Chargebacks are a common characteristic of ecommerce trade: every merchant will eventually deal with a chargeback, with chargebacks making up a substantial percentage of lost revenue for many online sellers. Avoiding chargebacks, therefore, is a crucial part of profitably trading.

Chargebacks refer to the scenario where the cardholder whose card was used to pay for online goods contacts their card provider and successfully requests a refund of the transaction. The provider then triggers a “chargeback” with the credit card network which in turn reclaims the amount via the merchant’s payment processor.

The real cost of chargebacks

A successful chargeback has significant costs for a merchant. The merchant loses not only the amount that it was to receive as part of the transaction, but also any goods shipped or services supplied. It also incurs chargeback fees, which can be substantial. In fact, LexisNexis determined that the real cost of a chargeback due to fraud, in particular, is $2.40 for every $1 in the nominal transaction amount.

Over time the reputational costs of chargebacks can be significant as well, and if a merchant experiences a high number of chargebacks it can find that it has trouble accessing payment services for future transactions. A merchant account that regularly exceeds industry levels of chargebacks can quickly be blocked by the payment processor. And a merchant that can’t accept payments will be out of business in short order.

Avoiding chargebacks due to fraud

One of the leading causes for chargebacks is fraud, and this is no surprise given the figures involved: the total loss due to card not present (CNP) fraud in the US is due to hit $6.4bn in 2018. Inevitably some of these customers will contact their providers for a refund, triggering a chargeback. Merchants who can prevent chargebacks stemming from fraudulent transactions stand to save significantly.

The recipe for preventing ecommerce fraud lies in deploying effective fraud prevention measures. Merchants have a range of tools available to them, from the blunt to the refined and effective, including sophisticated fraud prevention tools driven by machine learning. The more capable the fraud prevention tool, the less likely fraud will occur. Also, a capable fraud prevention tool will prevent the occurrence of false positives, where a legitimate transaction is declined.

Merchants that can successfully filter out transactions that pose a real risk of a chargeback not only save on the costs involved with a chargeback, but also maintain their reputation. A capable fraud prevention solution will, in the long run, maintain a solid layer of trust in your business.

Stopping non-fraud chargebacks in their tracks

Fraud is a big driver of card chargebacks but it’s not the only reason why merchants have to fork out to refund customers. Many of these reasons are driven by simple misunderstandings, and merchants should work to avoid these. A good place to start is to make sure your company is clearly identified on the credit card statement of a customer. Trading as “East Coast Pet Store” only to bill as “NY Trading and Supplies” will obviously increase the risk of a chargeback.

Physical delivery is a big culprit too. It’s not uncommon for delivery providers to not, for lack of a better word, deliver. If a customer does not receive the goods they paid for they will quite rightly trigger a chargeback, but in many cases the merchant has in fact shipped the product. The best way to prevent chargebacks of this nature is to engage with delivery service providers who are reliable, and more importantly, who can offer a clear and detailed tracking service. Obtaining signatures can be tedious, but there are alternatives including photographing the physical delivery of a package on the doorstep.

Chargebacks can also be prevented by making it easy for a customer to communicate with you. Including a number as part of the merchant ID on the credit card statement is one step, while clear and effective online communications channels can make it easier to resolve questions.

Avoid chargebacks, increase profitability

Considering the relatively narrow profit margins of many online retailers, it requires only a very low percentage of chargebacks before profits are eroded significantly. Start by implementing sophisticated, reliable and capable fraud detection systems, focus on eliminating chargebacks that are the result of a misunderstanding from the customer’s side, and finally, make sure you can rely on all your business partners to deliver when needed.