Chargebacks are costly and frustrating, for parties on both sides of the transaction. After all, no one wants to deal with disputed charges and chargeback fees. But they do happen.
Any customer today can request a chargeback from their computer or over the phone, citing a variety of reasons, including unrecognized charge, fulfillment issues, service problems, or dissatisfaction with the product. Designed to protect consumers, chargebacks give some assurance that their transactions are protected. Fortunately, merchants have significant control over chargeback prevention and reversal through proactive customer service, clear policies, and robust dispute defense procedures.
While most chargeback requests stem from service or communication failures, businesses must be vigilant against true fraud (use of stolen cards) and intentional chargeback fraud (also known as friendly fraud manipulation).
7 most common reasons for chargebacks
Chargeback claims range from intentionally fraudulent to innocent human error. Understanding the most common reasons for disputed charges allows businesses to take preventative action. Not all chargebacks will be avoidable, but they can be significantly reduced with the right precautions in place.
1. Friendly fraud
Friendly fraud takes place when a customer makes a legitimate purchase but disputes the charge, often intentionally manipulating the system or exploiting the chargeback process due to buyer’s remorse, transaction confusion, or forgetting the purchase. The majority of disputes in the ecommerce space are categorized this way.
There are many scenarios that could qualify as friendly fraud. The most common is an intentional action from the consumer to lie and cheat the system by purchasing a product and then filing a chargeback to try and get the item for free. In many instances, those who engage in friendly fraud may do it under the pretense of committing an honest mistake, hence the term “friendly.”
Friendly fraud often occurs when a customer is unhappy with the service or product and, after failing to secure a refund through the merchant’s customer service channels, files a chargeback to force the refund.
How to avoid friendly fraud
Unfortunately, friendly fraud is tough to prevent. As a business, it’s hard for you to know consumers’ intentions, and those who set out to intentionally manipulate the system are going to do so. The best defense is the offense.
Meaning, the best defense against friendly fraud is robust data collection and immediate, compelling evidence submission (representation) to prove the transaction’s legitimacy (proof of delivery, IP address, customer login, previous transaction history). Merchants should utilize chargeback alerts services to catch disputes early.
2. Misaligned product expectations
Chargebacks can also take place because of a misalignment of expectations regarding the purchased product or service.
This happens when a customer makes a legitimate purchase but files a chargeback because the product they received fails to meet their expectations.
How to avoid misaligned product expectations
Customers in this situation typically make a dispute because they are disgruntled and feel wronged in the transaction. The best way to avoid this is to take preventative measures that ensure your advertising and product descriptions are clear.
Expectation management is important whether selling products or services in person or online. Overselling a product or service verbally or on paper/online can lead to a mismatch of product expectations, which can result in chargeback requests.
Let’s say you’re an online D2C brand selling facial moisturizers designed to reduce wrinkles. Rather than touting your product as a miracle cure for everyone, make it abundantly clear who the product is for—and who it isn’t for. Is it made for people over 40? Is it best for those with oily skin? It also helps to set expectations for when people can expect results. Will they see results in a month? Three months? A year of consistent use? Iron out these details and communicate them with your customers.
All in all—clear advertising claims, straightforward product descriptions, and detailed guides are all helpful to ensure customers understand what it is they are purchasing.
3. Merchant error
Many scenarios can fall within the realm of merchant error. Issues with fulfillment, delivery, policies, and product quality can all fall under this category. Under these situations, no one is committing fraud, but merchants do have both the responsibility and ability to reduce these scenarios.
How to avoid merchant error
There is a lot that can be done to minimize mistakes that may result in a chargeback.
Start by analyzing the chargeback reason codes provided by the card network. These codes are your first line of defense; they pinpoint the exact legal reason for the dispute and dictate the specific compelling evidence required to successfully fight it.
Some of the most common ones include:
- Did not receive merchandise. If this is a common problem, you may want to reevaluate your order fulfillment practices.
- Product not as described / defective. Enforcing strict quality control is a must to prevent this issue.
- Customer service issues. When customers don’t get the help they need from your support team, they may resort to disputing a purchase or charge.
The best course of action will depend on the situations you commonly face in your company.
In any case, placing tighter controls across the business can help to make sure that products go out in quality condition, leaving fewer gaps for error.
Beyond process and quality control, customer service is the best barrier to chargebacks. The majority of shoppers will contact customer service before they dispute a charge. Strong customer service departments and training of customer support employees can ensure that errors are picked up and resolved before a chargeback happens.
4. Unclear return and refund policies
Unclear return and refund policies can also lead to chargebacks. In these cases, a customer may be unaware that returns or refunds are not possible or the time available to request one is shorter than expected.
