Chargebacks – Why They Happen and How to Reduce Them

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There are a variety of reasons why chargebacks can happen. The best way for a merchant to reduce chargebacks is to understand those specific reasons. Once you know exactly why a chargeback may occur, you can take targeted steps to reduce them.

The 6 Most Common Reasons Chargebacks Occur

1. Cardholder Dispute: If a customer files a dispute saying they never received a product or it wasn’t in the condition they were expecting, it can lead to a chargeback.

2. Cancellation or Return: A customer cancelling their purchase or making a return can result in a chargeback.

3. Authorization Issues: A chargeback can occur if proper authorization protocol wasn’t followed and a valid authorization was never obtained.

4. Fraud: A transaction that takes place but is actually fraudulent will likely be resolved as a chargeback.

5. Non-Receipt of Information: Failing to respond to a retrieval request or cardholder means the transaction won’t be recognized.

6. Processing Error: A chargeback that falls into this category is the result of an error processing a transaction or a mistake billing it.

Reducing Chargebacks Related to Authorization, Cancellations or Returns

Given that fees and fines assessed for a chargeback can range anywhere from $25 to $150 or even more, it’s important for businesses to avoid chargebacks whenever possible. Accomplishing that goal starts with following proper authorization protocol. Authorization should always be obtained on the day of the transaction with in-person purchases. And for card not present transactions, authorization must be obtained within seven days of shipment.

The most effective strategy for avoiding chargebacks related to returns is to always issue credit to the same account used for a purchase. Cash, checks or in-store credit shouldn’t ever be used to refund a purchase made with a credit card. It’s also important to provide clear disclosure of your refund and return policy when someone makes a purchase. If your business does any kind of recurring billing, make sure customers are fully aware of those conditions.

How to Reduce Fraud and Processing Error Chargebacks

Both fraud and processing errors can be a significant source of chargebacks for merchants. Fortunately, there are steps you can take to protect your business. For in-store purchases, using an EMV terminal is currently the best way to protect against fraud and subsequent chargebacks. It’s also important to train staff to pay attention to authorization steps during a transaction and to ask for ID if there’s any doubt.

For card not present transactions, take a look at our previous article on tools that can help businesses manage fraud. And in terms of preventing chargebacks related to processing errors, be sure to process all transactions within their required timeframes. It’s also important to ensure processing is only done once. In the event of duplicate processing, be sure to immediately void the second transaction and issue a credit or reversal.

By being aware of why chargebacks are most likely to occur and then being proactive about managing or preventing them, merchants can ensure that chargebacks never become a significant problem.

Posted on Wednesday, May 18th, 2016