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sticky.io’s Ultimate Guide to Credit Card Chargeback Prevention

Credit card chargebacks can hurt your subscription business’ reputation and profits. Learn how chargebacks work and how to prevent them in our guide.

Updated:  

May 18, 2023

Subscription merchant working on chargeback prevention strategy

Chargebacks happen. It’s a rule of ecommerce, no matter how much retailers would prefer otherwise. Consumer protections (like those that allow chargebacks) aren’t bad for our country, but they add obstacles that honest ecommerce sellers must work around.

You can’t just ignore chargebacks; they cost you money and, if too many are filed, your reputation. As an ecommerce subscription merchant, your good name and relationships with your customers matter.

Protecting your company from credit card chargebacks isn’t just about learning how to fight them. Statistically, a customer is more likely than you are to win one of these disputes. The 2022 Year in Chargebacks by Midigator, an Equifax company, found that merchants win, on average, about 30% of chargeback cases.

Instead, your goal as a merchant should be to prevent chargebacks by mitigating what causes your customers to file them in the first place. Read on to learn how chargebacks work and what you should do to lessen the burden on your company.

This guide includes the following sections:

  • What Is a Credit Card Chargeback?
  • Common Reasons for Chargebacks
  • Chargebacks vs. Refunds: What's the Difference?
  • Chargebacks vs. Voided Transactions: What's the Difference?
  • How are Credit Card Chargebacks Processed?
  • How Chargebacks Affect Subscription Businesses
  • How To Prevent Credit Card Chargebacks

What Is a Credit Card Chargeback?

Chargebacks are credit card transaction disputes that customers choose to file with their card issuer. You may also hear them called “payment disputes” or “disputed payments.” These disputes are very much what they sound like: A consumer tells their bank they don’t believe they should have to pay a credit card charge with the goal of having the transaction reversed and their purchase refunded.

Because U.S. law is on the consumer’s side, most chargebacks are resolved in their favor. The bank that issued the credit card in the first place investigates the chargeback request and makes the final decision. You’ll get a chance to send documentation supporting your case, but merchants can’t simply refuse to pay because they believe the consumer is wrong.

This is why chargebacks can quickly become a problem for ecommerce merchants who haven’t created processes to prevent and address them. Prevention comes first, but you also must know how to complete the representments process to challenge chargebacks your company believes were wrongly filed.

Common Reasons for Chargebacks

Every credit card chargeback is marked with a “reason code” by the card issuer that investigates the disputed charge, so you’ll know the consumer’s reason. The most common reasons for chargebacks are:

  • Fraudulent transaction: The cardholder did not authorize the purchase. However, some chargebacks labeled this way are actually friendly fraud: legitimate purchases the cardholder authorized but has claimed are fake, so they don’t have to pay for the product or service they received.
  • Unrecognized charge: The cardholder does not recognize the business name attached to the charge on their credit card statement and is unsure if they made it.
  • Double charge: The cardholder was billed twice for the same item.
  • Item never delivered: The cardholder’s purchase was not delivered to them, nor were they reimbursed for the item.
  • Item damaged during shipping: The cardholder received a damaged or nonfunctional product but didn’t receive a refund or replacement.
  • Quality not as expected: The cardholder receives the item but deems it low quality or otherwise not what they were expecting based on the product listing.
  • Subscription cancelled: The cardholder cancelled a subscription, but they continued to be charged for it and receive products.
  • Credit not processed: The cardholder initiated a return but hasn’t received a refund for their product.

Many of these are issues that you, as a merchant, could address — but some consumers won’t reach out to you for a resolution before turning to their bank. We’ll discuss how you can use the representments process to address this disconnect shortly.

Chargebacks vs. Refunds: What’s the Difference?

Refunds are resolved between the customer and the merchant without involving a third party (the customer’s card issuer) and are typically the better solution for sellers.

A customer may either request a refund outright or contact your company with a complaint and be offered one. The merchant is always the party that initiates the processing of a refund. Once your customer has met the requirements (like sending proof the item was damaged or returning it to you), you reverse the original transaction.

A chargeback, on the other hand, is reversed by the bank or card issuer after a dispute process, which could be lengthy. Your account will be debited the amount of the transaction plus the chargeback fee (more on these later). A record of the chargeback will also be permanently added to your merchant account.

Chargebacks vs. Voided Transactions: What’s the Difference?

A voided transaction doesn’t involve money changing hands because it’s canceled before it settles — meaning the funds aren’t credited to your account and then returned to a customer’s account. Both you and the buyer may see the transaction as pending in your accounts, but it’s never completed.

The timeline for a voided transaction is shorter, as most transactions are completed within a day or two of the purchase date. Because a transaction can only be canceled before it settles, this corrective measure is typically used for obvious mistakes (like double charges) that can be seen when a transaction posts. They’re not typically used to handle product-related complaints because ecommerce merchants don’t usually deliver goods until after a transaction has settled.

How Are Credit Card Chargebacks Processed?

