How merchants can win credit card chargebacks

Nobody likes chargebacks.

For a consumer, it means that something with the purchase – or their credit card – has gone haywire. For a merchant, chargebacks present the very real possibility they won’t get paid – and might be out merchandise or services, too.

This year, there will be 615 million chargebacks worldwide, according to one estimate from Ethoca (a Mastercard company) and Aite.

Especially for smaller merchants operating on thinner margins, every dollar counts. So the idea of handing over products or services and not being reimbursed stings.

But small business veterans and credit card professionals have a number of strategies for small merchants to pull a “win” out of a chargeback – and boost their businesses in the process.

See related: Fraudulent chargebacks rising as businesses struggle to stay open

1. Look at chargebacks as a chance to woo your customer

“One of the things that we talk to small business owners about all the time is customer experience,” says Joel Youngs, a regional director for the Small Business Development Center. “We are living in a very competitive world. Not everything can be driven to the lowest cost – nor should you want to be.”

“Winning is increasing your revenue and maximizing your profits,” he says. “So sometimes the best thing to do is just not fight it.”

Youngs recalls buying a soft-water system. The installer took his family through installation, setup and maintenance – and promised to call 10 days before they needed to charge the salt.

“Guess what? I bought the salt from [him],” he recalls. “I would have been going to some big box store. But because he did that, I ended up buying that through them. It was the follow-up.”

For the customer, a chargeback is the polar opposite of a good experience, he says. “When someone is calling about a chargeback, you have to realize that something went wrong,”

But it’s a great opportunity to reach out to the customer and offer them personalized service, along with a few solutions. And it can be a good chance to hear firsthand exactly what went wrong from their point of view, he says.

Whether merchants offer an apology with a coupon for next time or the chance to make the current purchase right, “the very best small businesses we have take that opportunity to sell another product or service or offer them another alternative,” says Youngs.

2. Look for patterns in your chargebacks

The best way to win a chargeback is not to have one in the first place. Think of this as the business equivalent of plugging a leak.

If you can find a commonality with a number of your chargebacks, that gives you an idea of where your transactions might be breaking down. A number of customers ordered the same item and initiated chargebacks when it wasn’t what they wanted? You may need a better description on your website, better training for staff or a clearly posted return policy that gives customers the option of a simple return.

But if you’re getting a raft of fraud complaints on card-not-present transactions, then you might want to look at additional card security measures for validating your customers and their cards.

And “review your policies periodically,” says Marie Mui, a senior vice president and business leader at Wells Fargo.  “Chargeback management, like fraud mitigation, continues to evolve.”

See related: What to do when your bank won’t refund fraudulent charges

3. Make the most of tech

Card networks, card processors and acquiring banks have myriad tools available for merchants to help prevent chargebacks, and merchants “should make sure they are leveraging all of the fraud prevention services provided by their acquirer and network,” says Scott DeBoard, vice president of the Discover Global Network.  “The best way to combat fraud is to prevent it upfront.”

Some of the tools are free, while others will come with a price tag. Examples include:

• One program offered by Ethoca – Ethoca Alerts – gives merchants an early warning when a customer initiates a chargeback, says Jason Howard, executive vice president of Ethoca. Under normal circumstances, if the customer has initiated the chargeback through their card bank, the merchant may not find out about it for several weeks. But an early notice “in near real-time” can alert them before they’ve put time and money into packaging and shipping the order. And it gives merchants the opportunity to reach out to dissatisfied customers to resolve the issue first – often by providing a refund – to stop the need for a chargeback, Howard says. There is a cost for the program, and it’s usually based on a percentage of the money saved by the merchant, he says.
• Other programs work on using IP addresses and other customer identifiers before and during the purchase to make sure the customer is who they say and is entitled to use the card.
• If merchants use 3D Secure 2 (also know as 3DS2) – which employs multi-factor authentication in real-time to vet customers, cards and transactions – it can also help shift chargeback liability to card issuers in cases of card-not-present transactions, Howard says. But merchants most often need to pay for the service.

