The basics of chargebacks explained

Managing chargebacks and disputes is a necessary evil. Merchants work hard to generate value and they’re rewarded in sales. That makes chargebacks a sensitive topic.

Chargebacks play an essential role in the consumer economy by mediating inevitable disputes that arise between businesses and their customers. Yet chargebacks are historically unpopular among merchants because they’re cumbersome to manage, damaging to the bottom line and often an indicator of fraud.

This brief review covers a few chargeback basics that every merchant should know. We’ll then turn to insights from a new report by Worldpay and Forrester Consulting that sheds light on how merchants are managing chargebacks in the digital age with an increasing emphasis on high-tech solutions.

What are chargebacks and why are they important?

Chargebacks can occur because of fraud, customer disputes, merchant error and a host of other reasons. The chargeback process protects consumers by providing a formal mechanism to arbitrate customer dissatisfaction with products and services.

Chargebacks often indicate fraud. Payment fraud is a costly menace to businesses, consumers and the financial system as a whole. Criminals fraudulently obtain the credentials of legitimate cardholders and make unauthorized purchases that often start a chargeback process.

Chargebacks can also be the result of so-called friendly fraud, like when a customer knowingly files a chargeback for legitimately purchased goods or services. Many chargebacks are the result of poor communication by merchants, like providing payment transaction records that a customer doesn’t recognize on their statement. Other times, the customer is the confused party, like when a family member made a charge the cardholder simply didn’t remember.

Finally, chargebacks can be an indication that something has legitimately gone wrong with the merchant’s processes and is a legitimate escalation of the cancellation and return journey. In other words, not all chargebacks should be arbitrarily disputed. Instead, part of due diligence is for merchants to confirm that everything has gone well and there is no room for improvement. While the card scheme’s disputes process infers opportunity to check these points, often the dispute process can be viewed as a series of hoops to jump through for the merchant to receive their revenue.

What’s the best response to chargebacks?

Businesses have responsibilities, but there are also many rights associated with chargebacks. The specifics of chargeback rights and responsibilities are detailed in your merchant services agreement and are meant to offer protection to everyone. The chargeback process offers clear and well-defined paths to dispute chargebacks where appropriate.

A representment offers merchants the opportunity to rebut a chargeback and present evidence to the issuing bank to prove the chargeback isn’t warranted. A retrieval request is a request for transaction information for a specific payment transaction, like when a cardholder doesn’t recognize a transaction on their billing statement.

Merchants should be prepared to respond to chargebacks by keeping good records and required proper authenticating data at the time of purchase. When you receive a request for information related to a disputed transaction, make sure you respond quickly and within the required timeframe.

How can my business best prevent chargebacks?

Here is a sampling of established practices for minimizing chargebacks:

• Clearly identify your common business name in your billing statements
• Educate your customers about cancellation and return policies and clearly post them on your website
• Adhere to all established security protocols for card acceptance
• Capture as much information as possible to verify each transaction
• Ship all orders with tracking numbers and delivery confirmation

How can my business best manage chargebacks?

Effective chargeback management that utilizes best practices and the latest technologies is essential to recoup what would otherwise be lost revenue. For global e-commerce and enterprise-scale merchants, an effective chargeback management solution can make a big difference to the bottom line.

The 2021 Payment Risk Mitigation Survey, a new report by Worldpay and Forrester Consulting, examined how merchants were managing chargebacks today. In-house teams manage chargebacks for half of the merchants surveyed. External teams manage chargebacks for 31% of global merchants surveyed, while 18% report using a hybrid model that combines internal teams and third-party vendors.

The survey showed that the methods used by merchants to receive and submit representments varies widely. E-mail is the most widely used method for chargeback communication, cited by 66% of merchants. At the other end of the automation spectrum, application programming interfaces (APIs) are used by 47% of businesses surveyed and 45% use portals; 9% of survey respondents still use a fax machine to exchange chargeback documentation.

Thankfully, there’s relief for merchants still managing chargebacks the old-fashioned way. Today’s leading chargeback management solutions can automate chargeback defense, reducing costs and sources of error while streamlining the process and increasing win rates. APIs allow merchants to directly integrate chargeback disputes into existing IT systems, offering a more tailored experience for their analysts while leveraging existing enterprise data.

The first and best practice to manage chargebacks is to partner with a payments provider that makes the process easy for businesses like yours. Connect with one of our payments experts to learn more about how your business can effectively manage the chargeback process. Find out how Worldpay helps protect what you’ve earned with secure transactions that minimize fraud and reduce risk.