How Effective Is Your Current Chargeback System?
The term "chargeback system" describes the policies and procedures a merchant has in place to deal with payment card chargebacks. Preventing and fighting chargebacks, however, is difficult—especially for new merchants.
The process is complicated, involving multiple parties, tight deadlines, and constantly updated regulations. If you plan to run an in-house chargeback system, you will need to thoroughly understand:
- Every step of the entire chargeback process, from start to finish
- The relationships between cardholders, banks, and any processors or other facilitators
- The ever-changing methods and technologies to prevent and dispute chargebacks
Some retailers have never created or used a dedicated chargeback system. They accept chargebacks as an unavoidable cost of doing business and treat them the same as a customer return. This erroneous thinking can actually increase the number of chargebacks a business receives, which leads to more lost revenue and possibly the loss of card-accepting privileges.
Chargebacks: A Basic Explanation
A chargeback happens when a cardholder bypasses you and goes directly to the issuing bank with a dispute. The bank claws-back funds from the merchant and returns them to a cardholder. You lose the goods (or time spent providing services) but are also forced to repay the purchase prices, any associated shipping or handling fees, plus any fines from the processor or the acquiring bank.
The chargeback process is like navigating an obstacle course. The path is intricate and precise, what you need for each hurdle is different (and subject to change at any moment), and you're under stringent deadlines to complete each phase. The worst part? Even if you make it through, the odds of merchants actually winning a chargeback dispute on their own are dismally low.
The entire process starts with the cardholder, who contacts the bank with a complaint. For example:
- The customer is unsatisfied with the products or services that have been provided
- Purchased items or services were not delivered to the cardholder
- Some type of billing error occurred (the card was charged twice, etc.)
- The transaction was not authorised by the cardholder (fraud)
- The consumer is engaged in friendly fraud (illegitimately claiming a refund)
In theory, contacting the bank for any of the above issues should indicate that cardholder has already been in communication with the merchant but was unable to obtain a satisfactory resolution. Chargebacks were designed to be a fail-safe. They’re the last defence that cardholders could use against unfair merchant practices.
Unfortunately, more and more consumers are cutting merchants out of the process altogether. They go straight to their banks, rather than work through the proper customer service channels. Cardholders do this because they may not understand the difference or feel the refund process is too much hassle. In the case of “cyber-shoplifting,” however, they know their dispute is illegitimate. They just don't want to raise the merchant's suspicions until it is too late.
Whatever the reason, turning to the bank as a first response means no chargeback system would solve the problem. You have no opportunity to correct the problem before the chargeback is filed. The only recourse is to fight the chargeback through representment which is also known as dispute response.
The Chargeback Process
Banks have made it convenient for unsatisfied customers to file disputes, either online, over the phone, or through the mail. The cardholder simply has to notify the bank within a predetermined timeframe, usually between 60 and 120 days of the first bill that divulged the error.
If the issuer feels the cardholder’s argument has merit, the bank will notify the acquirer of the transaction reversal. The acquirer removes the funds from the merchant's account, along with a fee for administrative efforts. The acquirer will notify you; however, this notification often does not take place until after funds are transferred.
You have the right to dispute the chargeback through the process of representment. After receiving a representment, the bank will re-review the chargeback. If they still find in favour of the cardholder, the funds will be permanently removed from your account. If the bank finds in your favour, though, the cost of the transaction will go back to the cardholder.
Either way, any fines or administrative fees charged are non-refundable under either decision.
Inefficiencies of an In-House Chargeback System
Assuming they're not ignoring chargebacks altogether, merchants commonly use some sort of in-house chargeback system. This means you’re responsible for creating and maintaining any risk mitigation strategy. You must also determine and implement the best chargeback prevention techniques, and navigate the representment process.
As is the case with nearly all highly specialised services, in-house chargeback management is neither as efficient nor as effective as hiring a professional chargeback management company. Do-it-yourself chargeback systems usually produce inferior results, because merchants:
The terminology used with one bank might not be the same as what’s required of another
The most effective management companies maintain working relationships with banks, processors, and card schemes
Chargeback management techniques are constantly evolving. New technologies emerge that are accompanied by unprecedented fraud tactics and schemes. Important regulations are updated on an erratic schedule
Chargeback management requires large, ongoing commitments in terms of time and effort. Evidence files must be kept and regularly updated. Regulations must be reviewed. And because the representment timeframe is very short, responses must be handled immediately.
With all the daily business demands, it is nearly impossible to find the time to devise an effective representment case. And sadly, as we mentioned before, the odds of winning are low, even for merchants who do everything "right.”
Ultimately, an in-house chargeback system works against the very thing you should be focused on: growing the business. Long-term sustainability depends on customer acquisition and retention, not juggling losses caused by finicky cardholders and friendly fraud.
A Better Chargeback System
Here’s the reality: you can only prevent a limited number of chargebacks without professional help. Most in-house chargeback systems are easily overwhelmed by the complexities of disputing chargebacks. With the growing threat of friendly fraud, this problem will only get worse.
This is not a slight on any merchants who try to handle chargebacks on their own. History simply proves that DIY strategies aren't as successful at disputing chargebacks.
The Chargeback Company® offers prevention and dispute tactics that are dramatically more effective than any other chargeback system. We're so sure of our proprietary processes, we offer the industry's only performance-based ROI guarantee.
Interested? Contact us today and we'll demonstrate exactly how much our chargeback system can save you.