Payment Chargebacks And How Service-Based Software Companies Can Avoid Them

You’re always looking to minimize risks and increase revenue for your business. Unfortunately, when chargebacks happen, it’s your service-based software company who has to pay the price. By learning about chargebacks and putting safeguards in place for when they inevitably happen, you can protect yourself from fraud, preserve your bottom line, and ensure that payments will successfully go through.

What Are Chargebacks?

Chargebacks happen when there is a reversal of a transaction that’s already been completed. They come up when a consumer disputes a transaction they paid for and then the issuing bank, or payments facilitator, gives them back their money. According to Expert Market, the average global cost of chargebacks is about 0.47% of total merchant revenue.

What’s more, not all chargebacks are legitimate. These false customer disputes, called friendly fraud, account for 70% of all credit card fraud, according to FIS. Friendly fraud is increasing at a 41% rate every two years and it is the no.1 cause of chargebacks. One of the reasons why is because 50% of customers who put in a false claim will do so again within 60 days of their first successful claim.

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Additionally, criminal fraud – in which criminals intentionally do chargebacks – and merchant or customer errors can also contribute to a high rate of chargebacks.

Statistics show that the software industry experiences the highest average chargeback-to-transaction ratio at 0.66%. That is higher than the total for all industries, which is 0.60%. The reason why it could be higher than other industries is because software is usually sold on a subscription basis. Customers have free trials that then run out, and they discover they are being billed monthly. Since software is expensive, customers don’t want to pay for it, and they demand their money back.

If you are a software payments facilitator that provides the integrated payment features businesses are using to charge their customers, it is up to you to give the customer their money back when chargebacks happen. And if you cannot recover the chargeback funds from your merchant partner, then you will still be held responsible for returning the money. This could result in a huge loss of revenue as well as time.

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Defending Your Software Company from Chargebacks

As the payments facilitator, since you are especially vulnerable to chargebacks, you need to use the right tools to protect yourself against them. If you put precautions in place, then you can save yourself valuable time and money.

When determining the cost of a chargeback, you have to look at not only the transaction amount, but also chargeback fines, lost processing fees, and labor costs for managing chargebacks. The overall financial impact of chargebacks is $130 billion each year. With more and more businesses going online, that number is only expected to rise.

To avoid and minimize the risk of chargebacks, software payments facilitators can take different steps.

Defending Your Software Company From Chargebacks

1. Maintain Detailed Transaction Records

Software vendors with integrated payment features need to maintain records of every transaction as well as customers’ data. Then, you will be able to defend yourself against chargebacks by having that evidence on hand, and you can spot fraud if you see chargebacks happening over and over again.

Maintaining detailed records can help with fraudulent cases where customers circumvent the business and go directly to their card issuer to request a chargeback.

They may claim that:

  • They never received/signed up for using the software, even if they had.
  • They hadn’t authorized the transaction—but had.
  • The service wasn’t as advertised—even though it was.
  • A recurring payment was not canceled as requested—even though they never canceled it.

2. Provide Great Customer Service

It’s critical to offer excellent customer service so that misunderstandings don’t occur. For example, software users should know the exact price of the software and how they will be billed (weekly, monthly, yearly, etc.) so there are no surprises and they don’t end up disputing the charges. The software company should be clear and transparent about the charges with the sub-merchant at all times. Communicating with the sub-merchant that they should be clear and upfront about any charges will save you a lot of time and money.

3. Avoid High Risk Sub-Merchants

Before working with a sub-merchant, you need to do your due diligence and screen them to make sure they won’t generate excessive chargebacks. If they have had issues with customers in the past, then they are likely to have them in the future as well.

You need to ensure that integrated payment features have the ability for the software company to determine the risk levels of sub-merchant looking to use their payment features. They should also be able to flag and monitor for risky behaviors for existing users.

Not only is there a cost risk associated with losing money to businesses, but also the greater the number of chargebacks they start to have as a facilitator would result in their company being flagged as “high risk.” Their own costs will go up, and they would have an even harder time recovering funds or getting transactions approved. It’s a lose-lose situation for everyone.

