In order to protect consumers from fraud and suspicious transactions, the European Union has established directives providing for the reimbursement, under certain conditions, of sums paid by card. These procedures are known as “chargebacks”.
Often long and costly, chargebacks have a direct impact on your e-commerce performance. Minimising them can be a real lever to increasing your revenue. In this article, we will explain the chargeback procedure in detail and advise on how to protect yourself and deal with them in the best way.
What is a chargeback?
Chargebacks are requests for reimbursement made by clients to their bank or credit card issuer when they believe they have suffered during an online transaction. A chargeback can be initiated for various reasons, such as receiving a damaged or non-compliant product, the non-delivery of goods or services or even fraud.
When a chargeback is initiated, the client’s bank reimburses the transaction and in turn requests the company to reimburse the corresponding sum. If the company is not able to supply sufficient proof to challenge the chargeback, it loses the amount reimbursed. Chargebacks can be costly for companies and lead to extra costs if there are too many of them.
Chargeback procedures generally occur this way:
1. The customer requests a chargeback from their credit card issuer owing to dissatisfaction with a transaction.
2. The issuer checks the chargeback request and reimburses the client for the transaction.
3. The credit card issuer sends a chargeback notification to the company concerned and asks it to reimburse them for the amount of the transaction.
4. The company generally has 30 to 45 days to dispute the chargeback by supplying proof of the transaction, such as receipts or order books.
5. If the company is able to supply sufficient proof, the chargeback is cancelled and the transaction is considered final. If the company is unable to provide sufficient proof, it loses the amount of the transaction.
6. If the company challenges the chargeback and the bank or credit card issuer decides in its favour, the customer can still appeal this decision and request a “second level chargeback” which will be assessed by a third-party organisation.
NB: the chargeback procedure can vary according to the customer’s bank or credit card issuer and the country where the transaction has taken place.
What are the main causes of a chargeback?
In 2021, we carried out a study with our clients to find the reason for chargebacks. It would appear that 80% of cases are in relation to fraud, while 18% are down to commercial disputes.
There can be many cases of fraud, but two stand out in particular:
Friendly fraud, also known as fraud by default or involuntary fraud, is a type of fraud where a customer initiates a chargeback intentionally, but with no bad intentions. This can happen when a customer forgets that they have carried out a transaction or when he or she does not recognise the transaction on their bill.
Friendly fraud can generate extra costs for companies, as they not only lose the amount of the transaction, but they also have to meet chargeback costs. It is therefore important for companies to protect themselves against friendly fraud by communicating clearly with their customers and supplying them with precise details of their transactions. It can also be useful to establish pre-transaction verification processes to ensure that the customer is totally aware of the purchase he or she is making.
You should also be aware of the problem posed by redirection to the payment page: the final customer will see the name of the acquirer appearing in the search bar and not that of the website where he or she is making their purchase. If he does not make the link, he might think that he has got the wrong website or that it is a scam. To avoid this type of chargeback, it might be interesting to invest in a “descriptor” which will allow the link to your site to be maintained at the time of redirection (if there is one).
Fraud by split payment
Fraud by split payment, also known as fraud by chargeback or fraud by bank opposition, is a form of fraud in which the card bearer makes the first transaction of the payment by instalment, then cancels the order with the bank or simply empties his account so that he is in a situation of insolvency. This is a case where the recovery of debts is even more delicate.
To mitigate this risk, you can equip yourself with a guaranteed payment solution which will ensure that you will receive the whole transaction, no matter what the payer may do or his state of insolvency. This is the case with Payplug’s PayLater feature and Oney is a deferred payment service which allows customers to pay for their online purchases in several instalments, with no extra costs.
How to avoid them?
We saw above that nearly 80% of chargebacks are related to fraud and that this can come in many forms. Sometimes, the cardholder states that he did not make the original transaction, which is an element difficult to challenge. To mitigate this, the simplest thing is to have a preventive solution in hand. Through an algorithmic analysis based on thousands of transactions, Payplug ensures the security of your customers’ transactions and strengthens monitoring where transactions appear suspicious. For this, we use 3D Secure, a security protocol developed by the Visa company to protect online transactions against fraud. When a customer makes a purchase online with a credit card protected by 3D Secure, he or she is redirected to a card verification page. The customer then has to enter a verification code, which is generally sent via SMS or generated by a verification app. This ensures that the cardholder alone can carry out the transaction.
For even greater security, the solution reviews the payer’s information and determines his level of reliability. Blockages are then put in place according to the countries from which payments are made, IP addresses used, card types and BIN (the first six numbers on payment cards), operators and e-mail addresses.
In order to minimise the risks of chargebacks linked to commercial disputes, make it a priority to avoid misunderstandings with your customers. For this, concentrate your efforts on the following points:
1. Give excellent customer service: you thereby reduce the risk of chargebacks by responding quickly to your customers’ questions and concerns.
2. Communicate clearly: ensure that your customers understand what they are buying and what they can expect in terms of delivery and service. This can be through a clear description on the product information sheets, for example.
3. Have a clear returns policy: ensure that your clients understand your returns policy and that it’s easy to follow.
4. Keep a record of transactions: ensure that you keep detailed files of all transactions, including order numbers, dates and amounts. This will help you challenge chargebacks efficiently, if necessary.
5. Demonstrate flexibility: if a customer is dissatisfied with their transaction, be open to discussion and see if you can find a friendly solution to avoid them challenging the payment.
Some card schemes have also developed programmes to simplify chargeback procedures. For example, Visa and Verifi have together constructed the Visa “Rapid Dispute Resolution” service or RDR, which can help companies sort out disputes before a procedure is even initiated. The programme aims to accelerate the processing of chargeback claims and to reduce the time and costs associated with their settlement. It allows companies to challenge chargebacks using an online platform which offers to submit proof of transaction and to communicate directly with the issuing banks in order to settle chargeback claims.
Chargebacks can therefore be costly and time-consuming, as they often force you to supply proof to challenge objection requests. To avoid them, it is recommended that you implement solid customer relations management processes to ensure that customers are completely satisfied with their purchases, as well as using counter-fraud solutions which offer protection against suspicious transactions. For this reason, Payplug has made fighting fraud one of its priorities, offering its customers solutions and a dedicated prevention team.
For further details and advice, you can download the guide “Chargebacks: How to minimize them to accelerate your growth”.