The eCommerce Merchants’ Ultimate Guide to Disputing Chargebacks

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The increasing worldwide penetration of the Internet has given wings to buyers who have more shopping avenues at their fingertips now. Nearly half of world’s population is using the internet nowadays and a sizable share of those indulge in online shopping at least once a month. It’s no hidden fact that smartphone and apps are playing a crucial rule in the increasing popularity of online shopping. That’s the reason most of the retailers have employed a mobile-first strategy to hook the potential buyers.

In mobile commerce payment processing is the most crucial step and, therefore, each retailer offers multiple payment methods to their customers. While Mobile Wallet is the new trend in the market, credit card still the most popular payment methods among retailers. A recent study highlights that 97% of retailers accept credit cards from mobile shoppers, followed by Debit Card.

But, It’s a delicate dance as online retailers must meet two often conflicting goals: On one hand, they have to provide a great customer experience. And on the other, they simply must prevent revenue loss due to credit card chargebacks.

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Essentially, they need to make the customer’s journey from “checking out” products to actual checkout as pleasant and frictionless as possible since even a negative online shopping experience can lead to cart abandonment and potentially drive away customers for good. On the chargeback front – charges successfully disputed by a customer can deflate revenue because the cost to merchants goes beyond the actual chargeback amount itself and includes shipping costs, resources spent disputing the chargeback, and chargeback penalties and fees.

The reason these two goals are often in conflict is that stricter fraud prevention measures can add additional steps and delays, making the whole experience more cumbersome for the customer.

One way for e-tailers to thread the needle is to use a third party fraud prevention solution. Although it’s common now for these types of vendors to offer charge back guarantees, such guarantees are only part of the solution since they only shift the financial risk from merchant to solution vendor. The damage was done to a merchant’s reputation, however, remains with the merchant, and if a chargeback rate is too high, that merchant may not be able to accept certain credit cards. This is why the actual performance of the fraud prevention system is important – you don’t want to end up on any credit card issuing bank’s blacklist.

The challenge of disputing chargebacks

Although credit card companies make it easy for customers to dispute a charge, the burden of proof falls on the merchants. Merchants need compelling evidence that the customer both authorized and received the order if they have any hope of successfully disputing a chargeback. Even if they win, the process can be costly for merchants.

There are many causes for chargebacks: merchant error, outright fraud, unauthorized credit card usage, and chargeback abuse. Chargeback abuse (aka “friendly fraud”) refers to instances where customers intentionally exploit the chargeback system. An example is a customer who claims that the purchase was never received when in fact they had buyer’s remorse. Chargeback abuse is the only category, however, that a merchant can dispute, but it is also the hardest cause of chargebacks to prevent because a genuine cardholder made a legitimate purchase.

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Not only is it the hardest type of chargeback to defend against, it’s the most common. Fraud prevention experts at the Riskified note that chargeback prevention is largely the task of defending yourself against friendly fraud, provided you’ve already screened out the online criminals. This, of course, is exactly why eCommerce businesses should be collecting relevant customer data on every online transaction, even after the merchandise has shipped: because that data can be used as evidence that the genuine cardholder authorized the purchase and received it.

Data to your defense 

So, what specific data should online merchants be collecting and retaining that can help them win against friendly fraud? E-tailers can start with the basics: signed proof of delivery to the cardholder’s shipping address, a match of the three or four digit security code, and for US orders, a positive match from the address verification service (AVS) of the provided billing address at order time with the billing address of the card used. Internal information can also be used, like order history (has this same customer used this same payment before for purchases that didn’t result in a chargeback?) and copies of all communications between the merchant and customer, since these often include order confirmations.

Merchants can also utilize the data they’re already given at order time which can be verified against publicly available listings:

  • Addresses: Do the billing address and customer name match according to the public listing? What about the shipping address and customer name? Are the billing and shipping addresses the same?
  • Phone Number: Does the area code provided at order time match the billing address? Is this phone number linked to the customer’s name on a publicly verifiable record?

Social media profiles (Facebook, Google+, LinkedIn, etc.) and the email addresses entered when ordering can also provide evidence in the merchant’s favor:

  • If the customer and recipient are different, are they connected on social media?
  • Is the email address linked to a profile with the same name as the customer?
  • Is the email address listed under the same name used in the billing or shipping info?

Lower-level technical details about the digital connection between your online storefront and the customer during ordering can also be helpful:

  • Did the customer use a proxy?
  • How close is the geographic location of the IP address to the billing address?

This is by no means an exhaustive list, nor is each piece of evidence conclusive on its own. The strength of the merchant’s case against a chargeback proceeding stemming from friendly fraud results from the agreement of all these individual pieces of evidence and the implausibility (or even impossibility) of the reason stated by the customer for the chargeback to be true. For example, if the cardholder disputes a charge claiming that they never received the merchandise, then a signature of that person (or family member) at the exact moment and place of delivery obviously refutes that story.

Costs from chargebacks are a serious problem in ecommerce, with friendly fraud being a major contributor. By collecting and retaining as much evidence as possible, online retailers give themselves a fighting chance to keep their hard-earned revenue.

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