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Mitigating Chargeback Risk During the Covid-19 Pandemic

As the economy continues to suffer due to Covid-19 closures, consumers struggling under their own financial burdens are committing 'friendly fraud' by exploiting the charge back function intended to protect consumers. There has been an overall increase in chargebacks of 23% since the lockdown began in March.

Learn how to minimize risk of chargebacks for your business.

What is a Chargeback?

A chargeback is the forcible refund of a transaction between a merchant and the bank that issued customer's credit card.  Chargebacks  may appear similar to traditional refunds, but differ in ways that nonconfrontational and dishonest consumers may appreciate. The difference is that rather than contact the business for a refund, the consumer asks the bank to forcibly take money from the business’s account.

Chargebacks were developed, as so many things are, with the best of intentions to ensure merchant transparency and supply consumer protection. In addition to the other consumer protections, they also protect cardholders from carrying the financial burden of criminal fraud.

Since March, chargebacks have become an issue for merchants in every sector across the US and the world. Online gambling websites and online content providers have seen a steep increase in chargebacks. This turn of events is not surprising given that activity levels for those types of businesses have seen exponential increases in users since Covid-19 drove the world indoors. 

No sector has seen higher increases in chargebacks than the travel industry which has been among the hardest hit by pandemic restrictions. Cruises, airlines, hotels, and car rentals have seen large numbers of chargebacks coming from people stopping payment on vacations they paid in advance for. 

The breakdown of chargeback costs

These consumer protections are costly for merchants. While the fees themselves are steep, they are only the tip of the iceberg. Ultimately, merchants wind up paying up to three times what the purchase price was for each chargeback they are issued.  

  • Chargeback fees: Chargeback penalties are steep and run merchants between 15 and 40% of the purchase price. 
  • Transaction fees: Each transaction processed by card carries with it a fee set by the card processor. These fees are typically between 3 and 5% of every transaction conducted via credit card. When the transaction results in a chargeback, it represents a serious cut into the merchant's profit margins.
  • Operational costs: Operational costs account for roughly 20% of a merchant's business costs. Inventory and warehousing, supply chain logistics, packing and shipping, and dozens of other business maintenance costs.
  • Marketing & acquisition costs: Just getting your customers through the door costs merchants money. Merchants spend up to 40% of their earnings in marketing costs to attract and retain customers. 

When all of these efforts result in chargebacks, it's a far more significant cost to merchants. 

5 types of Chargeback

The lists of chargeback reason codes from different credit card companies will make your head swim. But of the numerous reasons, there are five that are most common.

1) Friendly Fraud

60-90% of chargebacks are due to so-called "friendly fraud". This category holds a wide spectrum of scenarios. These include:

  • Customers trying to cheat the system and trying to obtain products or services they purchased for free.
  • Disputed charges for products or services that the customer did not receive.
  • The customer received defective merchandise.
  • Subscription payments continuing to go through even after cancellation.
  • Promised refund never going through.

2) Affiliate Fraud

It's a sad fact that you have to be cynical when going into business, and affiliate fraud is an excellent example of why this is so. Affiliate marketing accounts for 10-60% of chargeback fraud chargeback fraud occurring when a merchant doesn't properly vet their affiliate partners. 

Look out for this pattern:

  • An affiliate partner generating a massive number of bad transactions in order to make the most money possible.
  • By the time the merchant notices the huge number of chargebacks, the affiliate fraudster has taken the cash and run.

3) Bad Customer Service

Hell hath no fury like a customer scorned. Bad customer service accounts for 10-30% of all chargebacks. 

  • Call center wait times will prompt chargebacks.
  • Delayed response times to customer complaints or queries.
  • Understaffing or other operational issues, whether they are within merchant control or not.

4) Order (un)Fulfillment

Issues relating to order fulfillment are particularly relevant now with everyone ordering online and everyone throughout the supply chain struggling to keep up. 1-15% of chargebacks occur due to order fulfillment challenges.

  • Shipments that are late.
  • Shipments sent to the wrong address.
  • Shipments sent without tracking or proper Quality Control (QC) checks.
  • Shipments market delivered that have not been received (doorstop theft).

5) Subscription Cancellations

If your business offers subscription based products or services, you will be very familiar with chargebacks. 

Customers file chargebacks for subscriptions to:

  • As a way to cancel their subscription.
  • Recover charges made after they cancelled their subscription.
  • Cancel their subscription after  they have received the product or service so as to receive that purchase for free and recover the service charge.

what is the chargeback arbitration process?

There are three steps in the chargeback arbitration process. With some effort on the merchant's part, it is possible to prevent some chargebacks and protect your bottom line. 

1) Representment: If you respond to the issuing bank with the appropriate and sufficient documentation supporting claims that you fulfilled your order in good faith, the process will end here. If not, the process will advance (and with it, costs increase as well).

2)  Pre-arbitration: The process will stop here if you, the merchant, accept liability. If not and you choose to, you can request arbitration.

3) Arbitration: Adding to the costs associated with customer chargebacks, there are significant costs levied by credit card companies associated with the chargeback arbitration process. Filing fees, administrative costs, withdrawal, and technical fees vary from network to network but on average run around $600.

As a merchant, you can save money by responding to chargebacks and retrieval requests during the representment phase.

How can i mitigate chargeback risks during the covid-19 pandemic?

In order to successfully mitigate chargeback risks, you must do the following:

  • Be upfront, honest, and transparent in all of your sales, marketing, and website collateral.
  • Clearly and thoroughly explain your company's return and refund policies  to your clients.
  • Implement and maintain high standard quality control and order fulfillment procedures.
  • Listen and respond appropriately to feedback you receive from stakeholders.
  • Have a response plan and dedicated team who will respond to feedback and order fulfillment issues when they arise.

sekure is here to help

Chargebacks are expensive and time-consuming to resolve. Mitigating chargebacks can help your business navigate the challenges of COVID-19 and save your business’s bottom line down the road. Learn how Sekure can help your business. Visit our COVID-19 Merchant Resources page to help you stay open and #Staysekure.

Jennifer Mullen
Jennifer Mullen
Jenn is Sekure's Content Marketing Manager, and a passionate advocate for small business owners. In her spare time, she has deep conversations with her cats Chairman Meow and Oscar Wilde. Her dog Loki comforts her when she loses at board games played with her husband, son, and daughter.

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