How to Manage Chargebacks: The First 5 Things You Should Do

  • Max Jones
  • September 18, 2018
  • 6 minutes

Are you ready to make some radical changes to your chargeback management philosophy? Are you tired of simply accepting chargebacks as a loss?

Here’s how to manage chargebacks and start improving your bottom line.

STEP #1: Determine if Criminal Fraud is an Issue

Not all merchants are susceptible to criminal fraud. Certain industries and merchandise are more appealing to criminals than others.

It is important to determine early on if criminal fraud is an issue. If your business is processing transactions that later turn out to be unauthorized, you’ll want to use a pre-sale fraud detection tool to help stop those purchases from happening. But if criminal activity isn’t an issue, you shouldn’t waste resources on services that aren’t needed.

Here’s How to Evaluate Criminal Fraud Exposure

Unfortunately, identifying criminal fraud is easier said than done! The reason for this is because “friendly” fraud, or an illegitimate transaction dispute, can be easily disguised as criminal fraud.

Before you can start managing chargebacks, you have to know what types of chargebacks you’re dealing with—and data analysis can help with that. Trace your chargeback data back to the original transactions to test the validity of “unauthorized transaction” claims.

Criminal fraud often has distinctive patterns and characteristics. Visa has identified the following as common red flags:

  • Orders that include more merchandise or are more expensive than the norm
  • Orders that include multiples of the same item
  • Orders that include merchandise that is easily resold and converted to cash
  • Rush or overnight delivery requests
  • International delivery addresses
  • Multiple orders being shipped to different addresses, but processed with the same card
  • Orders with different names and/or card numbers, but made from the same IP address
  • First time customers that don’t fit the normal purchasing pattern

Friendly fraud, on the other hand, would usually be void of these indicators because the original purchase was legitimate and authorized. Friendly fraud might be tied to orders that are:

  • Not eligible for a return or refund
  • Big-ticket items that later trigger buyer’s remorse
  • Items that could unknowingly be purchased by a family member, such as a game or music download

If you determine chargebacks dubbed “unauthorized transaction” are criminal activity and not friendly fraud, you might want to sign up with a pre-sale fraud detection service that will scrub each transaction for indicators of fraud.

You can also take advantage of services provided by your gateway or processor, tools like Address Verification Service (AVS), 3D Secure, and the card verification value (CVV).

You’ll want to constantly audit your fraud prevention efforts though. You don’t want a reduction in chargebacks to come with a cost of increased cart abandonment and false positives. Set KPIs and strive for a balanced approach to risk mitigation.

Want help with this step? Midigator’s mission is to simplify the complexities of payment disputes so you can get back to business. If you have questions or want help making this task as simple as possible, Midigator can help.

STEP #2: Consider Prevention Alerts

Prevention alerts let merchants refund their customers so transaction disputes won’t turn into chargebacks. This helps keep chargeback ratios low.

And depending on your shipping procedures, getting advanced warning of a transaction dispute might enable you to stop fulfillment so the cost of goods isn’t lost.

Perhaps most importantly, prevention alert data is available 2-5 weeks earlier than chargeback data. This allows you to identify issues sooner, anticipate future chargeback trends, and take preemptive action to reduce risk exposure.

Here’s How to Evaluate the ROI of Prevention Alerts

Prevention alerts serve several very valuable purposes in the fight against chargebacks. Ask yourself these questions. If you answer yes to any of them, alerts might be able to increase your chargeback protection.

  • Do you sell (or want to sell) to a national or international market? Locally-owned banks are less likely to be included in prevention alert networks. If the majority of your customers use obscure financial institutions in a small community, you’ll see very little impact on your chargeback rates. However, if you are selling to customers outside your hometown, prevention alerts could reduce your chargeback exposure significantly. If you are unsure, check the BIN (bank identification number) associated with your chargebacks.
  • Do you sell digital goods? Digital goods require meticulous and expertly-composed representment paperwork. If you are unwilling or unable to apply the expertise to create a winning dispute, you may be better off refunding the dispute.
  • Do you sell products with a trial offer? Certain sales tactics, such as free trial offers, are often linked to higher chargeback rates. In these situations, merchants usually need an aggressive approach to chargeback prevention in order to keep merchant accounts healthy. Prevention alerts can help keep chargeback ratios low and reduce the risk of threshold breaches.
  • Do criminal fraud and internal errors yield more chargebacks than friendly fraud? Friendly fraud is the only type of chargeback that can be fought. Chargebacks that result from verified criminal activity or processing mistakes on your part must simply be accepted as a loss—they can’t be challenged. Therefore, it would be advantageous to refund these transactions rather than increase your chargeback-to-transaction ratio.
  • Are you enrolled in a chargeback monitoring program or are in danger of enrollment? If you are enrolled in a chargeback monitoring program with either card association, you need an immediate reduction in chargebacks—and prevention alerts might be able to provide that.
  • Are you hoping to acquire more merchant accounts? Before allocating more merchant accounts, processors will critique how well you’ve managed risk on the accounts you already have. Taking a proactive approach to risk mitigation will improve your credibility.