Need to manage the cost of chargeback prevention? Look at the problem in terms of tiers, says Howard. Sort through your free options first, selecting the ones that make the most sense for your business. Then review the technology that comes at a cost and how it could minimize chargebacks.

4. Make buying easy and explicit

Card experts and business gurus praise transparency. What they’re really saying is to let the customer know exactly what to expect before, during and after the transaction. Because when customers understand what they’re getting, how they’re receiving it, how to reach you if something goes awry and what their refund options are – there’s less chance they’ll just get frustrated and initiate a chargeback.

Transparency can run the gamut from providing accurate merchandise descriptions and training employees in great customer service to having easy-to-understand return or cancellation policies posted at your business and on its website. It also doesn’t hurt to include a phone number in case customers have questions.

5. Pick your battles

You don’t want a reputation for going to war with your own customers. Conversely, “goodwill is something of incredible value,” says Ira Rheingold, executive director of the National Association of Consumer Advocates.

With “card-not-present transactions” – which are purchases made over the phone or online – if a customer claims the transaction is fraudulent, most times it will be charged back, says Howard. Not necessarily every time, “but as a general rule of thumb,” he says.

If you’re trying to substantiate a legitimate charge, a few things can help:

• “Provide a timely response,” says DeBoard.
• “Capture things like address verification and valid proof of delivery for domestic card-not-present chargebacks,” he says.
• And “showing an established relationship with the cardholder could help in some instances,” DeBoard adds.

That said, even if you win the chargeback, it could leave you with a customer who feels they were cheated or shortchanged. And in an era of social media, that can be costly, too.

And if you lose the chargeback? While you can appeal, “that’s not smart,” says Stanley Langbein, law professor at the University of Miami School of Law. “What they gain from these squabbles is not worth the cost of arbitration, much less litigation.”

Instead, look to prevent chargebacks in the first place, he says. “Make sure you provide what you’re selling. And smooth your customers’ feathers to the maximum amount feasible.”

6. Play by the rules

Card banks and networks offer consumers the option of chargebacks, and if you accept payment with those cards, you want to make sure all of your store policies dovetail with card issuer policies.

Good sources for information: You acquirer, card processor and card networks, says Rheingold.

State and federal statutes also offer protection to consumers if their credit cards are used fraudulently, if merchandise never arrives or if the goods or services aren’t what was promised. As a merchant, you need to understand these protections and make sure that your store policies follow the rules, too.

Good sources of information: the Federal Trade Commission and your state attorney general’s office, says Rheingold.

“Cardholders are secure in knowing that they have recourse if there is fraudulent activity if they’ve received defective goods or services or no goods or services at all,” says Mui. “As a merchant, you should offer your customers that same sense of security. And give your customers an opportunity to resolve an issue directly with you first.”

See related: What to do if your online order never arrives

7. Choose your ‘merchant descriptors’ wisely

Sometimes the descriptor that shows up on a customer’s card bill sounds nothing like the name of your business, says Howard. And that confusion can lead to consumer fears of card fraud – and result in chargebacks.

Ethoca and Mastercard have a program that lets merchants include their logos on card bills when customers access card bills through their bank’s app or online site – making the charge much more recognizable to the consumer.

“About 50% of consumers are reviewing transactions through their bank apps,” and that program is free, Howard says.

Another initiative includes a copy of the digital receipt with the card bill when the customer accesses it through their bank’s app or website – so the customer can see exactly what they purchased and when. But there is a cost if merchants want to provide that option, he says.

Another free solution: Include identifying information in the descriptor, like the actual store name and physical address, he says. Add the phone number to encourage the customer to call you first if they have a question – instead of dialing their card bank to initiate a chargeback.

Bottom line

There’s an old business adage that it costs less to keep an established customer than it does to gain a new one. So if you have a customer who’s so upset they’re initiating a chargeback, it can be smart to see what you can do to make them happy and retain their business – along with good word-of-mouth.

“If they’re charging back, you’ve lost that sale,” says Youngs. “Do you want them to never come back again? There’s a lot of ways to try and recoup from that. How do you increase your profits, make them happy and make them want to buy again?”