4 ways to reduce chargebacks and manage disputes

Wednesday, October 11, 2023 4 minute read
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4 minute read

Disputes and chargebacks can be costly for business owners. It's been estimated that the average chargeback can cost a business around £250, which is definitely a hit to the bottom line.

Unfortunately, for many businesses, chargebacks are simply a part of doing business, especially in ecommerce where you don't have face-to-face interactions with customers. With retail ecommerce on the rise globally and card-not-present (CNP) transactions becoming more common, reducing your chargeback ratio is crucial to maintaining a healthy business.

What's a chargeback ratio?

A chargeback ratio is the number of chargebacks divided by the total number of transactions you make during the same period. Banks and card networks use chargeback ratios to indicate a merchant's risk. Low chargeback ratios imply a safe merchant, high chargeback ratios could indicate a problem. Experts consider a chargeback ratio below 0.65% to be reasonable, though this varies by industry. In some instances, high chargeback ratios could result in penalties or fees.

Managing disputes and reducing chargebacks can stop these penalties from happening. And save your business money.

Managing disputes and reducing chargebacks can stop these penalties from happening. And save your business money Managing disputes and reducing chargebacks can stop these penalties from happening. And save your business money
Experts consider a chargeback percentage rate below 0.65 percent good. Anything above 0.9 percent could result in penalties from credit card companies.

Disputes and chargebacks—what's the difference?

The dispute, in other words, describes the action the customer takes. The chargeback describes the action the bank takes. In the case of a chargeback, the customer often initiates a dispute directly with the bank rather than opening a dispute with your business.

There are ways to change that process so that you manage disputes directly with your customers—and lower your chargeback ratio. Experts call this dispute management, and it's a recommended part of any commerce strategy.

Manage disputes—and reduce chargebacks

How do you manage disputes proactively and lower your chargeback ratio? Here are four strategies.

1. Improve payment security

Credit card fraud often leads to chargebacks, so optimising your security is important. There are several ways to do this:

  • Update your point-of-sale (POS) for increased security with encryption, tokenization and password security.
  • Incorporate user authentication tools like 3D Secure 2 (3DS2), AVS and CVV2.
  • Add customer data including signatures and PINs to your transaction process.

Your payment partner can help you implement these security measures and choose the best fraud prevention methods for your business.

2. Stay connected

Staying connected with your customers throughout their shopping experience is crucial to preventing disputes and chargebacks. Successfully handling customer complaints can have a significant impact on your business. University of Newcastle research found that for every dollar a business invests in complaints handling, there's a potential return on investment (ROI) of up to $10.

Although refunding a purchase may result in short-term loss, it's a wise investment in building a stronger customer experience that will ultimately lead to greater customer satisfaction and loyalty.

3. Communicate your return policy clearly

A well-defined return policy can provide transparency and confidence to customers. This can result in fewer disputes and chargebacks. Not only will a clearly communicated return policy prevent misunderstandings, but customers are also less likely to initiate chargebacks when your terms are easy to understand and follow.

Your return policy should answer the following questions:

  • What items are eligible for return? Specify which types of items can be returned, such as unused, unworn or items with tags.
  • Can the items be exchanged?
  • When is the deadline to return the items?
  • Where should the items be shipped? Include an easy-to-read mailing address. (e.g., country, state, post code, etc.) Do you accept international returns?
  • Who will pay for the item's return shipping costs? (Will it be free or will it be deducted from the cost?) How much will the customer pay for the return shipping? Is there a return label?
  • What type of refund will the customer receive? (e.g., store credit, full refund, exchange, etc.) Are there any additional restocking fees?
  • What information does the customer need to bring into the store, send online or mail to receive a refund or exchange? (e.g., receipts, order number, etc.)

4. Clearly identify your business

It's important to ensure your customers can easily identify your business when they receive their card statements. This can help prevent chargebacks and disputes that occur when customers don't recognise a transaction or are confused by the information on their statement. Studies have shown that between 17% and 32% of chargebacks are caused by friendly fraud, which can often be traced back to unclear or confusing transaction details.

To avoid this, consider updating your merchant descriptor with your payment partner to include your business name or phone number. This simple step can go a long way in helping your customers feel confident and secure in their transactions with you.

The value of dispute management

Managing customer disputes is crucial for any business, and having a reliable system can make all the difference. An automated dispute management platform can streamline the process and help you communicate more effectively with your customers. This not only leads to better customer satisfaction and loyalty but it also helps to lower chargeback ratios.

Contact us today to learn how we can help you automate customer disputes and lower your chargeback ratio. And don't forget to subscribe to our Payments in Focus newsletter to stay ahead of the latest commerce and payment trends.