During such situations, customers who are unable to return an item may end up disputing the charge so they can get their money back. In the case of service providers, clients may dispute a charge if they’re unhappy or are unable to use the service rendered. Maybe you provided graphic design services and the client decided not to use your work. In this scenario, they may decide to dispute the charge.
Clarify the amount of time they have to return an item or the limitations of the policy (e.g., the item cannot be used, worn, or, for digital services, if the license key has been activated or the service was already consumed/utilized).
How to avoid unclear return and refund policies
Strict returns and refund policies are not very attractive, and as such, merchants may not want to highlight them before customers make a purchase. But clear terms are key to reducing chargebacks.
Customers need to know their responsibilities when returning or refunding a product. Clarify the amount of time they have to return an item or the limitations of the policy (e.g., the item cannot be used, worn, etc.).
For services, you may want to add a clause stating that clients may not request a refund if the service has already been provided.
(Pro tip: You can soften this policy by giving clients the ability to request do-overs instead of refunds.)
When all these things are clear-cut, shoppers are less likely to dispute the charge.
Put it simply, issues around returns and refunds can be reduced by providing clear, easily accessible terms upfront. This helps customers make better-informed purchase decisions and act according to the company’s return and refund policy.
5. Delivery issues
Online shopping is a normal part of life for many customers across the United States. People are more comfortable with online shopping than they’ve ever been, but delivery issues make customers uneasy and quick to worry that the items won’t arrive.
Delivery issues, such as delays or problems with parcel tracking, may spike customers’ anxiety. With news of scams all over the internet, delivery problems—perceived or real—can make customers trigger-happy and quick to dispute charges at the slightest sign of delay.
How to avoid delivery issues
Delivery risks come with the territory of running an online business. Once a product is with a courier, it’s often out of the merchant’s control. Delays can and will happen on occasion.
Merchants have to control what they can, such as proof of fulfillment. Utilize carriers that offer verifiable tracking numbers and require delivery confirmation or signature confirmation for high-value orders. This documentation provides compelling evidence during the representment process
Regular delivery communication—i.e., letting customers know when the order is received, when it has been handed off to the courier and how to track it—will minimize chargebacks related to delivery issues.
6. Defective products
For physical goods, defective products are the result of manufacturing or delivery issues. For SaaS and recurring services, this category includes system outages, bugs, missed service level agreements (SLAs), or features that fail to work as advertised.
Most merchants will forecast a level of chargebacks related to product defects. Like delivery issues, these problems are bound to come up on occasion. But they can still be minimized to a point.
How to avoid defective products
Quality control is an important step that merchants should take at various stages in acquiring and selling products. If ordered from a third-party vendor, products should be checked as thoroughly as possible before accepting them.
Once in the merchant’s possession, practices should be put in place to store products in appropriate conditions. And finally, you and your staff must stay on top of product care and maintenance to ensure it stays in good condition before leaving your store.
In cases where defective products slip through quality control efforts, strong customer service and returns policies can help to encourage customers to send the product back and receive a new one.
7. Canceled recurring transactions
Misunderstandings about canceled recurring transactions are very common with the growth of subscription-based services in the market. In some cases, merchants may make mistakes and charge a customer after they have canceled their agreement. Sometimes, the customer signs up for recurring payments without realizing it. And quite often, the customer just forgot to cancel, realized after the charge, and wanted to get out of it.
How to avoid issues with canceled recurring transactions
As most subscription models are automatic, automated processes can be put in place to control and minimize cancellation issues. The best method is communication. Sending out automatic emails a few days prior to processing the recurring charge allows the customer to:
- Remember the subscription, so they don’t find it odd when it comes up on the statement
- Realize that there has been an issue with their cancelation
- Remember to cancel
It’s also important to educate customers on how to cancel their subscriptions. Showing people how to cancel may seem like bad business, but chargebacks are worse, and simple email communication can go a long way in reducing these occurrences.
The best method is communication, but the most important technical solution is ensuring payment continuity. Implement an account updater service (provided through your processor) to automatically update expired or reissued card numbers on file, significantly reducing “card not honored” decline chargebacks
Final words
Chargebacks are most often the result of concerned customers worried they have been taken advantage of by dishonest merchants. Strong customer relationships are the best prevention tool. But when a dispute is filed, never automatically concede. Look at your chargeback reason code, assemble compelling evidence, and engage in the representation process. Leveraging data and integration is the best way to secure your revenue.
Luckily, Stax provides the secure, compliant foundation needed to reduce fraud, offering tokenization and robust data streams that easily integrate with third-party fraud detection and chargeback management tools.
