Introduction
Chargeback prevention and mitigation can be a complicated affair. Customers dispute a charge for numerous reasons and motivations— and such a range of surprise payment reversals forces merchants to adopt complex management strategies. Chargebacks also include an intricate regulatory environment and a timeconsuming representment process. To be truly effective, a solution must be comprehensive in its support.
But the problem has grown even more difficult. The sheer number of available chargeback management tools now causes additional confusion. The rapid release of business-specific solutions has led to a breadth of possible purchase options. With so much choice, many merchants now struggle to find and employ the right chargeback protection tools.
In this guide, we will explore the different types of chargeback management solutions. Use the following guide to understand which tools to select that fit your business needs.
What is chargeback management?
Chargeback management is the strategic process used to “manage” the complete chargeback lifecycle. To achieve that goal, merchants deploy a suite of chargeback technology solutions to monitor, prevent, and win chargebacks.
Each chargeback management tool helps address specific problems related to the three primary sources of chargebacks:
Criminal Fraud
Identifies and prevents unauthorized credit card use
Merchant Fraud
Reduces procedural mistakes committed by merchants
Friendly Fraud
Defends and reverses false claims initiated by a customer (whether by accident or with malicious intent)
By continually defending against chargebacks, merchants can limit the costs associated with a dispute: administrative expenses, chargeback fees, penalties associated with your chargeback ratio, and the lost value of the reversed transaction.
Benefits of chargeback management solutions
In particular, the different available chargeback management solutions offer merchants several distinct benefits:
- Increased revenue recovery: Mitigation solutions offer ways to effectively handle chargeback disputes and recover lost revenue. Some of these solutions also enable data insights that can be used to isolate the root causes of chargebacks. As a result, you can take the corrective actions necessary to lower the volume of chargebacks.
- Streamlined operations: Tackling chargebacks uses up critical business resources. But some chargeback management tools can automate each step of your chargeback strategy. Limit manual intervention and adopt operational efficiencies to lower your overall costs.
- Improved dispute management: Reversing a false claim requires extensive evidence. Some chargeback management tools help you compile needed documents for an efficient dispute process. Earn a better win rate with less effort.
- Enhanced customer relationships: Customer chargebacks can disrupt fruitful consumer-to-business relationships. Many chargeback management tools support the timely resolution of disputes (e.g. providing refund options) for better customer satisfaction and retention.
- Protect card-acceptance status: Reducing your chargeback volume can help you avoid the penalties and loss of card-acceptance status related to exceeding chargeback ratio thresholds.
In-house vs external solutions
Each type of chargeback management tool provides different features and integrations. The solution that works best for you will depend on the structure of your business operations. Some merchants prefer to self-manage, while others want support from third-party providers. Both formats offer several advantages and drawbacks:
In-house pros and cons
Pros
- Greater control: An in-house chargeback solution gives you complete control over your chargeback strategy. This helps ensure strategic alignment with company goals.
Cons
- Resource drain: Developing new systems can demand a significant upfront investment. The continual maintenance of your in-house solution can also be cost-prohibitive (e.g. expenses related to employee training).
- Opportunity costs: The in-house resources you used to develop a chargeback management tool could have been put to use on other projects that would have contributed to company goals and core competencies.
- Lack of specialization expertise: Your in-house solution may not have access to the latest technologies or innovations, limiting overall effectiveness. Unless you have in-house experts, it might be tough to design the required high-level solutions.
- Difficulty scaling: As your business grows, you may not have the resources to manage the inevitable influx of chargebacks.
The in-house option might seems like a cost-effective choice. But after you do the calculations, it is often more expensive in the long run.
External solution pros and cons
Pros
- Customized solutions: Third-party solutions can provide (or build) customized chargeback solutions that address the unique needs of your business.
- Improved use of technology: Chargeback management specialists integrate and maintain the latest technologies that offer the best services and features (e.g. machine learning).
- Better allocation of internal resources: Third-party solutions supply the required infrastructure and personnel so you can focus on business-critical operations.
- Expert level prevention, detection, and representment: A specialist vendor can offer industry-specific chargeback expertise that optimizes all aspects of your chargeback prevention strategy.
Cons
- Utilization problems: Adopting the incorrect technologies will result in a negative return on investment.
- Less oversight and control: By using a third-party solution, you become dependent on the service and may have to follow provider policies with limited flexibility.
Hybrid options
Lastly, you can choose a combined approach, a hybrid strategy that employs third-party solutions on an as-need basis. Gain the advantages of specific tools, all while managing costs and achieving greater levels of supervision.
Types of third-party external chargeback solutions
If you opt for a third-party solution, you can choose chargeback tools from four basic categories. Each service provides features that address specific parts of the chargeback process.
Chargeback prevention tools
Chargeback prevention tools are technologies designed to mitigate chargebacks pre-transaction. For example, various software solutions can validate orders, screen for fraudulent activity, and provide transaction risk assessments. Prevention tools are a proactive way to deflect risky and fraudulent customer orders before they turn into customer disputes.
