Tis the Season for Chargebacks: What Merchants Need to Know Now

Avoid excessive chargebacks this holiday season with these tips.

Much like 2020, this is a year unlike any other. It has included political posturing, an ongoing pandemic, supply chain issues, logistics challenges and labor shortages. Some of these concerns have the potential to cause serious payment problems, friendly fraud and chargebacks for merchants this holiday season. By following best practices from Visa, merchants can minimize chargebacks.

Tips to reduce chargebacks this holiday season

Set clear shipping expectations. Customers want their gifts to arrive in time for the holidays, but some shoppers wait until the last minute, even if they shop earlier, they don’t always allow enough time for standard shipping windows and delays. Merchants can avoid this common dispute trap by being transparent with their customers.

  • Give clear estimated shipping times at the point of sale.
  • Send shipping updates with notice of delays.
  • Notify the customer when the item is delivered to ensure they retrieve the package promptly.

Extend return windows to accommodate for the ebb and flow of the holiday season. Customers who order early may not realize an exchange or return is necessary until after the holiday; but by then, the item has already fallen outside the return window. In this case, the customer may feel punished for ordering on time, and consequently, file a dispute to resolve the issue. To avoid this cycle, enhance your customer service to handle increased volume and reward proactive customers with an extended return window to accommodate for the uncertainty of the holiday season.

Be aware of friendly fraud. During the pandemic in 2020, there was a 27% increase in friendly fraud1. Subscription and digital goods merchants estimate that 75% of their chargebacks are due to friendly fraud.2 The chances of friendly fraud increase during the busy and expensive holiday season because, by the time consumers take the time to review their bank statements, they often don’t recognize the charge, forget the purchase, feel sudden buyer’s remorse, or are unaware of a purchase a family member made using their card.

Fortunately, there are ways for merchants to prevent such transactions from becoming unnecessary friendly fraud disputes:  

  • Provide clear billing descriptors to make the transaction instantly recognizable.
    • Include “doing business as” (DBA), if applicable.
    • Include your customer support phone number in descriptor.
    • Use an abbreviation if your business name is longer than 20-25 characters.
    • Utilize service providers to supply enhanced transaction transparency and insight.
    • Engage with the customer to provide clear, consistent communication.
      • Send detailed order confirmation notices.
      • Be proactive with customer outreach and solicit their feedback through surveys.

Confirm the card the customer uses to pay is valid.  Legitimate fraud runs rampant throughout the holiday season. Take extra precautions to stop true fraud transactions at the point of sale.

  • In store:
    • Check expiry date and confirm the customer’s ID matches the one on the payment card.
    • Online:
      • Deployment of fraud tools like 3d secure 2.2; fraud filters; etc.
      • Fraud notifications – blocking transactions using confirmed fraud data

Analyze transaction trends. Once consumers realize they can get free goods or services by filing a dispute, they often repeat the inappropriate behavior until they’re caught.  To stop the bad actors:

  • Create a blacklist or exclusion list for customers who frequently file disputes.
    • Review dispute and purchasing trends to identify high risk product lines, business entities, countries, etc.

Be proactive

According to internal reporting at Visa, the pandemic has fueled a sharp increase in digital payments. This brought with it a 24% rise in payments disputes from 2019 to September 2021. This year, the situation will be even worse because friendly fraud disputes are likely to increase because of shipping delays and customer order cancellations due to supply chain issues. How can a merchant combat this?

Proactive communication is critical in helping prevent legitimate transactions from becoming friendly fraud disputes. Visa recommends the following best practices for payments to minimize potential disputes:

  • Only charge the customer’s credit card once an item has shipped.
  • If a shipment will be severely delayed, notify the customer 24 hours before charging the credit card and shipping the item, in case they’ve changed their mind about the item because it won’t be delivered as expected.
  • Provide the customer with frequent shipping updates to let them know:
    • The item was shipped.
    • The estimated arrival date
    • The updated arrival date, if changes or delays occur along the shipment route
    • When the item has been delivered

The problem won’t go away if you ignore it

Merchants juggle many different roles (e.g., seller, stocker, shipper, bookkeeper, marketer, etc.), particularly during the holidays. While it would be easier to ignore customer complaints and payment disputes, this is a very dangerous practice in the long run. Merchants must maintain low dispute-to-sales ratios to avoid limited acceptance rates and higher transaction fees. When a dispute-to-sales ratio becomes too high (0.9% for Visa, 1.0% for Mastercard), merchants risk getting labelled “high risk,” which mandates they enter a dispute monitoring program.

If merchants don’t proactively make an effort to lower their disputes, card networks have the ability to shut down merchant processing accounts entirely. From a customer retention point of view, once a customer experiences a fraudulent transaction, 63% of the time they won’t return to that merchant3. Merchants who need assistance with this can contract with a dispute prevention service to help them avoid excessive chargebacks.

“It’s in everyone’s best interest to rid the ecosystem of disputes. A merchant’s acquirer/payment processor is held to similar thresholds as merchants – which incentivizes them to work with their merchant clients to take actions to avoid disputes,” says Bibek Das, director of product at Visa.

[1] Online Payment Fraud 2021-2025 Deep Dive Strategy Competition Report, Juniper April 2021

[2] Improving the Dispute Experience: Transparency Is Power, Aite May 2020

[3] The Chargeback Triangle, Javelin Strategy & Research

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