White paper everything your business needs to know about chargebacks

Everything your business needs to know about chargebacks

Everything your business needs to know about chargebacks01

Chargebacks are an unavoidable part of business today. No matter what you

sell, your company will encounter a chargeback or chargeback investigation at

some point. Because chargebacks are so prevalent, it’s best to address them

upfront and understand them completely to minimize the financial impact they

have on your business.

In this white paper, we’ll take you through what chargebacks are, why they

occur, how many businesses are impacted, how your business can reduce them

and what you need to do when you’re informed of an investigation.

Chargebacks are an unavoidable part of business today. No matter what you sell, your company will encounter a chargeback or chargeback investigation at some point.


WHAT ARE CHARGEBACKS AND WHY DO THEY OCCUR?Put simply, chargebacks are transactions a customer isn’t held liable for. Who’s

responsible for a purchase your customer disputes? Unfortunately, your business is.

When one of your customers notices fraudulent activity on his or her credit card,

the transaction will be investigated by the consumer’s card-issuing bank and the

merchant processing bank. This is often a result of a stolen credit card, unauthorized

purchase or stolen data. Sometimes, an investigation will also be launched if a

customer wants to dispute a legitimate purchase he or she made. This second type

of chargeback is often referred to as “friendly fraud” and most often occurs when a

consumer doesn’t recognize a transaction on a credit card statement or is confused

about a purchase. If you’re able to clear up these friendly fraud investigations, you

may not be held responsible for them.

If the consumer isn’t held liable for the purchase (for example, in the event their

card was stolen and used at your business), your company must absorb the cost

of the transaction. You will typically be required to pay a fine on top of the cost of

the purchase. These costs can add up significantly over time and have a damaging

effect on your business’s finances and your ability to obtain better rates.

Put simply, chargebacks are transactions a customer isn’t held liable for.


HOW COMMON ARE CHARGEBACKS?If you’ve faced chargeback investigations, you certainly aren’t alone. The 2014

AFP Payments Fraud and Control Survey revealed 60 percent of businesses

were exposed to actual or attempted fraudulent payment activity. That means the

majority of companies are at risk for chargebacks due to fraud. If your business

hasn’t encountered one yet, it’s likely only a matter of time before it does.

Of the business owners who reported actual or attempted fraud, 43 percent

noticed card-related fraud. This number is substantially lower than the 82 percent

who reported check-related fraud, but still significantly high. Unfortunately, the

rate at which fraud occurs or is attempted probably won’t decline anytime soon.

According to the AFP report, only 16 percent of business reported they saw fewer

fraud attempts from 2012 to 2013.

Large e-commerce sites are especially at risk - their fraud losses as a percent

of revenue leaped from 0.69 percent in 2013 to 1.21 percent in 2014, according

to the 2014 LexisNexis True Cost of Fraud Study. E-commerce retailers are also

paying more per dollar of fraud they experience. This amount increased from

$2.23 in 2013 to $2.33 in 2014. These skyrocketing numbers indicate just how

important it is for businesses to avoid chargebacks whenever possible to save

their bottom lines.

The 2014 AFP Payments Fraud and Control Survey revealed 60 percent of businesses were exposed to actual or attempted fraudulent payment activity.


HOW CAN BUSINESSES REDUCE CHARGEBACKS?It’s impossible to eliminate chargebacks entirely. However, it is possible to

minimize the risk they pose to your business with a little effort and dedication to

security processes. You’ll need to take the steps to reduce legitimate fraudulent

activity, as well as “friendly fraud.” These two will require different strategies to

reduce your exposure to chargebacks.

STEPS YOUR BUSINESS CAN TAKE TO DETER FRAUD RELATED TO A

STOLEN CREDIT CARD OR DATA BREACH:

• Ensure your site is 100 percent secure. Conduct frequent updates and

make any fixes to improve site security as soon as possible.

• Verify all consumer information with the card-issuing bank immediately

as a consumer tries to make a purchase.

• Use the fraud services card-issuing banks offer - this simple step

could save you headaches down the line.

• If your business is considered high-risk, you may want to utilize the

services of one of the many third-party fraud scrubbing companies

out there. These businesses can assist you in verifying orders to

lower chargeback ratios and fight fraud.

• Keep records of past fraudulent attempts and activity to understand

patterns and recognize when a transaction may be risky.

After you’ve reviewed these transactions, you may get a feel for which

ones present the most risk for chargebacks and shouldn’t be completed.

HOW YOUR BUSINESS CAN REDUCE THE RISK OF FRIENDLY FRAUD:

• After the purchase, send a confirmation email with the exact same

company name, address and total charged that will appear on the

customer’s credit card statement.

• Make refund and return policies explicitly clear on the website, in the

confirmation email and on your website.

• Guarantee product descriptions are up-to-date and accurate to ensure

consumers know what they’re ordering.


WHAT SHOULD YOU DO ONCE A CHARGEBACK OCCURS?Because it’s impossible to never again face a chargeback investigation, it’s

important to know how to react when you’re notified of one. Helios recommends

responding to the disputed transaction notice immediately, even if it’s time

consuming, to demonstrate your company is doing its due diligence to solve the

problem and investigate and potential fraud.

If you’re running an e-commerce site, your business won’t have signed receipts

to present. However, it’s important to still offer any supporting documentation

you have, like recurring payment authorizations, invoices or shipment tracking

information. Anything you can provide that can help prove the transaction was

legitimate can help your case.

Because it’s impossible to never again face a chargeback investigation, it’s important to know how to react when you’re notified of one.

07 Everything your business needs to know about chargebacks

WHAT IS AN ACCEPTABLE CHARGEBACK RATIO?In short, aim to make your chargeback ratio as low as you possible can. Merchant

Council notes having a chargeback ratio of 1 percent or higher typically designates

your business as high-risk, which can force you to pay higher rates and make it

more difficult to find a processing merchant. There isn’t a one-size-fits-all number

when it comes to chargeback ratios, but keeping yours to a minimum will save you

money and keep your business running more smoothly over time.

There isn’t a one-size-fits-all number when it comes to chargeback ratios, but keeping yours to a minimum will save you money and keep your business running more smoothly over time.


1. http://usa.visa.com/merchants/merchant-support/dispute-resolution/index.jsp

2. http://www.accertify.com/documents/AccertifyWhitepaper_Chargeback101.pdf

3. https://blog.kissmetrics.com/stop-ecommerce-fraud/

4. http://www.regions.com/virtualdocuments/2014_AFP_Payments_Fraud_Survey.pdf

5. http://www.lexisnexis.com/risk/downloads/assets/true-cost-fraud-2014.pdf

6. http://www.gohelios.com/Chargebacks-101-How-merchants-c.news

7. http://www.merchantcouncil.org/merchant-account/types-uses/high-risk-merchant-

account.php

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