Protecting Your Profits: A Guide to Chargeback Management

Learn about chargeback management’s importance and benefits, and how to implement it in this comprehensive guide.

Published on January 24, 2024
Last Updated on January 24, 2024

The rise of e-Commerce has brought about a major transformation in our daily transactions, offering unparalleled convenience and speed. However, it has also led to a surge in a fraudulent practice called chargeback fraud, which has caused significant financial loss to businesses. Although chargebacks were initially designed to protect consumers, they are now increasingly used for illegal activities, posing a serious threat to businesses.

What is chargeback and what is chargeback fraud?

A chargeback is a reversal of a credit and debit card transaction provided by credit card companies to protect cardholders from unauthorized or fraudulent transactions. Chargebacks occur when a customer disputes a charge to their credit card issuer. The reasons for disputes can vary widely, ranging from legitimate issues, such as unauthorized charges or dissatisfaction with a purchase, to fraudulent intentions like chargeback fraud, an increasing concern for businesses.

Chargeback fraud, also called "friendly fraud," happens when a cardholder disputes a transaction they were fully aware of and benefited from. They claim that the transaction was unauthorized or the service was not provided while intending to keep the product or service and receive a refund. Essentially, they reap double the benefits without incurring any cost. According to the 2023 Chargeback Field Report, almost 75% of the surveyed retailers reported a 19% average increase in friendly fraud. Businesses must understand and effectively manage chargebacks to safeguard their revenues and maintain their credibility with credit card companies.

What is chargeback management?

Chargeback management, sometimes called chargeback mitigation or chargeback prevention, is a strategic approach businesses employ to reduce the instances of genuine and fraud chargebacks.

For businesses, effective dispute management is a must. In addition to causing direct financial loss, chargebacks also result in operational costs, penalty fees, and reputation damage to customers and credit card issuers. In extreme cases, businesses can even lose the ability to accept credit card payments or have their accounts frozen due to high chargeback rates. 

It is crucial to effectively manage chargebacks, especially during high-volume sales periods like the holiday season. During such periods, fraudsters can exploit changes in buying behaviors and increased transaction volumes, making effective dispute management all the more important. 

What is the chargeback dispute process?

Identifying the source of chargeback

To manage chargebacks effectively, one must understand their source, which typically falls into three categories.

Merchant Error: This refers to instances where the business or its employees make mistakes, leading to a chargeback. Some examples of merchant errors include charging a customer twice for the same transaction, failing to adequately describe a product or service, leading to a customer chargeback dispute, or not providing a refund when one was due.

Businesses can focus on staff training, conducting regular audit trials, and maintaining clear communication with customers to avoid such issues.

Friendly Fraud: Customers may have legitimately purchased a product or service but later claim not to have authorized the transaction or not received the goods or service to keep both the product and the refunded amount. 

Businesses can combat friendly fraud by confirming every transaction through an email receipt or text message, maintaining meticulous records, and employing advanced fraud detection tools. These processes can be outsourced to a third party that provides risk management services.

Criminal Fraud: This chargeback stems from fraudsters who make purchases using stolen payment credentials. Once the true cardholder becomes aware of the unauthorized charges, they initiate a chargeback. 

Businesses should implement secure payment processes, prioritize data security, and use fraud detection services to verify the card's authenticity before the purchase.

Implementing prevention strategies

Be it merchant error, friendly fraud, or criminal fraud, the next step is devising a robust system to prevent such instances from recurring. Before chargebacks become a thorn in a business's side, proactive prevention steps can drastically mitigate their occurrence.

Prioritize Security: Secure payment processes, online or in person, are critical to protecting the customers' payment information and their trust in your operations.

Clear Return and Refund Policies: Transparent and easy-to-understand policies ward off potential disputes arising from misunderstandings or dissatisfaction.

Keep Online Inventory Updated: Accurate, real-time inventory updates ensure customers know what's available, reducing chargeback disputes owing to unavailable items.

Provide Clear Product Descriptions: Detailed product descriptions help align customer expectations, reducing the perceived discrepancies between the online portrayal and the delivered product.