Every credit card company follows roughly the same procedure when a customer wishes to dispute a charge. However, the timelines allotted for each stage — including the window for customers to file a dispute after a purchase — vary by card issuer.

Credit card chargeback typical cycle
  1. The customer files the initial dispute with their card issuer.
  2. The issuer receives the dispute and pulls the transaction data from its record to investigate the purchase.
  3. The issuer informs the merchant they’ve had a chargeback filed against them.
  4. The merchant can either accept the chargeback, at which point the transaction is reversed and they will have to pay a fee or choose to dispute it.
  5. A merchant who chooses to dispute the chargeback gathers evidence showing the customer’s chargeback request should not be honored (because they are being dishonest or did not attempt to resolve the issue with you first) and submits it to the issuer for review.
  6. The issuer reviews evidence from both sides and determines whether to award the chargeback or reject the claim.
  7. A merchant who loses must refund the customer and pay chargeback fees.
  8. If the merchant and issuing bank cannot agree on whether the charge should be paid, the case will go to arbitration. A representative from the card network will decide whether the chargeback is valid.

The chargeback process may take upward of a few months, and each chargeback takes hours to fight. Merchants who receive more than a few chargebacks each month may see a significant amount of their resources go toward fighting chargebacks and paying fees.

How Chargebacks Affect Subscription Businesses

Chargebacks are one indicator of a company’s reputation. The more that are on your record, the less reliable you’ll look to banks and other financiers. Your company’s chargeback ratio — the number of chargebacks filed against your business compared to the number of transactions you’ve processed — is a major factor in determining your merchant risk factor.

The average chargeback ratio, according to ClearSale, is 0.6%. Merchants with a chargeback ratio approaching 1% are likely to be considered “high-risk.” Depending on your merchant account provider, exceeding 1% or 1.5% may get your account closed.

Companies considered “high-risk” often face increased demands from financial service providers. For instance, you’re likely to be turned down by some merchant account providers. Payment processors that serve high-risk merchants tend to charge higher fees and require their customers to keep significant reserves on hand as insurance.

Each chargeback filed comes with a cost to your business, as well. We’ve mentioned chargeback fees before; they can range from $15 to $100. The higher your chargeback ratio, the bigger the fee you’ll have to pay.

If your chargeback ratio exceeds 1.5%, your company may be forced to shut down because your merchant account will be canceled. Your merchant account is what your non-cash transactions run through — and no subscription seller can offer their service without the ability to accept credit cards and other electronic payments. An account closure typically means losing access to the funds in that account and being added to a list of merchants whose accounts have been terminated. Once you’re on this list, many payment providers will decline to work with you.

Chargebacks aren’t an ideal solution for customers, either. Your subscribers will have to wait much longer for a chargeback reimbursement than they would for a refund. Those consumers who rely on chargebacks too much might also face consequences from their banks for unnecessarily initiating costly investigations. Their chargebacks may not be taken seriously (which is an issue if they are a fraud victim), or their credit card account could be closed.

By making it easier for customers to resolve complaints in other ways, you’re doing your part to reduce chargeback rates for everyone.

How To Prevent Credit Card Chargebacks

Chargeback prevention starts with offering an excellent customer experience. Keep your subscribers informed and happy, and you’re less likely to see a chargeback claim. When your customers have issues with your company or products, your next best bet is clear communication that addresses their concerns. And if that doesn’t work? You’ll need to be ready to fight chargebacks in the representments process.

The tips below cover all fronts, so you’ll be ready to minimize chargebacks at all customer journey stages.

Use Fraud Prevention Tools

Ecommerce fraud is on the rise, and a study by sticky.io and Kount, an Equifax company, found that chargeback fraud is the leading concern for merchants like you. It’s much better to invest in prevention than to have to pay the cost of high fraud rates. Fight back with tools made for ecommerce subscription sellers who accept card-not-present (CNP) transactions:

  • Address verification service (AVS) to match the billing address entered by the consumer to the data the credit card issuer has on file.
  • Card verification value (CVV) to confirm the purchaser has a physical copy of their card.
  • Email verification to check the email address on a consumer account against a list of email addresses that have been used for fraudulent transactions in the past.
  • Purchase frequency limits so a single card number or account can’t be used to buy an unreasonable number of goods.
  • Automated transactional emails so account holders receive a receipt right after a purchase has been made using their card and can flag any unauthorized charges right away.

Subscription sellers with especially high-priced items may also want to manually verify transactions by contacting customers to check that a purchase is valid.

Fraudsters are always looking for ways to circumvent the tools above. Use a capable subscription management platform like sticky.io to get access to advanced credit card fraud screening tools like Kount’s AI fraud detection. We use machine learning to detect factors common to fraudulent transactions so you can automatically block illegitimate purchases.

Every $1 of fraud costs U.S. retail and ecommerce merchants $3.75.

Have Clear Billing and Return Policies

Give your customers the right to make an informed purchase by explaining your subscription policies up front. Before a customer makes their initial subscription payment, they should know:

  • Billing frequency
  • Cost of subscription (including any adjustments they may see)
  • How to cancel
  • Cancellation cutoffs

U.S. law requires you to inform customers what the “material terms” of their subscription transaction are. Going above and beyond the required disclosures to communicate clearly will decrease the number of purchasers who file chargebacks after being surprised by subsequent charges or automatic renewals.

