Chargeback Protection Services – What Merchants Should Know

Chargebacks represent a serious threat to any business that accepts credit or debit card payments as they can lead to significant financial losses and tarnished reputations. eCommerce retailers are particularly vulnerable to chargebacks as they tend to experience a proportionally higher volume of fraudulent transactions than their brick-and-mortar retailer counterparts. It’s estimated that merchants lose $125 billion per year to friendly fraud chargebacks.

Fortunately, there are several effective strategies and services available that can help eCommerce businesses protect themselves from chargebacks and chargeback fraud. These include advanced risk management tools, dispute support services, and other proactive measures that can minimize the risks associated with accepting card payments. Find out how chargeback protection services can help your eCommerce business stay ahead of the curve and mitigate these risks below.

Chargeback protection services are designed to help businesses minimize the financial damage inflicted by chargebacks. These services will often include multiple chargeback protections like fraud monitoring tools that identify transactions with a high likelihood of being fraudulent and dispute support services that help businesses successfully dispute fraudulent charges they may encounter.

Mitigating chargebacks by resolving them as well as using chargeback protection services is important for the sake of a business’s operations and reputation. Unchecked, the hidden costs of chargebacks can accrue and weigh down a company’s bottom line. Meanwhile, the existence of a large number of disputes can hurt lifetime customer value as customers are discouraged from repeat shopping with a merchant.

Chargeback protection services generally fall into one of three categories: chargeback alerts, chargeback deflection, and chargeback guarantees. Each service type offers different advantages and can be tailored to fit the specific needs of any business. An effective chargeback protection solution will often contain parts of all three of these service types to provide comprehensive chargeback protection across all stages of the transaction process.

Chargeback alerts notify businesses of a payment dispute as soon as it happens so that immediate action can be taken to resolve the issue. This often includes contacting the customer to confirm their identity and rectify any misunderstandings that may have led to the chargeback.

By enrolling in an alert service offered through the wide-reaching Ethoca (Mastercard) or Verifi (Visa) networks, businesses can receive real-time alerts for all chargebacks filed. Merchants will then have between 24 and 72 hours, depending on the alert network used, to take action on the chargeback before it is processed 

Once an alert is triggered, retailers can either choose to issue a refund to avoid the chargeback entirely or accept the chargeback and prepare for chargeback representment. Having these options can help reduce chargeback rates and avoid the additional fees and reputational damage that typically follows disputes.

Whereas chargeback alerts are typically used after a chargeback has already been filed, chargeback deflection tools aim to prevent fraudulent transactions from being disputed in the first place. Chargeback deflection services are primarily offered by Ethoca or Verifi. Ethoca’s Consumer Clarity and Verifi’s Order Insight systems integrate with retailers’ customer relationship management software to allow issuing banks to access data about a customer’s purchase history, shipping details, and dispute behavior. This helps banks identify which customers are at a heightened risk for disputes so that they can take appropriate action to prevent chargebacks from happening in the first place. Chargeback deflection can be a particularly important component of an effective chargeback fraud protection strategy, as chargeback fraud accounts for over half of all chargebacks merchants face.

Chargeback deflection services like Consumer Clarity can also help deflect chargeback disputes by enhancing transaction details on a cardholder’s mobile banking app. For example, when a customer attempts to dispute a transaction, they are presented with additional information about the purchase that may help them remember and recognize the transaction. This not only reduces the number of disputes that are filed but also helps improve customer relationships by providing greater transparency into their purchase history.

In addition to chargeback alerts and deflection services, some businesses also choose to enroll in a chargeback guarantee program. Chargeback guarantees are insurance policies that protect retailers against fraud chargebacks by promising to reimburse them for any losses incurred. This allows retailers to budget for the cost of chargebacks and avoid unforeseen associated costs.

Issuers of chargeback guarantee services use sophisticated algorithms and data-driven decisioning to approve or decline chargebacks. If a fraud chargeback is not successfully prevented, the issuer of the guarantee will cover any associated fees, as well as any additional costs incurred while combating the chargeback. While chargeback guarantees can be a helpful way to protect against fraud, they are not a perfect solution. Businesses should be aware that most chargeback guarantee services will only reimburse retailers for the cost of the product or service up to a certain dollar amount and often contain fine print that excludes non-fraud reason code chargebacks from being covered.

A variety of payment service providers and marketplaces offer some form of chargeback protection services as well. Examples include Shopify, Square, Stripe, PayPal and eBay, among others.

There is no one-size-fits-all solution when it comes to chargeback protection. Before choosing a service, it’s important to consider the level of integration required for the service provider’s solutions, as well as the effectiveness of their customer support services. Businesses should also perform a root-cause analysis on their chargeback rates, dispute behavior, and transaction characteristics. Once the primary issues have been determined, a targeted approach should be taken to address them.

For businesses that are struggling with friendly fraud, chargeback alerts and deflection services can be a valuable way to prevent disputes from happening in the first place. For businesses that are dealing with true fraud, chargeback guarantees may be a more effective solution, as they offer protection against losses stemming from fraudulent transactions that are generally more difficult to screen. Ultimately, the level of protection that is right for a retailer should be based on their risk tolerance, business model, and overall chargeback management strategy.

Chargebacks are a complex and ever-evolving issue for businesses of all sizes. Despite their best efforts, businesses can never fully insulate themselves to chargebacks. To protect themselves, businesses need to take a proactive approach to chargeback management. This includes implementing a chargeback protection strategy that is tailored to their specific needs. By taking the time to understand the root causes of their chargebacks and incorporating a combination of alerts, deflection tools, and chargeback guarantees into their chargeback protection strategy, businesses can protect themselves against the costly consequences of chargebacks.