Understanding Chargebacks: What They Are and How to Handle Them in eCommerce
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Introduction
In the world of eCommerce, chargebacks have become an increasingly common and costly issue for retailers. As a digital logistics platform, FreightAmigo understands the importance of helping our clients navigate these challenges. In this article, we’ll explore what chargebacks are, how they work, and most importantly, how you can protect your eCommerce business from their negative impacts.
Recent data shows that in 2017 alone, retailers and issuers lost a staggering $31 billion to chargebacks. Even more concerning is the projection that by the end of this year, retailers are expected to lose $25 billion to “friendly fraud.” These figures highlight the urgent need for eCommerce businesses to understand and address the chargeback problem.
What is a Chargeback?
A chargeback is a payment dispute that occurs when a buyer questions the validity of a transaction charged on their credit or debit card. The buyer initiates a claim with their card-issuing bank to reverse the transaction. It’s important to note that a chargeback is different from a return, as it involves the banks of both parties and can be a more complex process.
How Does the Chargeback Process Work?
The chargeback process typically follows these steps:
- A consumer files a chargeback on a disputed purchase within 120 days after the purchase is made.
- The issuing bank reviews the chargeback and initiates the process with the merchant’s bank if the consumer’s complaint is deemed valid.
- The merchant’s bank assesses the complaint, researches the transaction in question, and notifies the retailer to provide transactional evidence within 45 days to help validate the purchase.
- If the chargeback is found to be unjustifiable, the money is released to the merchant’s account. If the claim is valid, the transactional amount is returned to the cardholder, and the merchant pays the associated fees, which can range from $20 to $100 or more.
Chargebacks vs. Refunds: Understanding the Difference
While both chargebacks and refunds involve a return of funds, they are handled differently:
- Refunds: The customer sends the item back to the eCommerce merchant for replacement or a refund on the purchase amount.
- Chargebacks: This process involves both parties’ banks, and the disputed funds are withheld until the card issuer and the merchant’s bank settle the disputed transaction.
Common Causes of Chargebacks
Several factors can lead to chargebacks in eCommerce. Understanding these causes can help merchants take preventive measures:
1. Fraud or Identity Theft
This occurs when someone uses another person’s credit card to make unauthorized purchases. In 2017, over 133,015 Americans reported cases of credit card fraud.
2. Customer Dissatisfaction
Unhappy customers may bypass the merchant and request a chargeback directly from their bank instead of seeking a refund or replacement.
3. Fulfillment Issues
Problems such as lost packages, delivery delays, or incorrect shipping addresses can result in chargebacks.
4. Technical Issues or Mistakes
These can include unintended purchases due to checkout errors, expired cards, or processing issues on either the buyer’s or payment processor’s end.
5. Friendly Fraud
This occurs when a customer deliberately disputes legitimate charges as fraudulent. By the end of 2020, friendly fraud is expected to cost merchants $25 billion.
6. Return Item Chargeback
When a merchant refuses to accept returns or issue refunds as promised, buyers may file a chargeback to recover their money.
7. Miscommunication or Lack of Clarity
Unclear product descriptions, hidden charges, or poor-quality photos can lead to chargebacks if customers feel misled about their purchase.
The Impact of Chargebacks on Retailers
Chargebacks can have significant financial and operational impacts on eCommerce businesses:
1. Financial Losses
As of 2018, each dollar of fraud cost retailers $2.94. This includes the loss of the product value, shipping costs, and transaction fees.
2. Chargeback Fees
Merchants are charged a fee for each chargeback, typically ranging from $20 to $100.
3. Risk of Fines and Blacklisting
Excessive chargebacks can lead to higher fees, fines exceeding $10,000, or even blacklisting by acquiring banks.
4. Lost Marketing Expenses
Chargebacks result in the loss of time, money, and effort spent on marketing to acquire customers.
5. Operational Costs
In cases where buyers keep the item and receive a chargeback, retailers lose both the product value and associated operational expenses.
Protecting Your eCommerce Business from Chargebacks
At FreightAmigo, we believe in empowering our clients with knowledge and tools to succeed in the digital marketplace. Here are some strategies to help protect your business from chargebacks:
1. Maintain Open Communication Channels
Ensure your contact information is easily accessible, and offer multiple support options like phone, email, and live chat. This encourages customers to reach out to you directly before filing a chargeback.
2. Implement Secure Payment Technologies
Use advanced fraud detection systems, address verification services (AVS), and CVV verification to validate transactions before authorization.
3. Establish Clear Policies
Publish transparent return and service policies on your website and receipts. This can discourage fraudulent claims and strengthen your position during disputes.
4. Accurately Represent Your Products
Ensure your product descriptions and images accurately reflect the items you’re selling. This reduces the likelihood of customer dissatisfaction leading to chargebacks.
5. Deliver on Shipping Promises
Provide accurate shipping timelines and keep customers informed about their order status. Consider offering package tracking to reduce anxiety about delivery issues.
6. Optimize Your Checkout Process
Make sure all costs, including shipping, are clearly displayed before purchase to avoid surprises that could lead to chargebacks.
7. Gather Information for Rebuttals
Keep detailed records of all transactions, including AVS matches, signed delivery receipts, and CVV confirmations. This information can be crucial when disputing chargebacks.
How FreightAmigo Can Help
As a digital logistics platform, FreightAmigo offers solutions that can help mitigate some of the risks associated with chargebacks:
- Our advanced tracking system allows you and your customers to monitor shipments in real-time, reducing uncertainty and potential delivery-related chargebacks.
- Our automated documentation process ensures accurate and timely paperwork, minimizing errors that could lead to disputes.
- Our comprehensive insurance options protect against loss or damage during transit, reducing the likelihood of fulfillment-related chargebacks.
- Our 24/7 expert support can help you quickly address and resolve customer concerns before they escalate to chargebacks.
Conclusion
Understanding chargebacks and implementing strategies to prevent them is crucial for the success of any eCommerce business. By following the guidelines we’ve outlined and leveraging the tools and services provided by platforms like FreightAmigo, you can significantly reduce your exposure to chargebacks and their associated costs.
Remember, a proactive approach to customer satisfaction and transparent business practices are your best defenses against chargebacks. Stay informed, stay prepared, and don’t hesitate to seek expert assistance when needed.
