Managing Chargebacks: What ISVs Should Know

Editor’s Note: This blog entry was originally published on November 28, 2018, and updated on October 6, 2020.

Credit card chargebacks are unavoidable for businesses that accept credit cards. While chargebacks only happen to a small percentage of transactions, it’s still something merchants need to keep an eye on to reduce losses.

As the pandemic continues, banks are reporting an increase in chargeback claims. With more online purchases being made, the increased demand is putting a strain on businesses, who are already dealing with supply chain disruptions and labor shortages. A delayed or failed delivery can upset customers, motivating them to initiate chargebacks as a last resort. 

ISVs have the opportunity to add value to their offering by addressing this unfortunate side effect of credit card processing.

What is a credit card chargeback?

A credit card chargeback is not the same as a refund. When a customer is dissatisfied with a product, they can directly approach the retailer, choosing to return the item in-store and asking for their money back. 

For retailers and businesses, this can be a straightforward process. If they decide to process the refund, the funds will return to the customer’s credit card in a short amount of time.

However, some customers may choose to dispute the charge with their credit card company (their issuing bank) rather than directly contacting the merchant. When they initiate a credit card chargeback, they send the transaction back to the merchant’s bank (or acquirer). The issuing bank requests the acquirer to take away the disputed funds and credit it back to the customer.

The acquirer then has to contact the merchant, asking if they would like to challenge the claim. Response times vary, and if the merchant chooses to respond, this will lengthen the timeline for resolution.

The following video explains the chargeback process in more detail.

Reasons for chargebacks

There are several scenarios where chargebacks happen, but two major themes emerge:

Fraud

First, there’s criminal fraud, where scammers steal the cardholder’s identity. In this case, merchants should not attempt to dispute this type of chargeback.

Then, there’s “friendly fraud.” The transaction is valid, but the customer has buyer’s remorse or simply wants to get free items. In their dispute, they may claim that they didn’t authorize the transaction. 

 

Merchant Error

 

There are flaws in a merchant’s operations that could lead to a payment dispute. Accepting cards that are expired or stolen, or failing to follow proper card verification procedures are a few ways merchants can be liable for chargebacks. Merchants can train their staff on the do’s and don’ts of accepting credit cards to minimize errors.

 

Why are credit card chargebacks bad for business?

 

The chargeback process costs merchants money in the form of chargeback fees. Unfortunately, these fees can apply regardless of whether the merchant wins the arbitration process. Retrieval request fees generally range from $5.00 to $20.00. Chargeback fees vary per payment processor, ranging from $20 to $100 per incident. 

 

If the dispute reaches the arbitration stage, the card brand can charge $250 to $500 in fees. The losing party is responsible for paying these fees.

 

On top of the fees, the major card brands have strict limits - generally 1% of sales volume - that can trigger additional fines or account termination.

 

chart with credit card processing fees for 2020

 

How can businesses reduce chargeback fraud?

 

Providing excellent customer service, clear communication, training staff properly on accepting payments, and maintaining payment security standards are essential to keeping chargeback fraud to a minimum.

 

Communicate with customers

 

Merchants can oftentimes avoid chargebacks through open, direct communication and following these simple steps:

 

  • Clearly describe offerings to customers to avoid confusion.
  • Explain return, cancellation, and refund policies in detail, and keep it simple so customers do not feel like a chargeback is the only way to resolve the dispute.
  • Share what the customer can expect in terms of after-sales service.
  • For card-present or face-to-face sales, full return and refund policies should be on all receipt copies.

It’s best to make full return and refund policies available on your website or application in card-not-present environments, in addition to a "Click to Accept" or other acknowledgment button, checkbox, or location for an Electronic Signature.

Use payment processing software that provides up-to-date security features

The software solutions that merchants use for managing their business and processing payments should include the most up to date security features to ensure they are reducing the potential for fraud as best as possible. Some examples include:

  • EMV Quick Chip and EMV contactless. Cards with EMV chips are less susceptible to payment fraud, as it is difficult for fraudsters to skim and duplicate them. EMV-enabled hardware can also provide the documentation needed to defend your business when you submit your chargeback rebuttal. 
  • Tokenization. Tokenization is a best practice that replaces cardholder data (CHD) such as credit card information with one or more unrelated symbols it generates randomly or by algorithm. Including this feature in a security bundle will help keep large volumes of transactions secure.
  • Encryption. Encryption is a process that encodes information so that it is unreadable unless decrypted by someone with knowledge of the decryption key. Including encryption as a security feature helps provide confidence that CHD is safe.

Actively monitor disputes

When merchants receive a chargeback notification, they have an opportunity to respond and defend themselves. Merchants should:

  • Follow all instructions in the chargeback notification.
  • Respond by the due date given.
  • Address all cardholder concerns in writing.
  • Provide proper transaction documentation such as order forms, invoices, and more.

Global Payments Integrated merchants can monitor all chargebacks and resolve issues quickly by using the dispute manager function in the Merchant Portal

Offer a secure payment option.

ISVs that partner with a payment processor like Global Payments Integrated can ensure that their business management software provides an ideal solution for their customers’ payment processing environment. 

Our payment processing functionality includes the latest payment security features to help reduce fraud, giving ISVs confidence that they are providing a reliable payment processing option to their clients.

Our advanced security services bundle is intended to protect credit card data, prevent counterfeit fraud, and enhance payments security. Through a unique collection of complementary security solutions, we deliver one of the industry’s most secure payments platforms, protecting credit card data while at rest and in transit. 

To learn more about how we can help you offer secure payment solutions to your customers and help them prevent fraud, contact us today.

Michelle Mondonedo

Marketing Content Specialist

Michelle Mondonedo is a Marketing Content Specialist at Global Payments Integrated, a Global Payments company. In her role, she is responsible for content creation, optimization, and social media strategy. Before joining the payments industry, she worked in e-commerce, local search, and finance. A graduate of New York University with a Bachelor’s Degree in Sociology, she enjoys cooking and baking in her spare time. 

Email: michelle.mondonedo@openedgepay.com

Michelle Mondonedo author photo