The challenge of chargebacks

2 comments

The challenge of chargebacks

Contributed

This content is contributed or sourced from third parties but has been subject to Finextra editorial review.

2020 saw many powerful shifts in our society. From a business point of view, the rise of online shopping and the subsequent accelerated shift to digital payments brought about by the pandemic was a key feature which looks set to stay.

Whilst many traditional bricks and mortar businesses have successfully adapted and established an online presence in order to thrive, the required shift into digital environments has brought about significant new challenges for businesses to overcome, none more so than chargebacks.

With many businesses hoping for a brighter outlook in 2021, adapting business models successfully and integrating digital payments will be vital for success.

Chargebacks explained

Chargebacks were initially designed in part to protect card holders from fraudulent activity, providing a mechanism for consumers to secure a refund through their bank for disputed transactions rather than having to deal directly with a merchant.

As a result of this mechanism, merchants have little power in the event of a chargeback request being submitted by a consumer. Therefore, understanding the causes of chargebacks and the threat to revenue that they pose is key to reducing that threat and protecting your business.

Chargebacks can occur in three main ways. They can either be raised mistakenly when a customer forgets or does not recognise a purchase and initiates a chargeback request with their bank, through legitimate disputes around delivery and the condition of goods upon arrival or fraudulently through false information and a deliberate attempt to steal from a merchant by keeping the goods and services received. 

Either way, the outcome for the merchant is the same and they are hit with a fee each time. If chargebacks hit a certain threshold, business accounts can even be suspended or closed down.

The challenge posed by chargebacks has been of increasing relevance as businesses have been forced to move to online operations, often without the proper payment processing, tracking and delivery systems in place.

Highlighting this potential lack of expertise, recent Tyl research found that since the start of UK lockdown (16th March 2020), around half of new customers registering for the Tyl payment service up until December 2020 were adopting card payments for the first time.

Key drivers of chargeback risk and how to reduce business exposure

MOTO – Mail order telephone transactions offer little protection to chargebacks. If a merchant ships out goods following a MOTO transaction with no additional evidence of authorisation, and a chargeback request is raised, the chances are that the chargeback will be accepted with limited options available for merchants.

To reduce this risk for high value MOTO transactions, delivery could be made in person by a business representative who asks the recipient for identification or who obtains a signature as proof of delivery.

For this reason, MOTO transactions requested on non-UK cards and delivered to non-UK destination should be considered carefully. Other steps to protect your business include making use of Tyl’s pay by link service sent to a verified account, taking deposits via MOTO and asking for full payment via chip and pin and conducting due diligence on the sources of significant purchases.

Fulfilment – Engagement between a merchant and a customer is vital. If an item isn’t going to be delivered on time and a merchant ignores a customer, the chances of a chargeback being raised increase significantly. Timely updates and clear communications will go a long way to reducing the chargeback risks posed by fulfilment. Make sure your contact details are up to date and readily available regardless of whether any physical premises are open for trading.

Analytics and business systems

Businesses need to ensure that they have robust systems to review unusual activity such as sudden, large sales orders, as well as implementing an effective address verification element to the payment process to ensure the identity of the cardholder regardless of the payment method.

Make sure you have concise return policies that are clearly posted on receipts, websites and at online checkouts as well as making sure that your merchant billing descriptor is clearly recognisable to customers on their card statements, helping them to remember their legitimate transactions.

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Comments: (2)

Ketharaman Swaminathan Founder and CEO at GTM360 Marketing Solutions

"Chargebacks can occur in three main ways. They can either be raised mistakenly when a customer forgets or does not recognise a purchase".

I can count most two ways. What is the third? 

David Decorte Content Manager at Chargebacks911

Hi Ketharaman,

I believe these are the three sources referred to by the author:

1. The customer fails to recognize a purchase on their bank statement and files a chargeback in error.
2. The goods or services are not as described, or are not delivered in a timely manner, prompting a chargeback.
3. The customer deliberately tries to get something for free by abusing the chargeback process.

Contributed

This content is contributed or sourced from third parties but has been subject to Finextra editorial review.