Want help with this step? Midigator’s mission is to simplify the complexities of payment disputes so you can get back to business. If you have questions or want help making this task as simple as possible, Midigator can help.

STEP #3: Look for Hidden Issues

If the underlying issues that cause transaction disputes aren’t resolved, solutions are only temporary.

Here’s How to Expose Issues

The best way to identify and solve issues at their source is to analyze your prevention alert and chargeback data. You’ll want to look for patterns and anomalies.

For example, a merchant analyzed chargebacks by billing cycle and discovered transaction disputes spiked after the fourth billing cycle. The merchant realized perceived value tapered off the longer customers used the product.

Likewise, prevention alert data is helpful too. For example, a merchant noticed the majority of her prevention alerts were coming from one particular country. She realized the risk associated with that marketplace likely outweighed the earning potential.

Analyzing prevention alert and chargeback data is one of the most impactful things you can do; it will lead to the most significant reduction of chargebacks and risk. And, this strategy creates a long-term solution. Other risk mitigation strategies are really just a temporary fix.

However, this risk management task is also the most challenging. Your data is likely isolated, stored in several different platforms. To be successful, you’ll need to consolidate all data in a single portal, like Midigator,® so you can easily and more accurately detect issues.

This task is something you’ll want to do when you first start to manage chargebacks, but it will be an ongoing responsibility. As your business grows and changes, new issues will emerge. Your chargeback management will need to be just as dynamic as your business.

Want help with this step? Midigator’s mission is to simplify the complexities of payment disputes so you can get back to business. If you have questions or want help making this task as simple as possible, Midigator can help.

STEP #4: Change Your Policies and Procedures

Once you’ve identified issues, start resolving them. If you take action quickly, you can address problems before they become a major issue.

Here’s How to Make Changes

Again, data analysis is going to play an important role as you manage chargebacks.

Start making changes to your policies and procedures, but conduct A/B tests for everything to determine the appropriate amount of friction, risk exposure, and profit or loss.

For example, Midigator can help you analyze chargebacks by price point. Adjust prices until you find the sweet spot.

What about your return policy? If you are more lenient and customer-friendly, do you get fewer chargebacks?

Then take a look at your other issues. Do you have a lot of chargebacks marked “cancelled recurring billing”? Are those cases of friendly fraud or is your customer service department lacking follow-through?

Want help with this step? Midigator’s mission is to simplify the complexities of payment disputes so you can get back to business. If you have questions or want help making this task as simple as possible, Midigator can help.

STEP #5: Fight Friendly Fraud

Disputing cases of friendly fraud can recover revenue, improve your bottom line, and prevent future risk.

Here’s How to Successfully Respond to Chargebacks and Recover Revenue

It might seem like this is an “advanced” project, or something you wouldn’t tackle when you first start managing chargebacks. But it isn’t as difficult as it seems. There is no reason for you to simply accept all chargebacks as a cost of doing business.

Here’s how to make this daunting project easy: automate the process.

Technology is capable of creating and submitting chargeback responses on your behalf. This means you can fight more chargebacks than your resources would otherwise allow with manual processes. More responses mean more chances to win!

Also, technology ensures cases are aligned with card brand requirements and processor preferences. This can increase your win rate and revenue recovery.

Not only does technology make disputing friendly fraud easier and more successful, these automated responses are inexpensive too. Revenue recovery demands fewer resources than you’d expect, meaning a significant ROI.

Studies have found that friendly fraudsters are usually repeat offenders, meaning if they file one illegitimate chargeback, they’ll file another. If you fight a chargeback and win, it means you’ve successfully uncovered friendly fraud. You can add the corresponding characteristics into your fraud detection process to more effectively prevent risk in the future. You can also blacklist problem customers and create a negative list to consult with each future order.

Want help with this step? Midigator’s mission is to simplify the complexities of payment disputes so you can get back to business. If you have questions or want help making this task as simple as possible, Midigator can help.

Are You Ready to Manage Chargebacks?

You’ll be amazed by the difference these changes will make to your bottom line.

If you’ve been accepting chargebacks as a loss because you assumed effective management required too many resources—time, money, expertise—you’ll be pleasantly surprised to learn that isn’t the case.

If you’d like to learn more about how to manage chargebacks in the most effective way possible, the team at Midigator would be happy to discuss options with you. Schedule a demo today.

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