5 Things Every E-Commerce Merchant Needs to Know About Chargebacks

Chargebacks are a common challenge for e-commerce merchants. They can be costly, time-consuming, and impact your business's bottom line and reputation. As an e-commerce merchant, understanding the fundamentals of chargebacks and implementing effective strategies to manage them is crucial. Here's what every e-commerce merchant needs to know:

1. What is a Chargeback?

A chargeback occurs when a cardholder disputes a transaction on their credit or debit card statement, prompting their bank to reverse the payment. Chargebacks are designed to protect consumers from unauthorized or fraudulent transactions, but they can also result from misunderstandings, dissatisfaction with a product or service, or even fraudulent claims by the customer.

2. Why Do Chargebacks Happen?

Chargebacks can happen for several reasons, including:

• Fraudulent Transactions: Unauthorized use of a customer's card by someone else.

• Product/Service Issues: Customer dissatisfaction with the product or service, or non-receipt of goods.

• Processing Errors: Incorrect transaction amounts or duplicate charges.

• Friendly Fraud: When a legitimate transaction is disputed by the customer, often due to a misunderstanding or forgetfulness.

Understanding these reasons is crucial to identifying and addressing the root causes within your business.

3. The Impact of Chargebacks on Your Business

Chargebacks can have several negative effects on your business, such as:

• Financial Losses: You not only lose the sale amount but also incur chargeback fees from your payment processor.

• Increased Costs: Investigating and disputing chargebacks requires time and resources.

• Reputation Damage: High chargeback rates can damage your reputation with acquiring banks and customers.

• Account Termination: Excessive chargebacks can lead to penalties, higher processing fees, or even termination of your merchant account.

4. Understanding Visa's VDMP and VFMP Thresholds

Visa has implemented the Visa Dispute Monitoring Program (VDMP) and the Visa Fraud Monitoring Program (VFMP) to monitor and control excessive chargeback and fraud rates among merchants.

• VDMP Thresholds: Merchants enter the VDMP when they have over 100 chargebacks in a month and a chargeback ratio exceeding 0.9% (standard program) or 0.65% (high-risk program). Visa imposes fines and requires the merchant to implement corrective action plans.

• VFMP Thresholds: Merchants enter the VFMP when they have over $75,000 in fraudulent transactions and a fraud ratio exceeding 0.9% in a month. Fines and additional scrutiny apply to non-compliant merchants.

Staying below these thresholds is essential to avoid penalties and maintain a healthy relationship with Visa and other card networks.

5. Deploying Chargeback Mitigation Tools: Order Insights, RDR, CDRN, and Ethoca

To effectively manage chargebacks, e-commerce merchants can deploy various tools and services such as Order Insights, Rapid Dispute Resolution (RDR), Cardholder Dispute Resolution Network (CDRN), and Ethoca Alerts through Verifi, a Visa company.

• Order Insights: Provides detailed transaction information to the issuer, reducing the likelihood of a chargeback by resolving the dispute before it escalates.

• Rapid Dispute Resolution (RDR): Automates dispute resolution by enabling merchants to accept liability for certain low-risk disputes, minimizing costs and maintaining customer relationships.

• Cardholder Dispute Resolution Network (CDRN): Notifies merchants of disputes directly before they become chargebacks, allowing time to resolve the issue with the customer.

• Ethoca Alerts: Provides near-real-time alerts for confirmed fraud cases, allowing merchants to stop the fulfillment process and prevent shipping fraudulent orders.

By deploying these systems, merchants can significantly reduce the volume of chargebacks, saving time, money, and resources.

Tips to Prevent Chargebacks Further Upstream

While deploying chargeback mitigation tools is crucial, preventing chargebacks from occurring in the first place is even more effective. Here are some proactive measures you can take:

1. Enhance Customer Service: Provide clear and accessible customer support to handle disputes before they escalate into chargebacks. Make sure your contact information is easy to find, and consider offering live chat support.

2. Use Clear Billing Descriptors: Ensure that the name appearing on the customer's statement matches your business name to avoid confusion. Vague or misleading descriptors can lead to chargebacks due to customers not recognizing the transaction.

3. Verify Customer Information: Use AVS (Address Verification Service) and CVV (Card Verification Value) checks to confirm the legitimacy of the transaction and reduce the risk of fraudulent transactions.

4. Offer Transparent Policies: Clearly communicate your return, refund, and cancellation policies on your website. Make sure they are easy to understand and visible during the checkout process.

5. Implement Fraud Prevention Tools: Use tools like 3D Secure, machine learning-based fraud detection systems, and geolocation checks to detect and block fraudulent transactions in real time.

By taking these steps and utilizing effective fraud tools, you can create a multi-layered strategy that minimizes chargebacks, reduces costs, and improves customer satisfaction.