Understanding chargeback management is crucial for merchants. We explain where chargebacks really come from, how to manage them, and the pros and cons of internal chargeback management.
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Worried about chargebacks? If you’re a merchant, you have good reason to be.
According to Mastercard, worldwide chargeback costs hit $117.47 billion in 2023. Accounting for chargeback fees and other related revenue drains, the average chargeback will cost merchants about $3.75 for every dollar in direct transaction costs.
Chargeback management is crucial, but that doesn’t mean the job will always be easy. In this article, we’ll explore how to reduce chargebacks through advanced chargeback management. We’ll expound on why it’s vital to your ongoing success, and discuss the pros and cons of trying to handle the task in-house.
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Chargeback management refers to the tools, techniques, and overall strategy a merchant used to minimize the impact of chargebacks on their business.
A customer dispute, or chargeback, is a forced payment reversal initiated by an issuing bank. Thus, “chargeback management” is an umbrella term that describes different ways of controlling the impact that chargebacks can have on your business.
Successfully managing chargebacks requires addressing both dispute prevention and revenue recovery. The end goals here are to prevent chargebacks wherever possible, contest suspected friendly fraud through representment, and keep your business’s chargeback ratio within an acceptable range.
You could accomplish all this through an in-house chargeback team… at least in theory. But, with the amount of work and expertise required, you may find it easier and more cost-effective to outsource the job to a trusted professional.
Make no mistake: chargebacks are serious business. Fortunately, they can be managed, as long as you can understand and address the problem.
Losses from the occasional dispute might seem acceptable, but the typical merchant will severely underestimate how extensive their chargeback problem actually is. This calculator can give you a quick idea of what you’re losing.
It’s not always easy to keep customer disputes to a minimum. But, with the right chargeback management strategy in place, you will save immense amounts of time, resources, and revenue. It can also increase the longevity of your business, and let you build better relationships with customers.
Each chargeback comes with a reason code pointing to the supposed reason for the cardholder’s claim. These labels rarely tell the whole story, though. Ultimately, all chargebacks stem from one of three fundamental sources: merchant error or mishandling, third-party (criminal) fraud, or first-party (“friendly”) fraud.
Each dispute source requires a unique management strategy, built around the most effective combination of tools and tactics. Put another way, developing a successful chargeback management strategy depends on identifying the true source behind each transaction dispute.
Relying solely on reason codes for this data often results in plans that address the symptoms, not the problem. You need to develop a chargeback reduction plan targeted at addressing each dispute source in a unique manner.
Learn more about chargeback management plans
Once you segment your chargebacks by source, you can then tackle chargeback management in three stages. Let’s take a closer look at how this works, and what you can do to combat each chargeback source.
Step 1
Prevent Chargebacks From
Criminal Fraud
Third-party credit card fraud covers any unauthorized transaction made with stolen or breached account information. If potential criminal activity can be identified, prevention is generally a straight-forward process. Fraud scoring, card network verification tools, and detection processes should form the basis of your reduction strategy.
Step 2
Eliminate Chargebacks From
Merchant Errors
“Merchant error” refers to a wide range of seemingly minor policy and procedural missteps that can trigger chargebacks. Issues like unclear policies, processing shortcuts, and simple oversights can collectively account for between 20-40% of your chargebacks. These chargebacks are preventable, however, if you can identify the errors responsible.
Step 3
Fight Chargebacks From
Friendly Fraud
Once you’ve eliminated most criminal fraud and merchant error chargebacks, nearly all remaining claims will likely come from first-party misuse, or friendly fraud. In most cases, the best response will be to challenge these illegitimate claims through representment. This will offer both revenue recovery and better bank relationships.
There are two key roles that will be the base of your chargeback management team: the chargeback analyst, and the chargeback manager. A successful management team requires both.
The differences between the two seem slight, but they’re actually quite significant. Here’s a quick comparison:
Chargeback analysts investigate and review evidence to support — or oppose — the legitimacy of the customer’s claim. They’ll look for patterns or trends in chargebacks received and potentially make strategy recommendations. At the end of the day, though, they typically defer to the chargeback manager’s expertise.
The chargeback manager’s job is to oversee your business’s risk mitigation using fraud data, model schematics, and specialized tools. Managers will acquire Information from the chargeback analyst and use it to create and implement business-specific strategies. Managers are also responsible for keeping stakeholders updated on the status of claims.
Many merchants try to handle all chargeback-related tasks in-house… at least at first. That might work if you receive only a few chargebacks per month. However, you’ll probably find it more cost effective in the long run to work with an experienced third-party provider that handles both chargeback analysis and management.
There are other factors to think about as part of your chargeback management approach, too. Questions like “how do you track your progress?” and “how do you store and analyze data?” will be key considerations, regardless whether you manage chargebacks internally or are looking for a third-party solution.
