Chargebacks: 7 Issues to Watch Out for and Avoid

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 in the event of an unrecognized charge. Designed to protect consumers, chargebacks give some assurance that their transactions are protected. Unfortunately, merchants have little control to stop chargebacks from taking place.

While most chargeback requests or disputed charges are valid, bad actors do exist, and businesses need to be vigilant of how chargebacks commonly occur and what to do to avoid them.

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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 using their credit card, only to dispute it later on. While it can sometimes be unintended (due to genuine confusion on the part of the consumer), friendly fraud is more often than not an intentional manipulation of the chargeback system.

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.”

In the grey area, there may be customers that are unhappy with the service or product, developing a false belief that the transaction was illegitimate and reporting it as fraudulent.

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.

Merchants in a friendly fraud situation should blacklist the customer and dispute the chargeback through the proper channels. Reporting the customer to a blacklist with their card information, billing address, and IP will help prevent them from doing this again. Merchants can then supply evidence to the bank to show the illegitimacy of the chargeback in order to get the chargeback reversed.

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 chargebacks that have occurred. Review the chargeback codes and understand if the customers believe the product did not match its promise or whether there are delivery or policy issues.

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.

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. By 2023 eCommerce revenue is expected to reach $740 billion. 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 just control what they can and make transparency a priority. Quick action to process and ship orders at the merchant level will help get them out in a timely manner, and email updates at each stage of the process will keep customers calm.

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

Defective products can result from manufacturing, packing, or issues with delivery. Sometimes products don’t work, they’re faulty, or they get damaged somewhere in the process.

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 cancelation 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.

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 way to build confidence and minimize chargeback trouble. Offer great transparency on terms and product descriptions, keep a well-trained customer service department and communicate at every stage of the delivery process.

If you’re facing more chargebacks than you believe is reasonable, look at your chargeback code, identify your primary issues and work through the processes of those areas to create an airtight plan for customer service and communication.

And in the case of bad actors, Stax helps minimize chargeback fraud by constantly monitoring your accounts and offering robust security tools.

Get in touch to learn more.

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