Provide Excellent Customer Service: Prompt responses to customer inquiries, swift resolution of complaints, and easy returns lead to satisfied customers who are less likely to resort to chargebacks.

Utilize Fraud Detection Tools: Robust fraud detection and prevention tools can identify suspicious transactions based on location, purchasing patterns, and unusual transaction amounts, allowing early action against possible fraud.

Fair Return Policy: A customer-friendly return policy can reduce product dissatisfaction-related disputes. Customers who find it easy to return unwelcome purchases are less likely to initiate a chargeback.

Monitor Transactions: Keep a continuous eye on transaction patterns to spot any unusual activity for possible fraud. Repeated purchases or unusually high order amounts warrant an investigation.

E-commerce Consulting: Optimize your e-Commerce strategies with expert consulting to increase efficiency and reduce chargeback risks.

Responding to chargebacks

Proactive prevention strategies are a strong defense against chargebacks. However, some may still slip through the cracks. When faced with a chargeback, managing it effectively and promptly is integral. Here’s a step-by-step guide on responding:

Step 1 - Chargeback Notification: The merchant receives a notice as soon as a chargeback is initiated. Act swiftly upon receiving a chargeback notification. Any delay can result in an automatic loss, costing the merchant the disputed amount and an additional chargeback fee.

Step 2 - Investigation: Conducting a thorough investigation into the claim is crucial to verify a chargeback’s legitimacy. This involves carefully reviewing the transaction details and the reason for the chargeback provided by the issuer. By doing so, you can determine whether the chargeback results from a mistake made by the merchant, legitimate fraud, or friendly fraud.

Step 3 - Evidence Gathering: Once the claim has been reviewed, the next step involves gathering compelling evidence to refute the chargeback. This can include anything showing the transaction was legitimate, and the goods or services were provided as agreed. For instance, this could be order confirmations, tracking information, records of correspondence with the customer, or proof of product delivery.

Step 4 - Chargeback Response: The next step is to draft a compelling chargeback response after gathering all the necessary evidence. This usually involves explaining why the chargeback is invalid and describing the evidence supporting this assertion.

Step 5 - Submit Response: The merchant must submit their response to the payment processor within the specified timeframe. The processor then forwards the response and accompanying evidence to the issuing bank. It is crucial to meet the given deadline, as failing to do so may result in an automatic loss of the chargeback dispute.

What are the different chargeback rules and regulations?

To properly manage chargebacks, businesses must understand key regulations like Regulation E and Regulation Z. Reg E governs electronic fund transfers, allowing consumers to dispute unauthorized transactions within 60 days. Meanwhile, Reg Z applies to credit transactions, giving cardholders the right to dispute errors or fraud within the same timeframe.

Credit card networks also have specific guidelines for chargebacks. They define the chargeback dispute process, classify types of chargebacks, and dictate the necessary evidence for disputes. 

Navigating these regulations effectively and utilizing card networks’ dispute resolution mechanisms can bolster resiliency against improper chargebacks and future false claims.

Why outsource chargeback management?

With the complexities and potential impacts of chargebacks, outsourcing the task is highly beneficial for businesses. By partnering with a proven expert with advanced tools and knowledge of evolving regulations, businesses can minimize the impact of chargebacks and ultimately enhance customer satisfaction.

Combining best-in-class global talent and Generative AI, TaskUs delivers effective, end-to-end solutions supporting the Issuer and Cardholder in the entire chargeback process. We deploy workflows, automation, and case management tools to quickly process chargebacks, validate transactions, and challenge when warranted. Our expertise in identifying chargeback fraud through a combination of AI and skilled resources helps clients minimize chargeback fraud losses. We provide these services across Fintech’s, E- commerce platforms and Chargeback Management CompaniesWith our effective chargeback management process, we’ll help you navigate the business landscape confidently, enabling your business to reach its full potential.

Interested in Outsourcing Chargeback Management?

References

Surekha Nagpal
Senior Director, Financial Crime & Risk
Surekha has 20+ years of experience across financial crime compliance, business transformation, operations and talent acquisition. She drives aspects of the go-to-market strategy, social media engagement, and strategic initiatives.