Welcome back to Chargebacks 101! In the first installment of this series, we covered fraudulent chargebacks, which account for nearly 35% of revenue loss to merchants related to fraud. If you missed that article, you can read it here to get all caught up.
Intended to protect consumers from unauthorized transactions, chargebacks result from disputed transactions. When a dispute is made, the credit card company forces the merchant to reverse the transaction and the customer receives his or her money back. Instead of wasting time arguing with merchants on the legitimacy of a transaction, customers can simply go straight through their credit card company and initiate a chargeback.
We all know chargebacks pose a significant threat to businesses. With chargebacks rising at a rate of 20 percent per year and merchants losing $2.40 to chargebacks, fees and merchandise replacement for every dollar of losses, businesses are more at risk than ever.
This is especially worrisome because chargebacks, no matter how they originate, have several negative impacts for business:
- Fees are issued, usually anywhere from $15 – $100
- Revenue is lost
- The cost of goods sold is forfeited
- Transaction processing fees are wasted
Merchants that frequently have to issue chargebacks are placed on the MATCH list, can have their merchant account closed, can be forced to use high risk payment processing, or can lose the privilege of accepting credit cards. The extra expense of a high risk account usually drives a merchant out of business.
When most people think of chargebacks, they typically think of fraudulent chargebacks or true fraud – instances where either the customer tries to dispute a legitimate charge in the hopes of getting something for free, or the customer disputes a charge that was made with stolen information. While these types of fraud certainly contribute to a great deal of chargebacks, the bulk of chargebacks that impact businesses stem from a much less nefarious source: legitimate, friendly customers, otherwise known as friendly fraud.
WHAT IS FRIENDLY FRAUD?
Friendly fraud comes not at the hands of hackers or criminals, but from legitimate customers. These customers don’t have malicious intent. Instead, simple forgetfulness, miscommunications, family members making unknown purchases and misunderstandings of merchant return or recurring billing policies are typically the reason why customers will dispute transactions with credit card companies in hopes of getting a chargeback. Essentially, friendly fraud is the result of an honest mistake. While it may seem relatively harmless, friendly fraud is one of the top sources of revenue loss related to fraud for merchants. The good news is that protecting your business against friendly fraud and chargebacks is simple.
HOW TO PREVENT FRIEDNLY FRAUD:
- Make Contact Easy: Transaction disputes occur because the customer will contact their credit card company first before contacting the merchant. This can cause unnecessary conflict. Most issues could be resolved if the customer would contact the merchant first. So make your contact information easy to find by including it on receipts, emails, your website and in your physical location.
- Provide High Quality Customer Service: Working with customers to resolve complaints can significantly reduce chargebacks. Often times, customers will go directly to their credit card processor if they feel like they cannot resolve the issue with the business itself. Make providing service after the sale a priority and communicate your business’ dedication to customer service to your clients. Then, dedicate some manpower to quickly and effectively respond to customer queries and complaints. The customer may still want a refund, but you can still issue that without dealing with the additional fees and other negative impacts of a chargeback.
- Send Confirmations: Send email, text or written confirmations to customers each time a purchase is made. This way they are made aware when a purchase has been made in their name. It also is a great way to provide contact information and give clear instructions on how to make returns, exchanges or ask questions if they think something is wrong.
- Over communicate policies: A lot of friendly fraud transaction disputes occur because customers don’t understand return, exchange, recurring billing or invoicing policies and become frustrated when they can’t return something or are hit with cancelation fees. To keep this from happening, over communicate your policies before purchases are made and contracts are signed to ensure your customers understand exactly what they are agreeing to.
We hate to break it to you, but people aren’t perfect. Customers will continue to make honest mistakes. But by following the above techniques, you can prevent a large number of those honest mistakes from turning into costly chargebacks. Get proactive, implement prevention techniques and keep those friendly fraudsters close. Your revenue, and your customers, will thank you.