Analyzing Chargeback Risks and Why You Might Get Dragged Into Disputes

It doesn’t matter how well-run your business is. At some point, you’re likely to get hit with chargebacks. That said, by taking the right steps now, you may be able to greatly reduce risks. In this article, we’ll outline some of the most common causes and biggest risks when it comes to chargebacks.

But first, let’s discuss why chargebacks need to be taken seriously in the first place. Each year, chargebacks cost businesses billions of dollars and the average merchant faces over 300 chargebacks per month.

With a chargeback, a bank can reverse a payment, returning funds to their card-holding customers. This results in lost revenue, and that’s only the start of your problems. Merchants will also get hit with chargeback fees and their chargeback ratio will rise. Once this ratio crosses specific thresholds, you may have to pay your payment processor increased fees. Or they could refuse to work with you completely.

When you get hit with your first few chargebacks, you might try to shrug them off as bad luck and a minor nuisance. Unfortunately, however, chargebacks are anything but, and if you don’t take proactive steps to protect your business, you’ll expose yourself to considerable dangers.

Let’s examine how you can analyze and reduce chargeback risks.

Offering a Complicated Return Process or No Return Process at All

Not every customer is going to be satisfied with your goods. Even if you offer great products, some customers may make accidental orders or not read product descriptions closely. Fortunately, consumers will often turn to a company’s return process rather than filing for a chargeback.

However, if your return process is complicated, or you simply fail to provide one at all, you may quickly find yourself dealing with chargebacks. Customers can ask their bank to refund their funds, and if the bank realizes you don’t offer returns or make it hard to file returns, they’ll be more likely to side with their cardholders.

Bad Product Pages That Set the Wrong Expectations

Wondering what might be causing returns in the first place? Some are simply unavoidable and a cost of doing business. However, if you’re experiencing a lot of them, something might be wrong. Bad product pages that set the wrong expectations rank the most common culprits of frequent returns.

Turn on the TV and you’re bound to see some fast food commercials. The burgers and whatnot on display look wonderful, artisan crafted even. But then after visiting a drive-thru you open up the paper sack and the sandwiches look stale and the fries soggy. Thing is, most of us by now know those fast food advertisements rarely, if ever, live up to the hype.

If you set up the wrong expectations on your product pages, however, you’ll likely face increased returns. Not only could you end up with open-boxed items you have to sell and money wasted on shipping to and from, you may also get hit with chargebacks.

A Hard to Reach and Work With Customer Service Department

Another major risk is having a hard-to-reach customer service department. Often, consumers will reach out to the company to resolve issues before contacting their bank. Many banks prefer that clients try to work with a merchant before they get involved. If a customer can’t get in touch, or you’re slow to respond, they may contact their bank to ask for a chargeback.

Fortunately, it’s easier now than ever before to set up a responsive customer service department. Many companies now offer low-cost customer service platforms. Instead of having to build your own customer service department, you can outsource some of the work. You can also use chatbots that can communicate with customers instantaneously, answering questions and escalating complaints when needed.

Accepting International Orders

Unfortunately, criminals often try to conduct fraudulent activities over international lines. Why? If a criminal is in one country, say France or India, and the business is in another country, perhaps in the United States, it’s harder for the company to go after the thief. If an American business is ripped off by someone in the United States, they can turn to the local or federal courts for redress.

It’s much harder for an American business to pursue a criminal in another country. The company would need to work through foreign court systems and try to coordinate with overseas police departments and the like.

This doesn’t mean that you should automatically refuse to serve people overseas. However, if you are conducting such business, you should keep an eye out for fraud and decline suspicious transactions.

Bad Billing Descriptors

If you open up your credit or checking account, you’ll come across various payments to people and companies. Maybe you bought a new laptop at Best Buy or had dinner at that chic new burger joint in town. Scroll through the list, and you should be able to identify each transaction quickly, verifying that it was a legitimate charge.

You might, however, come across some charges that you don’t recognize. Some companies make the mistake of using vague or unclear billing descriptors, and if so, it can lead to confusion.

Let’s consider the trendy burger place. Perhaps it’s called John’s Best Bar Burgers. But when sending bills to clients, “John” might use a different name, say his holding company, which is named “In-Town Eateries Inc.” You might be familiar with John’s Best Bar Burgers and would recognize the charge. But you’ve never heard of “In-Town Eateries.” Fearing fraud, you contact your bank to file a chargeback.

Unfortunately, bad billing descriptors can quickly drive chargebacks through the roof. So make sure you’re as clear and explicit as possible. The eatery above should use its public name “John’s Best Bar Burgers,” for example.

Not Collecting and Organizing Evidence

Once you get dragged into a dispute, you’ll have a chance to try to disprove the customer’s claim. If you can provide compelling evidence that a purchase was legitimate, delivered, and otherwise properly handled, the bank may decline their client’s chargeback.

Fortunately, a lot of evidence can be brought to bear, including signed shipping receipts, CVV numbers, chat logs with customers, IP addresses, and more. The more evidence you can provide, the better.

Collecting evidence is time-consuming, however, and it’s easy for stuff to get lost. Fortunately, merchants can now use dispute management platforms.

Assessing Your Chargeback Risk Profile

We covered some of the most common factors that will increase the risk of chargebacks. Every business is different, and still more risks could emerge. It’s important for every entrepreneur to closely consider factors that could lead to increased chargebacks. As chargebacks pile up, you’ll not only lose revenue but also have to pay fees and the like.

Businesses should identify the most pressing risk factors, and also those most easily mitigated. For example, you could take extra time to verify international transactions, or outright refuse to serve overseas clients. You might also rework your customer service department to ensure customers can make returns without filing chargebacks. Finally, using a dispute management platform makes it easier to gather data, reduce risks, and win disputes, including chargebacks.

This article has been published in accordance with Socialnomics’ disclosure policy.