The 3 Types Of Chargebacks (And How To Avoid Them)

Chargebacks, or transaction reversals on the part of consumers as a form of protection against fraudulent merchant activities, are all too common in the eCommerce world.

In fact, consumers can easily conduct chargebacks on any number of purchases, and whether right or wrong, credit card chargebacks can have dire effects on your overall bottom line and your ability to process credit cards through your online shop.

As part of your eCommerce best practices, it is important that you understand the 3 most common types of chargebacks and ultimately, how to prevent them.  This way you can continue generating revenue and prevent gaining a bad reputation in the online world.

3 Common Types of Chargebacks Affecting Your eCommerce Shop

1. Merchant Error

Merchant error chargebacks are the most common type of chargebacks.  This includes clerical errors on your part, and system errors that you may have had zero control over, but are still responsible for because you are the seller.

Some good examples of merchant errors include:

  • Customer not receiving goods or receiving goods in poor condition
  • Dissatisfaction with customer service rendered
  • Failure to refund purchase amount to customer after a return or service cancellation
  • Technical glitches leading to duplicate charges
  • Recurring charges after service cancellation

20-40% of all chargebacks are a result of merchant errors.  Consequently, it is crucial eCommerce shop owners manage the purchasing process customers go through to avoid a loss in revenue due to unwanted chargebacks.

2. Criminal Fraud

When a cardholder’s financial information is used in your online shop without their consent, this will always result in a chargeback.  After all, no one wants to allow others to use their credit cards to buy things.

It is for this reason that the chargeback process was created.  In the event a person’s credit card information is stolen, the actual card is stolen, or a person’s bank account is hacked and used to make fraudulent charges, chargebacks are enforced to credit the victim of the fraudulent charges.

Unfortunately, these types of chargebacks will have a negative effect on your bottom line if you deliver goods to someone who didn’t have the actual funds to purchase the item.  That’s because on the other end of the transaction, you are likely crediting the real cardholder their missing money.

3. Friendly Fraud

Though the name implies that this type of chargeback is somehow not serious, do not let it fool you.  Friendly fraud occurs when a customer reverses charges, despite having received the goods or services purchased.

This dishonest form of chargeback happens for one of two reasons.  First, the customer may be looking to use your goods or services without having to pay for them.  On the other hand, this type of chargeback may be accidental.  For example, a customer may change their mind about a recurring subscription they signed up for, or may not recognize a credit card charge that they indeed did make.

Either way, friendly fraud is bound to hurt your business and can be difficult to stop if you don’t take the right precautions.

Preventing Chargebacks

There are several ways you can prevent the negative impact chargebacks have on your online business:

  • Always obtain authorization for all transactions
  • Never allow transactions to exceed authorized amounts
  • Only use a PCI DSS Level 1 certified payment processor to process transactions
  • Ask for security codes on credit cards if applicable
  • Clearly state your shop’s refund policy directly on your website
  • Provide refunds quickly to prevent further disputes resulting in more revenue loss
  • Communicate all transaction details (including refunds) via email to customers
  • Document all transaction records for use in disputes if necessary

In the end, charge backs are always going to be a part of your eCommerce business.  However, taking the right steps to prevent them at all costs is your best bet at avoiding major losses in time, money, and goods.

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