If youโre a merchant, you donโt need us to tell you that chargebacks are a problem. While chargeback management helps reduce the impact chargebacks have on your bottom line, in most cases itโs preferable to avoid the chargeback in the first place (without rejecting valid business). Letโs take a look at why itโs important to reduce chargebacks, and how you can go about doing that.
Key Takeaways
- Chargebacks are costly and can lead to penalties
- Use pre-dispute tools and anti-fraud solutions strategically
- Learn from chargeback data to improve operations
- Simplify returns, billing, and subscription management
- Set clear expectations around shipping and charges
Why itโs important to reduce chargebacks
Chargebacks have high direct costs
When a customer files a chargeback and that chargeback is not reversed, the merchant will lose both the revenue from the sale itself โ which is returned to the cardholder – and the cost of goods and services (COGS), including shipment, as the item that was purchased has typically already been delivered. As a rule of thumb, you can estimate that for every $100 chargeback, youโll lose around $250.
Additional fees
The payments ecosystem will often impose various chargeback fees on merchants who have chargebacks filed against them. This is done to cover the administrative costs of handling the chargeback dispute and to encourage certain behaviours.
The exact fee regime will depend on the card scheme and the payment service provider, but in many cases these will apply even if a merchant ends up winning the chargeback dispute – and even if they choose not to fight it. (See for example the recent updates to Stripe dispute fees)
Monitoring programs and penalties
When the monthly chargeback rates rise above the predetermined chargeback thresholds by card networks, merchants are forced into inconvenient and costly chargeback monitoring programs. If the chargeback rates donโt drop below the acceptable threshold, the acquiring bank may close the merchantโs bank account.
After account termination, the merchant is entered into a MATCH list (i.e. a blacklist) and will find it exceedingly difficult to open a new account even with a different acquirer for five years. And even if they get a new account, it will be a high-risk merchant account with higher processing fees than a regular merchant account.
8 strategies to stop chargebacks
There are many ways you can tackle chargebacks – from rejecting high-risk transactions to refunding the customer before they dispute a transaction. While each of these is a topic on its own, you can use the list below as a starting point for your chargeback mitigation roadmap.
1. Use pre-dispute resolution tools, but do so strategically
Pre-dispute resolution services like Ethoca Alerts, Verifi RDR, and American Express ADR can be powerful chargeback prevention tools when used correctly. These services allow you to intervene before disputes become formal chargebacks, typically by refunding transactions within 48-72 hours of receiving an alert.
While these tools help maintain favorable chargeback ratios and avoid monitoring program penalties, they must be used judiciously. Research shows that up to 70% of disputes are illegitimate friendly fraud cases that can and should be fought and won. Automatically refunding every alert can result in significant revenue loss โ up to 25% of net income in some cases.
Some best practices to keep in mind:
- Use pre-dispute resolution for clear-cut cases where you’re at fault or true fraud occurred, but fight illegitimate disputes through proper representment.
- Configure automated refund rules conservatively โ for example, automatically refunding only disputes under $25 or from repeat customers with valid concerns.
- For higher-value transactions or suspicious patterns, escalate for manual review or dispute management.
Learn more about pre-dispute resolution services
2. Learn from your chargeback data
Your historical chargeback data – which can include information such as products or geos that are more prone to chargebacks, periods when chargebacks increase, reason codes, and win rates – can help you identify problems, optimize operations, and recover revenue.
Most merchants treat chargebacks as isolated incidents, but analyzing patterns in your dispute data can reveal critical insights about fraud vulnerabilities, operational gaps, and seasonal trends.
Key areas to focus on include:
- Fraud pattern analysis: Monitor segment-specific dispute spikes and win rate fluctuations to identify customer segments that need tighter controls. Analyze high-risk transactions by region, product type, and ticket value to fine-tune your fraud rules without impacting legitimate customers.
- Operational insights: Track “item not received” chargebacks by carrier to identify delivery partners that aren’t providing adequate confirmation documentation. High dispute rates on specific products may indicate quality issues or overhyped marketing.
