If you run an e-commerce website you’re probably already very familiar with chargebacks. But just in case you’re not, chargebacks are situations in which your customer, the cardholder, goes to their card issuer and challenges the charge from your business.  If the challenge is successful, the original charge for the sale will be reversed, and typically, regardless of whether it is successful the merchant will also be charged a fee from their credit card processor as well as another transaction charge for processing the refund. But perhaps the worst part of chargebacks is that they can cause your risk profile to go up with your credit card processing company, leading to you potentially having to maintain a rolling reserve account or getting dropped as a merchant altogether.

So with those concerns in mind, here are three techniques to minimizing chargebacks for an ecommerce site:

1. Work Closely With Your Payment Processor

There are two important things you can do with respect to working closely with your payment processor to reduce chargebacks. The first is during the setup phase of your merchant account; make sure that you specify that charges from your company list both your company DBA and a toll free customer service phone number. If you don’t specify this, your processor may default to your entity’s legal name, which in many cases doesn’t provide a customer who is looking at their credit card statement a month later with a clear idea of who the charge was from. Thus, even if the purchase was legitimate, the customer might initiate a chargeback.  By providing the DBA and a toll-free number, the customer is more likely to call you instead of their credit card company.

The second important step is to respond timely to retrieval requests. Once a customer initiates a chargeback, you’ll typically only have a couple of days to respond to your merchant service provider with evidence that the charge was legitimate. By responding in a timely way you not only give yourself an opportunity to successfully contest the chargeback, you also give the credit card processor the impression that your business is sound and that you aren’t at risk of disappearing and leaving them holding the bag for future chargebacks.

2. Over-Communicate With the Customer

In the context of legitimate purchases made by a consumer with their own card, most chargebacks occur because the customer is unable to communicate effectively with customer service after problems arise with the purchase.  The customer might want a refund due to the fact that the item wasn’t shipped timely, or because the customer was for some reason dissatisfied with it. For most of these types of situations, providing a means for the customer to have their issue resolved that is easier for the customer than initiating a chargeback will eliminate the chargeback altogether.

Good practices in this regard include;

• making sure that you send an email following the purchase which provides an email and phone number that the customer can use to discuss any issues,
• providing a 24 / 7 customer service phone number that is prominently displayed on your website, and
• offering refunds in even questionable situations.

That last good practice recommendation, providing refunds even in questionable situations, may seem like a difficult policy to stomach implementing. But if you recall that a chargeback causes you to incur multiple fees regardless of it’s success, and that the burden is on the merchant to prove that a transaction was legitimate should you decide to fight it, in general a swift refund is the cheapest way out.

3. Implement Transaction Scoring to Minimize Fraudulent Transactions

Contrasted from situations in which a legitimate customer resorts to initiating a chargeback because they find it more convenient or effective than communicating with the merchant, are those situations involving fraudulent transactions. Fraudulent transactions leading to chargebacks are situations in which the cardholder did not actually make, or didn’t intend to make, the transaction. The most effective way to reduce these is to implement transaction scoring.

Transaction scoring simply means that not every valid card entered will automatically be run for sale once the submit button is run. Rather, a scoring algorithm will first be used to determine the likelihood that fraud is taking place, and when that score is high enough, the transaction will not be completed.

Best practices for implementing transaction scoring include;

• requiring the customer to enter special digits (CVV2, CVC, CID) to verify card authenticity and that the customer has the card in hand,
• require an expiration date for further authenticity assurance,
• using AVS to verify a cardholder’s billing address, and using the resulting code of full, partial, or no match to help determine scoring,
• set limits to payment velocity to prevent accidental duplicate payments
• apply higher risk scores for orders shipped to the same address with multiple cards,
• flagging multiple cards from a single IP address,
• flagging for manual confirmation rush deliveries and foreign transactions to nations with traditionally high-chargeback rates

Conclusion

Managing chargebacks has become an essential part of any e-commerce business, not only to minimize costs in the short term, but also to maintain attractive credit and debit card processing rates, and reduce the possibility of being required to maintain a rolling reserve or being dropped by your merchant service provider. Thankfully, by following some of the recommendations discussed in this article you can dramatically reduce the incidence rate of chargebacks in your ecommerce company.

About the Author:

Rich McIver is the founder of Merchant Negotiators a credit card processing comparison site.