Pros
- Robust technical security: A set of prevention technologies will address many security flaws in your business systems. The ability to defend against fraudulent orders will improve the consumer payment experience and drastically lower your chargeback rate.
- Operational improvements: Collected data, analytics, and source detection info can provide a wealth of insights that help you streamline your current fraud prevention. The technology will work behind the scenes to protect you without any additional labor or effort.
Cons
- Possible errors: Prevention tools are not perfect. You do run the risk of incurring false positives. The technology may also miss friendly fraud chargebacks.
- Complex integrations: The need for several prevention tools – each with advanced technical requirements – can demand extended infrastructure and further complexity.
- Lack of comprehensive support: Prevention tools only identify or deflect flagged incoming orders. The software provides minimal help for other steps in the chargeback process (e.g. disputing false customer claims).
- Cost: Required updates, maintenance, and recurring provider costs can hurt profitability.
Chargeback alerts
Chargeback alerts send real-time notifications when a customer initiates a chargeback. For each pending dispute, you receive a set time window to resolve the chargeback before it posts with the issuer. Effective monitoring and quick merchant action (i.e. refunds) can resolve many customer disputes before they become chargebacks.
Pros
- Lower chargeback volume: Alerts are a first-line defense for initiated disputes. Quickly identify and respond to disputes before they become costly and labor-intensive hassles.
- Improved customer satisfaction: Notifications give you a chance to address the potential chargeback directly with the customer. It is a valuable opportunity to maintain a positive customer-to-business relationship.
- Reduced losses: Refunds are often less costly than chargebacks, helping businesses retain earned revenues.
Cons
- Possible errors: Chargeback alerts can suffer from malfunctions such as double refunds or false positives.
- Lack of comprehensive protection: Chargeback alerts are once again a practical solution for a single aspect of the chargeback lifecycle. Relying on chargeback alerts is not enough. Refunds are not a long-term solution, and solely using alerts fails to address other critical problems like evidence compilation.
Chargeback guarantees
Chargeback guarantees are a form of insurance often offered by pretransaction fraud solution providers and sometimes payment service providers. The providers cover the costs of qualified chargebacks, a method merchants can use to defer the financial impact of a dispute. In exchange, the provider charges a small per transaction fee.
Pros
- Financial protection: Chargeback guarantees are a simple and effective way to reduce the revenue losses related to fraud-related chargebacks.
- Additional fraud screening: Chargeback guarantees are often offered alongside transaction screening services that determine the validity of orders. Typically, the two go together and complement each other.
Cons
- Minimal coverage: Chargeback guarantees only apply to specific instances of fraud. Many chargeback reason codes (e.g. service-based friendly fraud claims) remain the merchant’s responsibility and receive no coverage.
- Lack of evidence support: Merchants still have to spend extensive time and effort compiling evidence in order to recover lost revenue.
Fully managed chargeback mitigation
Fully managed chargeback services provide customized solutions that address the entire chargeback lifecycle. It is a hands-off option that outsources all aspects of the chargeback prevention process to a third-party solution vendor.
Pros
- Comprehensive support: Fully managed tools take responsibility for all post-transaction protection. You receive chargeback assistance throughout the representment process (e.g. evidence compilation, data reporting, issuer communication, etc). Enjoy handsfree protection with minimal effort or internal company resource use.
- Access to innovation: Some solutions employ advanced expertise, artificial intelligence, data science, and automation to improve performance and win chargeback disputes.
Cons
- Cost: The robust vendor support and advanced technology supplied by third-party solutions can be cost-prohibitive for some merchants and businesses. This is especially true for small and medium size businesses that have low ticket price items for sale.
- Reliance on offshore labor: Certain mitigation solutions operate under the business process outsourcing model and rely on farming out work to offshore unskilled or semi-skilled labor to handle large volumes of chargebacks. This can hurt efficiency in terms of the time it takes to resolve chargebacks and also negatively impact win rates. Justt is currently the only managed solution on the market that is based on a technology product offering and not heavily reliant on outsourced labor.
- Possible errors: Fully managed services can still fall victim to problems caused by either human or machine.
Key Takeaways
With the available tools, it is possible to build a comprehensive chargeback prevention and mitigation strategy. But the effectiveness of your chargeback mitigation strategy will depend on your specific business conditions, the tools you choose, and the type of protection you need. As you select the right option for your business, keep the following takeaways in mind:
- No chargeback management tool is perfect: Chargebacks can be managed, not eliminated. Opt for solutions that offer a beneficial return on investment, regardless of known drawbacks or possible flaws.
- Good chargeback management requires a business-specific combination of solutions: Your business circumstances are unique, so the best prevention strategy may include a mix of solutions to fit your exact needs.
- Leverage the help of experts: The chargeback process is complicated, but it does not have to remain that way. Take advantage of the expertise specialists offer to build a simple and effective chargeback mitigation strategy.