One of the most critical aspects of chargeback management is the timeframes for chargeback processing. These deadlines are mandatory, and delayed responses or lack of proper documentation can disqualify an otherwise tight representment.
After receiving a response from the merchant, the issuer has a set window of time to review the evidence and make a final decision on the chargeback. This period usually falls within 30 to 60 days, but will vary depending on things like the card network, the issuer, or specific circumstances of the chargeback.
There are fees associated with chargebacks, as well – even if a merchant successfully wins a reversal. On average, a single chargeback fee is typically around $20, but the final amount of a chargeback fee varies, depending on the circumstances: if the merchant is labeled as “high risk,” for example, the per chargeback fee will be much higher. These fees are in addition to any fines the acquirer or processor might charge.
Learn more about chargeback processing
Yes. As we mentioned earlier, in-house chargeback management is technically possible. That doesn’t mean it’s necessarily cost-effective, though.
There is no “set-it-and-forget-it” solution. Dispute management requires ongoing attention and education. Someone within your business will have to stay up-to-date on the constantly changing rules and regulations set by different card schemes, banks, and even local and national governments.
You’ll need to balance multiple chargeback management tools. For example, fraud filters can be effective in stopping potential fraud. With the wrong parameters, however, the amount you save can equal far less than what you would lose to false positives.
Managing customer disputes in-house involves significant investments of time and resources, with statistically low return on investment. At the end of the day, seeking help can save you time, headaches, and revenue.
Learn more about in-house chargeback management
Regardless of how you decide to handle disputes, chargeback management software can be a huge help. Specialized platforms can collect and analyze data from multiple sources, including previous customer disputes. The best software will use this information, along with your custom parameters, to let you:
Chargeback management software leverages AI and machine learning to facilitate and streamline tasks like data analysis, error processing, and flagging potential fraud. It can also increase accuracy and ensure response deadlines are met.
Learn more about chargeback management software
There are different approaches to using chargeback management software. You can opt for a SaaS solution, or fully managed chargeback management.
SaaS (short for “software as a service”) is a self-service option. Your provider licenses management software to you on a subscription basis. SaaS offers flexibility and a lower price point. However, it also involves some ongoing oversight on your part. For example, you’ll have a full view of all your data, but you’ll need to do your own analyzing and reporting.
With a fully-managed service, you outsource all chargeback management to professionals. It allows you to take disputes completely off your plate and focus on running your business. The only downside is limited direct insight into the process. That stresses the importance of engaging with a provider who offers accurate, detailed, and user-friendly reporting to track performance and ROI.
Learn more about chargeback management software
Of course, it’s also possible to combine elements of both methods. A SaaS solution, for example, may allow you to more easily monitor data and spot trends. At the same time, you could outsource tasks such as responding to invalid friendly fraud claims. Splitting the load works well for some businesses. This hybrid approach might well be the best strategy for merchants that seek to outsource operations, but still have oversight and some degree of control.
Chargeback management involves a great number of moving parts that can shift with little or no notice. There are few service providers on the market that offer true, transparent, end-to-end management services to handle all your chargeback needs.
Chargebacks911® is the exception to the rule.
In addition to customizable strategies, we offer proprietary technologies and experience unmatched by anyone. Our solutions are flexible, scalable, and global in scope. Our error-risk-threat notifications are accompanied by actionable real-time solutions. And, we offer the only performance-based ROI guarantee in the industry.
Chargebacks911 knows how to handle chargebacks, from consultations to wholly implemented strategies. For information, contact us today.
Successfully managing chargebacks requires addressing both dispute prevention and revenue recovery. The end goals here are to prevent chargebacks wherever possible, fight friendly fraud through representment, and keep your business’s chargeback ratio within an acceptable range. There are a number of chargeback management solutions merchants can use to help with this, but not all work equally.
Chargeback management refers to the strategy used to minimize the impact of chargebacks on your business. The tools and tactics you use to manage chargebacks are all part of a broader strategy to prevent disputes, recover revenue, and collect and analyze chargeback data to fine-tune your efforts.
That’s up to the individual merchant. Companies with few chargebacks may try to deal with them in-house, while most businesses find it more cost-effective to outsource management to third-party professionals.
A chargeback is a credit or debit card charge that is forcibly reversed by an issuing bank. This typically happens after a cardholder claims a transaction was the result of fraud or abuse.
The chargeback process encompasses all the steps taking place between a cardholder contacting the issuing bank to dispute a charge, and the resolution of that dispute. Multiple parties, including issuers, acquirers, merchants, vendors, and card networks may be involved in this process.
Merchants are hit with non-refundable fees for every chargeback they receive. They’ll also lose the cost of the sale, any merchandise from the order, and associated fees such as shipping and restocking.
