E-commerce transactions don’t always end up smoothly. Sometimes, a customer can receive a product that doesn’t match the description of what they ordered, only to return it and find that the return window is over.
Or a child can get hold of their parent’s credit card and make unauthorized purchases online. Such customers often resort to chargebacks to try to recover their money.
This article looks at what chargebacks are, their purpose, why customers file them, and what you can do in each case to protect your business. Let’s begin.
What are Chargebacks?
A chargeback happens when customers use their debit or credit card to buy goods or services and then call their bank to dispute the charge.
Under normal circumstances, you’d expect a customer who’s not happy with their purchase to contact the business where they made their purchase and ask for a refund or an exchange.
However, some customers will bypass the business and call their banks directly to reverse the payment from their debit/credit card to the business account.
This forceful removal of funds from a business’s account to the customer’s account leads to a loss of sales revenue and merchandise and destroys a business’ reputation and customer relationships.
The Purpose of Chargebacks
The U.S. federal government created the chargeback system mainly to protect consumers from credit card fraud.
Any consumer whose credit card details have been used to make payments without their consent can easily file a chargeback and recoup their money.
Other than protecting cardholders from fraud, chargebacks also act as a deterrent to businesses that may want to sell substandard products/services to their customers.
The fear of getting into a chargeback situation and losing sales revenue is enough to deter businesses from selling substandard products.
Top 6 Reasons Why Customers File Chargebacks and Their Solutions
Let’s now look at six of the most common reasons why customers file chargebacks and the measures you can take to protect your business.
1. Friendly Fraud
Friendly fraud happens when a customer uses their debit or credit card to make a purchase and then calls their bank to dispute the charge despite knowing very well that they don’t deserve a refund.
Here are four common examples of chargebacks resulting from friendly fraud:
- A customer takes too long to return a product only to realize that the return window is over.
- A customer experiences buyer’s remorse after purchasing a high-priced item.
- A family member uses the customer’s credit card to make a purchase, but the customer isn’t willing to pay the bill.
- Customers aren’t satisfied with the product they received but don’t want to go through the return process because they feel it’s either too complicated or too slow.
A dishonest customer in any of these situations can decide to call their bank to dispute the charge on their credit card to get an undeserved refund.
Solution
So, how do you prevent chargebacks resulting from friendly fraud from occurring in your business? Here are some measures you can take:
- Maintain a good relationship with your customers and encourage them to get in touch with your customer service team whenever they have a problem with their order.
- Provide multiple communication channels, including email, 24/7 phone lines, live chat, and social media, to make it easier for customers to contact you.
- Keep all customers informed about their order status from when they place their order up to when the order is successfully delivered.
- Make your return and refund policies simple and clear to encourage customers to contact you (instead of the bank) whenever they’re unsatisfied with the item they’ve received.
- Limit the number of orders a customer can purchase within a 24-hour period to discourage friendly fraudsters from making several transactions quickly and then filing chargebacks later.
2. The Product is Unacceptable
This is another common reason why customers file chargebacks. When a product is delivered when it’s already broken or damaged, the customer can refuse to accept it and decide to file a chargeback to recoup their money.
The same can also happen when the customer receives a product significantly different from what they ordered or when they receive the wrong product color or size.
Solution
To avoid this kind of chargeback, provide customers with high-quality product images from different angles to enable them to see the product they want to buy clearly before making a purchasing decision.
Also, ensure the product information and specifications you post alongside each product are as accurate as possible.
Product dimensions, color, size, material, and brand should be factual, so customers aren’t surprised when they eventually receive their order.
Be sure to consider the post-purchase customer experience, not only for successful transactions but also for those that may go wayward.
3. Merchant Error
Errors made by the merchant can also trigger multiple chargebacks from customers.
These errors include entering the wrong shipping information, charging customers twice for the same product, failing to stop a recurring payment after a customer cancels their subscription, and so on.
Solution
One way to prevent chargebacks resulting from merchant errors is by conducting a detailed evaluation of every aspect of your business operations.
This is important because it enables you to identify the specific errors triggering each chargeback, which helps you know the right action to take to solve it.
As an e-commerce store owner, however, you may not be able to evaluate your business unbiasedly because you’re already too close and attached to it.
So, it’s better to seek help from external experts who have zero attachment to your business.
4. Unrecognized Transaction on Credit Card Statement
Another common cause of chargebacks is unrecognized transactions on the customer’s credit card statement. Customers who don’t recognize a particular charge on their card statement are more likely to call their card issuer to dispute the charge.
An unrecognized transaction can occur when a customer orders an item and then forgets about the transaction or when a customer’s family member gets hold of their credit card and uses it to pay for goods without their permission.
Solution
To prevent chargebacks resulting from unrecognized transactions, encourage your customers to activate email or text notifications with their card issuer to enable them to receive a notification each time someone uses their credit card to make payments.
This is important because it allows them to immediately confirm each transaction’s legitimacy.
5. The Product Never Arrived
Customers can also file chargebacks when the item they ordered fails to arrive. Some claims of non-delivery of items are genuine, while many others are made by dishonest customers who take advantage of the chargeback system to get free goods and still get a refund.
Solution
To protect your business from non-delivery chargebacks:
- Require Signature Delivery Confirmation — Ask every customer to leave their signature before picking up their order. This is strong proof that the item was successfully delivered and collected by the intended recipient. Therefore, it’ll be extremely difficult for someone to claim that their order never arrived.
- Provide a Transparent Shipping Process — It’s equally important to ensure that your shipping process is as transparent as possible by providing your customers with package tracking, order status, and estimated delivery dates.
Also, inform them early enough if there will be shipping delays, so they know their items will arrive late.
6. Criminal Fraud
The last reason customers file chargebacks is criminal fraud. Criminal fraud happens when fraudsters steal a customer’s credit card information and uses it to buy goods/services fraudulently online.
For many customers, the first call of action when they notice a fraudulent transaction on their credit card statement is to call their issuing banks to dispute the charge.
Solution
Here are a few tips you can implement to protect your business from chargebacks resulting from criminal fraud:
- Require 3-Digit Security Code When Paying with Credit Card — Most fraudsters use dark web marketplaces and phishing scams to obtain other people’s credit card numbers. The good news is that they don’t always get the 3-digit security code on the back of those cards. Because of this, you should always ask every customer to enter their CVV (card verification value) code when using a credit card to make payments on your e-commerce website. This is one way to validate the identity of your shoppers and prevent criminal fraud.
- Use Address Verification Service — Other than requiring a security code, you should also consider using an address verification service (AVS) on your store to verify whether the credit card billing address of each customer matches the address you have on file. Any transaction where the customer’s addresses don’t match should be rejected.
The Bottom Line on Chargebacks
As you can see above, there are many reasons why customers file chargebacks. These include friendly fraud, merchant error, criminal fraud, and so on.
We’ve provided specific measures you can take in each case to protect your business. Go through them to see what you can implement in your business to keep your chargeback cases low.