4. Put Limits on All Merchants (at First)

In the beginning stages of working with a sub-merchant, you could put limits on processing and make sure you closely monitor all transactions. If you see any suspicious activity, then address it right away.

Integrated Payment Tools to Help with Software Company Chargebacks

When searching for an integrated payments processor to use when working with sub-merchants, make sure your payment processor offers you real-time reporting as well as insights and analytics into your transactions. You need to be able to examine payment trends, manage your refunds, and track your customers’ payment history anytime and anywhere. If you can review the data on a regular basis, you’ll see if patterns are emerging and whether or not there are excessive chargebacks happening.

The integrated payments processor should additionally have a risk team, provide safety and security, and supply a dispute management tool.

The dispute management tool is particularly helpful because companies have a tendency to automatically refund payments right away and not go through a whole dispute process. They close out the charge as “refunded” to the user/customer without realizing at the top level that a hefty chargeback fee still exists and hasn’t really been closed out.

The payment is then levied by the bank/processor against the software company. So even though the business “refunded” the payment themselves, they’re now losing out on funds twice. The greater the scale of their company, the higher the risk someone doesn’t realize it was already “paid out” and accidentally sends another “refund.”

That means they paid out three times. Now they have a claim still sitting with the payment processor and they end up with no way to reclaim the money because they didn’t follow the necessary payment processing protocols for disputes. With a dispute management tool, they could avoid all of that.

Getting Started with Stax Connect

With Stax Connect’s Risk Management feature, you can do all this and more. Stax Connect provides you with access to an in-house risk team for monitoring and validating all of the payment transactions processed on your software platform. It offers continued PCI DSS security and compliance at every level, and the ability for users to monitor and quickly respond to chargebacks from within your platform in real-time with the Dispute Manager API.

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FAQs about Payment Chargebacks

Q: What are chargebacks?

Chargebacks occur when a completed transaction gets reversed because the consumer disputes the transaction they paid for, and the issuing bank or payments facilitator refunds their money.

Q: What is the global cost of chargebacks?

According to Expert Market, the average global cost of chargebacks is approximately 0.47% of total merchant revenue.

Q: What are the common causes of chargebacks?

The common causes of chargebacks are customer disputes, also known as friendly fraud; criminal fraud, where criminals intentionally cause chargebacks; and merchant or customer errors.

Q: How prevalent are chargebacks in the software industry?

The software industry experiences the highest average chargeback-to-transaction ratio, estimated at 0.66%, which is higher than the total average across all industries at 0.60%.

Q: How can software payment facilitators protect against chargebacks?

Software payment facilitators can protect themselves against chargebacks by maintaining detailed transaction records, providing excellent customer service, avoiding high-risk sub-merchants, and initially setting limits on new sub-merchants.

Q: How can integrated payment tools help with chargebacks?

Integrated payment tools can assist in combating chargebacks by offering real-time reporting, insights, and analytics into transactions, allowing companies to monitor payment trends, manage refunds, and track customers’ payment history.

Q: What features should a good integrated payments processor have?

A good integrated payments processor should offer real-time reporting, insights, and analytics, a risk management team, security and safety measures, and a dispute management tool.

Q: How does the dispute management tool help in resolving chargebacks?

The dispute management tool helps in resolving chargebacks as it discourages companies from immediately refunding payments upon a dispute, which could lead to them losing out on funds twice due to existing chargeback fees.

Q: What services does Stax Connect’s Risk Management feature offer?

Stax Connect’s Risk Management feature offers access to an in-house risk team for monitoring and validating all payment transactions processed on your software platform ensures continued PCI DSS security and compliance, and allows real-time response to chargebacks with the Dispute Manager API.

Q: What other help is available to manage chargebacks?

There are chargeback management software solutions that help companies reduce the risk of chargebacks via real-time reporting, in-depth analysis, and other tools. Examples of these include companies like Midigator, Accertify, and others.