Sarah is a Marketing Manager at Clearsale and has been with the company since 2012. During that time, she has developed deep knowledge about fraud prevention. She brings extensive expertise in planning, marketing, go-to-market strategy and sales experience, thanks to a background that spans financial planning, controlling and analysis. She previously spent 5 years with Proctor & Gamble, and she holds bachelor and master degrees in Business with great distinction from a top Brazilian business school.
While most small business owners are likely well aware of the headaches associated with fraudulent online transactions, they may not fully understand one of the most crucial aspects of credit card fraud: the chargeback. So let’s take a step back and explore a few of the common questions surrounding this fundamental issue.
What is a chargeback?
When a cardholder identifies a questionable transaction on a statement, the cardholder may file a complaint with the credit card issuer. If the issuer determines that the cardholder should not be responsible for the payment (for example, if the card had been stolen, or if the goods were never received), the issuer will refund the original transaction amount back to the cardholder. The issuer will then reverse any payment previously made to the merchant, along with an additional fee.
The payment reversal plus fee is called a chargeback.
What do chargebacks cost?
The most obvious cost of chargebacks occur with the loss of payment for goods/services provided. The penalty fee can also be substantial, ranging from $50 to $100 (or even more) per transaction.
Additional indirect costs may be involved as well. For example, if goods were in fact shipped, those shipping fees cannot be recovered. Moreover, the merchant may need to spend valuable time and resources to deal with the card issuer during an investigation.
Also, significantly, merchants that incur too many chargebacks can be assessed higher fees by card issuers and may even lose their ability to accept credit card payments.
What are the most common types of chargebacks?
Chargebacks inherently are designed to protect consumers from fraudulent activity. They can take place in a number of circumstances – not all of which are fraudulent.
- Criminal fraud: This is when an actual unauthorized transaction occurs, such as when a criminal uses stolen credit card information to rack up fraudulent purchases.
- Item not received: This occurs when a customer pays for an order but claims the goods never arrived, for example, if the package is lost in the mail.
- Credit not processed: In this scenario, a customer returns an item to the merchant for a refund, but claims the credit was not correctly posted to his or her account.
- Canceled recurring transaction: This is when a customer reports that he or she requested that a recurring transaction (such as an automated refill of a particular item or an ongoing service) be canceled, but the card was still charged.
- Technical problems: From a double charge on a card to a mix-up during the authorization process, these chargebacks stem from some technical issue during the payment process.
- Friendly fraud: This occurs when a customer creates a legitimate charge and then reports it as fraud. For example, a customer may place an order and receive the goods but falsely report that the goods never arrived.
It’s important to know that in nearly all chargeback cases, the card issuer typically sides with the consumer – which often leaves the merchant on the hook. Because of the hassle and expense of trying to fight the uphill battle of chargebacks, many merchants unfortunately simply accept them as a cost of doing business.
How can merchants protect themselves?
Because of the difficulty involved with trying to fight chargebacks, the best course of action for most merchants is to try and prevent them from happening in the first place.
While it may be nearly impossible to eliminate all chargebacks, there are certain steps that merchants can take to better protect themselves and reduce their risk, including:
- Ongoing monitoring to look for patterns, red flags or typical areas that fraudsters might try to exploit
- Implementing additional fraud controls, such as closely monitoring IP addresses, excessive usage on certain cards and high-value transactions
- Reviewing any past chargeback cases to determine what forms of documentation and which areas of analysis were most helpful to expedite the review process
- Implementing a fraud prevention solution that includes chargeback insurance protection
Online fraud protection is obviously not your main business focus, so it may make sense to seek out a partner that is constantly thinking about fraudulent transactions and chargebacks. To learn how Clearsale can be that expert partner, contact us at email@example.com and let’s talk.