and illegitimate disputes. This helps you to limit the financial losses resulting from chargeback fees while maintaining positive relationships with your customers and payment processor. An effective chargeback mitigation strategy should involve a combination of preventive measures and responsive actions that you can deploy as soon as your business starts to experience a sudden and potentially damaging increase in chargebacks. 

When is chargeback mitigation needed?

When you need a chargeback mitigation plan and when you need to use it are two different questions. All merchants should have a chargeback mitigation strategy ready to roll out when necessary. That way you can act fast to limit the damage of a sudden increase in chargebacks - it’s no use waiting for crunch time to start developing your mitigation measures. 

You’ll know you need to take action if your chargeback ratio - the number of chargebacks you experience as a percentage of your total monthly transactions - exceeds the thresholds set by your card network. When this happens, most networks will give you an early warning notifying that you need to take decisive action to reduce your chargebacks. If you fail to do so, you’ll be placed on a dispute monitoring program. These programs require you to get your chargebacks under control before a set deadline, after which you’ll face fines for subsequent disputes and months spent on the program. To prove you are making the effort to bring your chargeback ratio back under the threshold, your bank will expect to see your mitigation strategy.

Strategies for chargeback mitigation and solution

Of course, you don’t need to wait until you’re being warned by your card network. Your goal should be to always maintain a low chargeback ratio by consistently applying the measures detailed below. 

Implement a Fraud Detection system with filter

A powerful Fraud Detection system will help you identify and prevent fraudulent transactions that are likely to lead to chargeback fraud from occurring in the first place. You can create flexible rules that, when combined with your system’s machine learning capabilities, will flag any transactions that bear certain suspicious characteristics for further authentication or blocking. 

Improve your customer support

Good customer support is essential. If your customer is confused about a charge or frustrated about a delivery time, you need to address their complaint quickly, because dissatisfied customers are much more likely to initiate a chargeback.

That means making it clear on your website how to contact customer support via phone, email, and live chat - the more options the better. You should also train your customer support staff to deal with a wide range of issues appropriately, so that any complaints can be resolved in the first instance and before they escalate to a chargeback.

Optimize your shipping process

You should offer a range of shipping options to meet different preferences, and make it easy for your customers to find the best option for their needs at checkout. You should also clearly state expected delivery dates and be transparent about the costs involved in shipping, especially for international deliveries. You can’t control what happens when your products are out with your delivery partner, but you can manage customer expectations to reduce the chance that they’ll initiate a chargeback if something does go wrong. 

Maintain transaction documentation and records

Documents and records of all your transactions will serve as vital evidence in the event of a dispute. You can use them to prove that a charge you’ve taken from a customer is legitimate and that the goods or services they purchased were delivered as expected. 

Analyze chargeback data

You should continually analyze your chargeback data to identify why your chargebacks are happening. That way you can spot trends and take targeted action to, for example, address slow delivery times. Data analysis will also help you implement thresholds that you can use to monitor for unusual chargeback activity. 

Focus on avoiding chargebacks

You can avoid chargebacks by focusing on the key triggers that cause them in the first place. Almost all chargebacks are the result of either unauthorized criminal transactions, merchant’s errors or oversights, or invalid customer chargeback requests (friendly fraud). You should develop a mitigation strategy that encompasses specific measures for these three triggers, because, while they might all cause chargebacks, they all require different solutions. 

Implement a chargeback alert

Rather than relying on your card network to warn you, you should implement a chargeback alert in your own systems to notify you when your chargeback ratio is increasing. It’s up to you what threshold the ratio should have to pass before you’re alerted, but it should be high enough that you’re not being constantly warned, but low enough that it gives you ample time to take action. 

E-commerce as breeding ground for chargeback fraud

With the growth of e-commerce and digital services, more transactions are performed with the consumer, product and merchant apart. These ‘card-not-present’ purchases give an opportunistic shopper the chance to claim ignorance about the transaction. Delivery of the product - or not, as may be alleged - offers another chance to hoodwink. Savvy consumers know the default position of their bank is to believe them and force a refund. They also know the merchant is likely to want to avoid the hassle and reputational threat of disproving their complaint. So the person gets their product, and they get their money back. Of more concern to merchants is the increase in large-scale, systematic chargeback fraud.  

Fighting chargeback fraud with Checkout.com

In truth, predictive modelling in the payments space is relatively immature. And much of it is focused on improving payment success rather than combating chargeback fraud. But that’s OK. It doesn’t have to be perfect. Fraud is about exploiting the soft touches. Merchants only have to make it harder to commit fraud with them than another vendor, and they push the fraud elsewhere, with all the costs and consequences that go with it. 

So tackling fraud - and your choice of PSP to give you the best shot at it - has become more than just a payments issue. It is another opportunity for a merchant to use payments to strike a competitive advantage in its market. It is about marketing, customer retention, brand reputation and everything else that makes a business tick over and grow. 

Checkout.com’s Fraud Detection system fights chargeback fraud by stopping fraudulent transactions before they happen. Our system uses machine learning and flexible rules to spot suspicious activity. If a transaction resembles previous transactions that have led to chargeback fraud, you can automatically route it for further authentication or to be blocked.  What’s more, Fraud Detection Pro continually analyzes our entire network to learn about fraudulent trends, which helps you to stay one step ahead of criminals.