One of the primary reasons an industry is defined as high-risk is because it has a disproportionate rate of chargebacks. Chargebacks are a problem for any merchant, but high-risk online businesses are far more likely to experience a higher rate of payment disputes than other ecommerce sellers.
A chargeback, or payment dispute, happens when a customer reports a problem with a transaction to his or her card issuer and requests a refund. Without strong proactive defenses against chargebacks, it’s all too easy for a high-risk merchant to go out of business. Chargebacks can result in a merchant losing their ability to accept credit cards. Other issues include the time associated with managing disputes, the impact to a business’s financial rating, potential fines and penalties, and the loss of both products and money. Here’s how to prevent the most common causes of chargebacks.
When a merchant receives notice that a payment dispute has been opened, he or she has two choices: accept the chargeback, or prove that the transaction was legitimate.
Depending on the reason for the chargeback, the merchant will have to provide evidence such as a screen capture of the store’s website showing shipping details and refund policies, email/web site records of the sale, forms detailing the sale process and more. If the merchant’s evidence is accepted, the cardholder’s dispute will be rejected and the transaction will then be resubmitted to the customer’s payment card. But the merchant still has to pay the fees associated with the chargeback.
Fees start mounting the moment the chargeback process begins, from retrieval fees to investigate the dispute and a chargeback fee if the customer’s claim is ultimately found to be true.The typical retrieval fee is $5-15 per incident and an average chargeback fee is between $20-$50 – but the costs can be higher for high-risk businesses. If the bank ultimately sides with the customer, but the merchant wishes to pursue the case, there will be additional filing fees of several hundred dollars or more. Meanwhile, the money in dispute is withheld from the merchant’s account until the matter is settled – typically 60-75 days but it can be much longer.
And if a business experiences chargebacks that exceed 1% of its total sales, banks providing payment services can levy thousands of dollars in fines and penalties, as well as terminate the merchant’s ability to accept payment cards and/or close the merchant’s account. For most merchants, this means going out of business.
What Causes Chargebacks?
The typical reason for a chargeback is customer dissatisfaction – for reasons ranging from non-receipt of an order to the claims that the product received wasn’t as advertised, or was damaged in shipping. Unresponsive customer service and unexplained shipping delays may also convince customers to file a chargeback.
Misunderstandings play a part too. Customers may also, in good faith, report a fraudulent charge if they don’t recognize the business name associated with the charge. Or a customer may think he or she has been double-billed if an authorization hold and an actual charge appear on the same statement. Ecommerce sales may also be affected by technical glitches and user errors, such as pushing “buy” buttons multiple times.
Some chargebacks are related to fraud. A customers’ payment card may be used without proper authorization, or reoccurring charges may not have been clearly explained. Customers may also deliberately commit fraud by ordering products and filing chargebacks simply in order to get a refund – and can often keep the product as well. This is known as “friendly” or “first-person” fraud.
Defending Against Chargebacks
High-risk merchants can help shield their online business from legitimate chargebacks with good communication, which includes:
Most customers will try to sort out the problem with the merchant before resorting to a chargeback. If a business is responsive and makes a real effort to resolve the problem, many chargebacks can be avoided. Unfortunately, though, a merchant can do everything right and still be a victim of friendly fraud, when customers falsely claim that they didn’t order the product, or it was never received/doesn’t live up to expectations.
Chargeback protection services
High-risk merchants should look for payment processors that offer robust chargeback protection services. These services utilize data-driven intelligence, collaboration with the financial industry, and proven risk-reduction tactics to proactively defend against chargebacks.
T1 Payments, a leading provider of payment processing services to high-risk merchants, works with two chargeback protection solution services – Ethoca and Verifi – to reduce customer’s exposure to both genuine fraud and the “false declines” that can occur when payments are incorrectly declined due to a perceived risk of fraud.
To find out more about T1 Payment’s services for high-risk online merchants please visit t1payments.com or call 866-518-2216.