Chargebacks are an unavoidable cost of doing business that can affect your bottom line. But that doesn’t mean there aren’t ways you can reduce its impact.
It’s very common for ecommerce businesses to underestimate the financial damage that results from a high chargeback rate. According to Chargebacks911, ecommerce businesses actually lose $2.40 for every dollar of chargeback, which means that a $100 chargeback actually costs you closer to $240. These additional costs include:
Beyond the above listed financial risks, merchants habitually accumulating elevated chargeback rates can often be faced with even greater penalties. These penalties can include increased fees, fines by processors and card schemes, costly requirements for review or audit, and can even lead to termination of merchant accounts and processing agreements.
Clearly, it pays to take chargeback management seriously. A complete management program will include strong preventive measures, as well as a willingness to actively dispute illegitimate chargebacks. In this article, we’ll focus on prevention, since disputes can be expensive and unpredictable, as noted earlier. Furthermore, adhering to preventive best practices can often strengthen your case in the dispute process anyway.
1. Use a Recognizable Soft Descriptor for Credit Card Statements
If your customers don’t recognize your business name on their credit card statements, they are much more likely to assume that something is amiss. To avoid confusion, ensure that you use a commonly-known “Doing Business As” (DBA) name, or one that matches your website URL. It’s also helpful to include contact details such as an email address or phone number somewhere in your descriptor, so that customers can contact you easily if they don’t remember their purchase.
If you absolutely have to use a less recognizable name – like the name of a 3rd-party payment processor – be sure to notify customers beforehand, so they won’t be surprised when they see the purchase on their statement.
2. Provide Clear Product Descriptions
Another common reason for chargebacks is when the customer receives a different product from what they were expecting. Try to be as clear as possible when writing the product descriptions on your website, and address any common misconceptions directly in your FAQs.
This is particularly important for software products, which are intangible by nature. Screenshots and video demos can be very useful, as they allow customers to visualize what they’re going to get. According to Andy Hagans of FunnelUp, demonstrating the product in a video cuts returns by 60%, and also reduces “not as described” chargebacks significantly.
Notice a trend here? Clarity is one of the best ways to minimize chargebacks, because most (non-fraudulent) chargebacks are due to unmet expectations. If your customers fully understand what they’re getting upfront, they’re a lot less likely to be unhappy with their purchase.
To that end, make sure to state your refund policy clearly on all your product description and purchase pages. Ideally, refund conditions should be in line with other companies in your industry, so customers are not taken by surprise.
If any disputes arise despite your best efforts, it often makes sense to give the customer the benefit of the doubt, and issue a prompt refund. Yes, this will result in some lost revenue, but you’ll also avoid all those extra chargeback-related fees, and strengthened your reputation for good customer service.
For more on refunding best practices specifically, click here.
4. Be Accessible and Responsive
The first step for any customer who is unsatisfied with their purchase is to contact the merchant directly. But if your customers can’t find your contact details or get in touch with you easily, they might skip the process and go straight to their bank to initiate a chargeback.
The best way to prevent this is to feature your contact information prominently on every page of your website – most commonly in a footer. Additionally, when a customer does contact you, you should aim to reply within 24-48 hours.
In fact, it might even pay to be more responsive than this. According to Monica Eaton-Cardona of Chargebacks911, you can significantly reduce chargebacks by ensuring a human answers the phone within 4 rings. This can cut chargebacks by 30% compared to automated IVRs.
5. Paid Subscriptions Should be “Opt-In”
If you offer a free trial for your software or SaaS product, ensure that your customers are not automatically signed up for a paid subscription. This is known as “negative option billing”, and often results in a high number of customer complaints.
It’s alright to collect payment details at the start of the trial period, so as to minimize the friction of transitioning to a paid service. However, you should alert the customer upfront at the time of purchase and email them a few days before their trial ends, so they’re able to choose whether to continue with their subscription. Your customers shouldn’t feel like they’ve been misled into enrolling in a subscription.
6. Implement CVC Verification
On the back of most Visa, Mastercard and Discover credit cards is a 3-digit number known as the Card Verification Code (CVC). For American Express Cards, this code is found on the front of the card and is typically 4-digits long.
Ecommerce companies should require customers to enter this code as a standard security measure. While this might sound simple, Visa has stated that this method can single-handedly reduce chargebacks by 26%. Not to mention, using the code will reduce transaction fees for online, card-not-present transactions.
7. Use the Address Verification Service
If you accept payments from U.S. customers, you should strongly consider using the AVS, which automatically compares the address entered on an order form with the credit card company’s records. If there is a mismatch, either the transaction will be declined, or the customer will be required to provide more information. As with CVC verification, using the AVS will lower processing fees as the transaction is deemed more secure by the credit card networks.
While the AVS is a powerful tool, however, it is not perfect. Sometimes addresses might be declined simply because there is an error in the database, or the customer inputs his address differently in the form (such as reversing address line 1 and 2). Be sure to offer other payment options for the customer to fall back on if his credit card is declined by AVS.
While chargebacks aren’t exactly an exciting or glamorous topic, effective chargeback management is key to running a profitable ecommerce business. Given the high costs and risks involved with chargebacks, implementing these preventive measures will quickly make a positive impact on your bottom line.
