Ahhh, the chargeback. The most hated word in the lexicon of the modern entrepreneur. A chargeback is when a customer contacts his or her issuing bank to dispute a charge rather than to go directly to you, the merchant, to resolve the matter. Chargebacks can occur for many reasons, including poor customer service, unrecognized charges, uncancelled subscription billing, slow shipping, unauthorized charges, friendly fraud (more on this later), and more. They are particularly challenging for ecommerce merchants, where the card holder is not present for the transaction.
Chargebacks have become a difficult (and costly) minefield for online merchants to navigate. They are more than just an expense, they are an existential threat to your business. If your merchant account receives too many chargebacks, or your chargeback ratio is too high, your merchant account can be shut down and your funds held for up to six months. So, it is vital to manage this key part of your business, to improve your margins and ensure the continuity of your business.
The Chargeback Cycle
The chargeback cycle begins with (1) the customer contacting her bank (the issuing bank) to initiate the chargeback. (2) The customer’s bank will locate the transaction and attempt to validate the customer’s claims based on the information provided. (3) If the customer’s complaint appears to be valid, the issuing bank will file a chargeback. The merchant’s acquiring bank (the bank that issued the MID), receives the chargeback case and forwards it to the merchant, along with a deadline for the merchant’s response (also known as representment). (4) The merchant then compiles the transaction information (the invoice or receipt, tracking information, records of communication with the customer, etc.) and submits the representment to the acquiring bank. (5) The acquiring bank submits the chargeback representment to the cardholder’s bank for review. (6) The issuer reviews the case and will decide to either award the customer with the chargeback or decide in favor of the merchant. (7) If the merchant is victorious, the funds from the transaction are returned to him. If the customer’s bank decides in favor of the customer, the merchant can (8) initiate a second chargeback, or pre-arbitration, contesting the chargeback again. The merchant (9) compiles even more information supporting his case and a second presentment is sent to the card brand (Visa/Mastercard), instead of the issuing bank. (10) the card brand reviews the information submitted by the acquirer and the issuer and (11) issues a ruling in favor of one of the parties.
This process can take time and be a distraction from activities (like monitoring your KPIs, listening to support phone calls, etc.) that can actually reduce chargebacks. Most experienced advertisers outsource their representment and chargeback management to third party companies. Feel free to contact us if you need help finding the right team to help you represent and manage your chargebacks.
What Causes Chargebacks?
Friendly Fraud
The cardholder right to dispute a charge is vitally important to the credit card payment process, because it ensures consumer trust in credit card payments. However, some unscrupulous consumers have been gaming the system for years with ‘friendly fraud’. Friendly fraud is when a consumer places an order for a product online, receives the product and then disputes the charge with her bank. In this scenario, the customer has no intention of returning the goods to the merchant and is opening a chargeback with the bank to get the transaction refunded, thereby getting the goods for free. Estimates on friendly fraud put the percentage of friendly fraud related chargebacks somewhere between 17% and 32% of all chargebacks.
Bad Traffic
While affiliate networks and affiliates can help you scale extremely fast, it can come at a price. Affiliates are driven by CPA commissions (Cost Per Action), and some affiliates may make deceptive and even false claims to get a sale. Misleading customers about the true cost of the product may generate quick sales, but it inevitably leads to refunds, chargebacks and higher customer service costs. This is not to say that all affiliate traffic is low quality and to be avoided. However, as an advertiser, you must guard your business (and your hard-earned MIDs) against affiliate fraud. This means checking KPIs, like refund rate, chargeback rate and partials ratios must be done regularly (daily and weekly). When you spot a bad affiliate, cut them immediately and address the situation with your manager at the network. A quality network will work with you to cease traffic from bad pubs (publishers, aka affiliates), and credit you for the bad sales. With a system of checks in place, you can confidently scale using affiliates.
Shipping
Slow shipping and lost packages can not only cause customer service headaches and reputational damage, but can also lead to chargebacks. Advertisers should be shipping with tracking, and monitoring delivery carefully. Each week, you should be checking your shipments to ensure their arrival and addressing any issues with your fulfillment house.
Customer Service
Long hold times, off-shore customer service and (even worse) automated customer service lines can wreak havoc on an advertiser’s bottom line. Nine times out of ten, if a customer is calling your 800 number, they are not happy. This point in the customer experience is crucial – a make or break moment that can turn into a chargeback, or a friendly resolution. Yet so many advertisers overlook the interconnection between customer service and chargebacks. As an advertiser, your customer service is most likely outsourced to a third-party call center. That’s fine, as long as you pay attention. Listening to calls and monitoring KPIs by customer service agent can help to spot problems before they erupt.
Chargebacks and the chargeback process are changing, but not going away any time soon. For the sake of your bottom line and the future of your business, make a pledge today to treat chargeback disputes with the same time, attention and resources as you do to other parts of your business. Not sure where to start? Contact us, we’re happy to provide additional guidance.
Up Next: What Can I Do to Reduce the Impact of Chargebacks On My Business?
In the next installment of our series on chargeback management, we’ll go into further detail about outsourcing your chargeback management and tools you can use right now to cut your chargebacks significantly.