So along with the above information, share your merchant account name so subscribers know where to look for your charge on their credit card bills. And make sure that name matches your storefront and URL to cut down on “unrecognized charge” disputes.

You can also cut down on chargebacks by sending subscription renewal reminders a few days before a customer will be charged for an upcoming billing cycle. These emails should include your cancellation policy (or a link to it) and the deadline customers must meet with their cancellation requests to avoid an upcoming charge. Make sure you send a post-cancellation confirmation email as well that indicates when the last transaction will hit their card and when the service or shipments will end.

Communicate return policies ahead of time, too, especially if you don’t offer free returns or have a small window for returns (most merchants offer at least a month). Though returns are a hassle and come with costs you likely don’t want to pay, smart merchants will consider buyer goodwill a more important factor than preventing every loss.

A customer who can make a return might opt for an exchange or come back to your store down the line when they see another product they’d like to try. If they must file a chargeback to get their money back for a product they didn’t want, chances are they won’t ever shop with you again.

Returns and cancellations should be processed promptly — customers who miss a deadline due to your team’s response time will have a strong chargeback case. Prevent unwanted charges and credit consumers for returned items before they have a chance to get upset over a mistake.

Set Accurate Expectations Around Your Products and Shipments

Keep customers from claiming your company is withholding products and/or services by clearly communicating what they can expect after making a purchase. Everything from product details to projected delivery dates should be as accurate and detailed as possible.

Advertise your products honestly (using real photos and videos rather than computer-generated media or product mockups) and check your marketing copy for accuracy. Exaggerating what your product can do may result in disappointed buyers who file chargebacks when the item doesn’t live up to their expectations.

Set up your site to provide would-be buyers with estimated shipping and delivery dates based on their shipping address before they complete the purchase. Most merchants can’t keep up with Amazon’s lightning-fast logistics, especially given current shipping costs. Ground consumers’ expectations in reality to avoid them filing chargebacks over items they believe got lost in the mail or never shipped.

After a customer makes their purchase, send an automated email receipt that includes estimated shipping and delivery dates. Send another email with tracking information once a package has shipped, so buyers can keep up with their purchases from their own homes.

Finally, ship purchases as soon as you can. And if you do face unexpected delays, communicate them as soon as they happen.

Provide Responsive Customer Support

Customers who struggle to get a response to a complaint or refund request may choose to file a chargeback instead of trying to talk to your company. Ensure that customers know that they can easily contact you by creating a dedicated “Contact Us” page on your site.

When someone reaches out, make sure they know your team is ready to help. Consider automating email responses for each support ticket to acknowledge receipt and set expectations for a response time.

Then, make sure your internal team hits your response time deadlines. According to a survey by SuperOffice, the average response time for email support is approximately 12 hours. That may be out of reach for smaller teams, but we advise you don’t shoot for the upper end of the range in their study (8 days) — that’s plenty of time for a customer to get frustrated and file a chargeback.

Collect and Save Transaction Data

If the previous steps are not effective in preventing chargebacks, you need to be ready to verify the legitimacy of a transaction and your service. That means keeping records from all the processes you set up during the previous tips.

sticky.io customer data capabilities

The evidence required for representment will depend on on the chargeback reason. However, you may need to show:

  • Proof of fraud prevention tools
  • Copies of your recurring transaction agreement plus cancellation and return policies
  • Customer transaction records (to prove the person filing a chargeback has previously bought from you and been satisfied by their purchase)
  • Copies of transactional emails for the disputed purchase
  • Shipping address information, tracking numbers and shipment records
  • Purchaser IP addresses and server logs for digital downloads
  • Refund receipts
  • Documentation of merchandise quality and customer satisfaction

Obviously, filing and then searching this information manually would be a lot of work. Robust subscription CRMs like sticky.io can help you automate your information storage to save time on this step. Our platform saves customer and transaction information for you and makes it easy to search for the documentation you need.

Chargeback Prevention Is a Worthwhile Investment

Credit card chargebacks have serious consequences, so it’s time to get serious about preventing them. Subscription CRMs like sticky.io are the best tools to help you with this effort because they centralize everything you do.

Along with the fact that your data will all be in one place, you can implement advanced chargeback solutions. Our platform integrations include Visa Verifi Alerts and Rapid Dispute Resolution (RDR) and anti-fraud tools provided by Kount. Learn more about our representments service to prevail in more cardholder disputes without losing your team’s valuable time. sticky.io makes it easy to implement all the best practices to reduce your chargeback rates.

Chargebacks were implemented to protect consumers’ rights, not yours, which means they’ll always be a challenge for merchants. Your best bet when it comes to chargeback prevention is to give yourself a full suite of tools to address consumers’ underlying complaints.

Ready to learn more? Download our Chargeback Prevention Checklist to stay prepared.