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How Merchants Can Reduce Chargeback Risks for Virtual Items

How Merchants Can Reduce Chargeback Risks for Virtual Items

Consumers can purchase just about anything in today’s online marketplace, including items that are never physically shipped to them. Nontangible items like tickets, custom graphics, in-app purchases, e-books and computer software are increasingly popular online purchases. And while merchants are happy to have a market for their virtual products, they’re finding these products to be more vulnerable than physical goods to expensive chargebacks: In first-quarter 2015, 24% of all digital goods purchased in the United Kingdom were charged back.

One reason it’s so hard to mount a successful chargeback defense is because it’s hard to prove the buyer received and used their virtual item. Proof of delivery is so challenging that payment giant PayPal doesn’t offer seller protection for digital goods and other intangible purchases.

With the cards stacked against merchants, is there anything they can do to prevent — or successfully dispute — chargebacks for their virtual products and services? We’ve got seven tips that can help merchants prevent lost revenue due to virtual item chargebacks.

Seven Strategies for Protecting Virtual Transactions

Merchants may feel it’s impossible to win a chargeback for digital goods, and for good reason: the odds are rarely in the merchant’s favor for any transaction, and fighting disputes can be expensive. Each forced return costs merchants upward of $75, including fees, penalties and lost personnel costs.

It’s no surprise, then, that many merchants are using these strategies to stop chargebacks from ever happening.

1. Keep Detailed Documentation

Establishing purchase and delivery expectations early can help eliminate any confusion about an order and reduce the customer’s ability to say they didn’t get what they paid for. Merchants who sell digital images, for example, may provide a watermarked proof to the customer. Once the customer approves it, merchants email the final image without the watermark.

Although PayPal doesn’t protect transactions for virtual items, merchants may still win a dispute if they can prove their customer agreed to exchange payment for a digital good/service and then approved of and received it.

2. Communicate Clearly

Many chargebacks occur simply because a customer isn’t informed about the status of their order. Avoid this by sending customers a detailed summary of the transaction and then keeping customers updated throughout a transaction — from receiving the order, processing the payment, beginning production, delivering the final product and asking for feedback.

For recurring charges, merchants should inform the customer well in advance of each billing event and provide instructions for cancelling or changing their subscription.

3. Establish a Refund Policy

An unclear or too-stringent refund policy often leads to a rise in chargebacks by frustrated customers. Establish a flexible return policy that’s fair to both merchants and consumers, and then communicate it — on product pages, transaction confirmations and e-mail communications.

4. Provide Great Customer Service

E-commerce retailers never close — neither should their customer service. If frustrated customers can’t reach the merchant, they may instead click “Dispute Charge” on their credit card issuer’s website for a quick resolution. Great customer service isn’t about just being accessible; it’s also about fixing customers’ concerns — even if it means refunding the purchase.

5. Ship a Physical Product

There are two reasons merchants should always require shipping addresses, even if the item is delivered virtually. First, having the shipping address lets a merchant use the Address Verification System to compare billing and shipping addresses.

Second, merchants can use the shipping address to mail a physical package to customers that includes:

  • Digital download instructions for their order
  • A receipt that lists the date of purchase, order status, order number, and the buyer’s and seller’s contact information
  • Other relevant purchasing information

Send this package with delivery confirmation, giving merchants the proof of delivery they need to make it harder for a customer to claim they didn’t receive an order.

6. Require the CVV Number

The CVV — the three- or four-digit number printed or embossed on a physical credit card — is the one piece of information a fraudster is least likely to have in their hands. Merchants who require this number increase the likelihood that they’re making a sale to the legitimate cardholder.

7. Send Trackable e-Mails

Merchants who email customers links to their digital downloads or virtual purchases should consider using an email client that can track who received and opened the email – and when. Such documentation provides valuable proof the customer received the purchase.

Bolster Chargeback Defenses With a Fraud Protection Solution

There are many reasons a customer might file a chargeback. They may be the legitimate victim of fraud, or they may be defrauding online retailers in an attempt to get a product or service without paying for it. Regardless of the reason, merchants who sell virtual goods are challenged to avoid these expensive disputes.

But merchants can minimize fraudulent transactions and chargebacks with a single solution: a comprehensive fraud protection solution that uses trained staff and advanced artificial intelligence to evaluate the legitimacy of transactions and block fraud before it affects a merchant’s bottom line. Contact a ClearSale analyst today to learn how we can help e-commerce merchants defend their sales of virtual items against fraudulent transactions and chargebacks.

ClearSale Fraud Protection Buyers Guide