February 2, 2023

How to Reduce your Merchant Chargebacks

What are Chargebacks?

Chargebacks are debit or credit card transactions that have been reversed from the merchant’s (your) account because your customer has disputed the charge.

Chargebacks were created in response to the increase in consumer card fraud by scammers. Credit card chargeback laws were enacted in 1974 with the Fair Credit Billing Act, an amendment to the Truth in Lending Act, and debit card chargebacks were implemented in 1978 with the Electronic Fund Transfer Act.

Why do Chargebacks happen?

Chargebacks happen for a variety of reasons such as:

  • True Fraud: the transaction was fraudulent because your customer’s debit or credit card was stolen and used by a scammer
  • Friendly Fraud: the transaction was valid but your customer disputed the charge anyway. These disputes can happen because your customer was dissatisfied with their service, they don’t recognize or have forgotten about the transaction, or they’re simply trying to get something for free
  • Merchant Error: the merchant (you) made a mistake such as shipping the wrong item

What happens during Chargebacks?

Chargebacks result in delayed or lost revenue. This happens because:

  1. When the transaction is first disputed, your customer’s bank will contact your bank and have the funds reversed from your account
  2. You will then need to decide whether to contest the chargeback or not
  3. If you decide to contest the charge, you will be asked to submit evidence and a rebuttal letter arguing why the transaction was valid and your customer’s dispute should be voided
  4. Your customer’s bank will review the evidence, make a decision, and return the funds to either the merchant (you) or your customer

What are the consequences of Chargebacks?

Chargebacks can be very expensive for merchants. When all fees and expenses are factored in, chargebacks can result in up to 2x the actual transaction amount being taken from your bank account.

In addition to lost revenue, keeping your chargeback ratio healthy is even more important. If your chargeback ratio exceeds your bank’s threshold, the bank may issue additional fines or even cancel your account

The most common chargeback threshold is ~1%.

Should you fight Chargebacks?

True Fraud and Merchant Error chargebacks are typically not worth fighting. 

However, Friendly Fraud chargebacks can and should be fought. With proper responses and documentation, you can reduce your chargebacks by up to ~70%.

How do you fight back?

One of the first steps is to examine the transaction’s chargeback reason code. All major card networks (Visa, Mastercard, Discover, and American Express) have chargeback reason codes that explain your customer’s reason for disputing the transaction.

You should then work with your sales department / customer account executive to create your chargeback dispute package. Your chargeback dispute package should contain:

  • A rebuttal letter, which is usually a written letter or a submission form, that summarizes your case, explains your evidence, and disproves your customer’s dispute claim
  • Any evidence, such as signed contracts or electronic communication like emails, that support and help prove your case

Think of your chargeback dispute package like a court case. You’re presenting arguments and evidence to convince the judge, in this case the bank, that the dispute was wrong and the money should be returned to you.

A key part of any chargeback dispute case is having a strong, legally signed contract that clearly states the terms that both sides agreed to. Roger has helped thousands of companies solve this problem and reduce their chargebacks. Let us know if you want help.

Send yourself a quick sample agreement

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