- Authentication optimization: Use A/B testing to evaluate 3DS trade-offs, comparing conversion gains without 3DS to fraud-related revenue losses. This helps you fine-tune authentication requirements by issuer and product type.
- Seasonal planning: Analyze historical holiday season data to prepare for dispute surges, allocate resources appropriately, and create targeted evidence packages for common seasonal chargeback types.
Learn more about gaining new insights from chargeback data.
3. Use anti-fraud tools to reject high-risk transactions
Anti-fraud tools should be your first line of defense against chargebacks, preventing fraudulent transactions from being approved in the first place. These solutions analyze each transaction in real-time โ typically within milliseconds โ to determine whether to approve, decline, or flag a purchase for manual review.
Modern fraud prevention platforms combine multiple risk assessment techniques, including historical fraud scoring, identity verification, behavioral analysis, and device fingerprinting. Machine learning models process these data points to make swift decisions about transaction legitimacy. Every fraudulent transaction you block is a chargeback you’ll never have to fight.
Key benefits of implementing robust fraud prevention include:
- Immediate ROI: Since fraud-related disputes make up a significant portion of all chargebacks, stopping them at checkout delivers direct cost savings.
- Chargeback guarantee models: Many providers like Riskified, Signifyd, Forter, and Sift offer liability protection, assuming responsibility for fraud-related chargebacks on transactions they approve.
- Reduced manual review: Advanced algorithms minimize the need for time-consuming manual transaction reviews while maintaining high approval rates for legitimate customers.
Learn more about different types of chargeback tools.
4. Have a clear and easy return policy
Most customers initiate a dispute with their issuing bank because itโs easy. Laying out your return and dispute process shows customers itโs easy and beneficial for them to contact you first. You can improve the return process by:
- Adding an FAQ for your return process
- Following up after purchase through a text or email to verify the transaction and the customerโs satisfaction.
- Automating the return process. You can implement a system where customers submit returns and track their progress online.
5. Use pre-authorization
Pre-authorizing a credit card puts some cardholder funds on temporary hold. The hold can last for 31 days, depending on the merchant classification code. The customer cannot withdraw the held amount during this time, and the merchant doesnโt have the money until the charge occurs.
Until the funds are captured, the cardholder cannot dispute the transaction. And if the cardholder notices an unauthorized pre-authorization on their account, they can request the merchant to cancel it to prevent fraud chargeback.
6. Update your shipping service level
Updating your shipping level will provide your customers with a better shopping experience. However, faster shipping doesnโt always translate into reduced chargebacks; if anything, chargebacks may increase. To reap benefits from upgrading your shipping level, you should keep customers up to date on costs and delivery times to avoid misunderstandings that may lead to chargebacks.
7. Manage subscription customers better
Long-term subscribers have different expectations from one-time customers. Merchants must be ready to respond fast to inquiries and initiate communication. Steps to take to prevent subscription chargebacks include:
- Make the customer read the terms of service before the first transaction. They should be readily available, clear, and concise.
- Make the process of canceling a subscription transparent. Complicated cancellation processes cause customer frustration, leading to chargebacks.
- Notify subscribers before renewing their subscriptions to avoid surprises. This prevents chargebacks from customers whoโve forgotten about the subscription.
8. Use accurate billing descriptors
About 20โ40 percent of all chargebacks are caused by merchant error, including poor or confusing billing descriptors. Descriptors determine how your name appears on cardholder statements. Tips to optimize your billing descriptors include:
- Use clear and concise descriptors that remind customers of the transaction.
- Use your trade name.
- Display your phone number in the descriptor in case a customer wants clarification about a transaction.
How can Justt stop your chargebacks?
With so much on the line, merchants need help from an expert to fight and prevent chargebacks. Justt offers an end-to-end success-based solution that turns the frustrating and resource-draining process into a simple, hands-free affair. We achieve this through a combination of artificial intelligence and industry expertise to create a custom solution that intelligently and effortlessly fights and prevents chargebacks.
