A chargeback is the reversal of funds following a debit or credit card purchase. This process is typically initiated by a customer who disputes a charge with their bank or credit card provider. While businesses can also request chargebacks, it is a rare occurrence.
Positive Trend: The global chargeback-to-transaction ratio has been decreasing over the years, indicating fewer chargebacks relative to the total number of transactions. This improvement is due to various strategies and investments by businesses, many of which we will discuss.
Negative Impact: Despite the positive trend, chargebacks remain a significant and costly issue intertwined with broader business fraud. A study by Juniper Research estimated that ecommerce businesses would lose about $20 billion to fraud in 2021, up 18% from $17.5 billion in 2020. Additionally, LexisNexis reports that businesses pay $3.75 for every $1.00 in chargebacks.
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Understanding the reasons behind chargebacks and the nature of fraudulent chargebacks can help you as a store owner mitigate their occurrence and protect your business.
Different types of fraudulent transactions:
Legitimate Fraud: This is the primary reason for the existence of chargebacks. Customers may notice unauthorized transactions on their accounts and initiate chargebacks to reverse charges made by fraudsters using stolen card information.
Friendly Fraud: Despite its name, friendly fraud can be quite damaging. It refers to chargebacks that do not involve actual fraud. Here are some common examples:
Product or Service Issues:
Customer Service Problems:
Billing Errors:
Unrecognized Transactions:
Fraudulent chargebacks, often referred to as "friendly fraud," occur when a customer disputes a legitimate charge with their bank or credit card issuer, falsely claiming that the transaction was unauthorized or unsatisfactory.
Here are common scenarios of fraudulent chargebacks:
Buyer's Remorse:
Avoiding Payment:
Misuse of Chargeback System:
Subscription Chargebacks:
There’s a specific process customers, merchants, and credit card companies go through when dealing with chargebacks.
After a retailer collects money from a customer, transaction details should appear on the customer’s credit card statement.
If the customer doesn’t recognize the transaction or receive the purchase, they can dispute the charge with their card issuer (usually via a banking app or over the phone).
US law requires card issuers to offer chargebacks within 60 days of the date of billing.
Credit card providers may need to see evidence, such as a purchase receipt or communications with the merchant, to authorize the chargeback.
The customer’s card issuer sends the chargeback to the merchant, debiting the disputed amount, plus a processing fee.
If necessary, a merchant can submit evidence (e.g., proof of delivery) to the customer’s card issuer to contest the chargeback and confirm the validity of the charges.
The credit card company can take up to 75 days to review the merchant’s chargeback response. Some cards, like Visa, require merchant banks to respond with evidence within 30 days of a chargeback.
Chargeback disputes end with the merchant accepting the chargeback, the customer canceling the chargeback, or further arbitration by the credit card company.
If neither party is willing to accept the outcome, the credit card provider is called on to make a final decision over the chargeback dispute.
If the dispute is found in the merchant’s favor, the customer’s bank returns the amount to the merchant (plus any fees, depending on region).
However, merchants may have to pay additional fees if the chargeback is deemed valid.
When you use Shopify Payments, chargebacks are handled by the cardholder's bank. As a store owner, it’s crucial to understand how to respond effectively to these disputes to protect your revenue and maintain good customer relationships.
Immediate Notification When a chargeback is initiated, you will receive an email notification from Shopify. This email will contain details about the chargeback, including the reason for the dispute and the amount involved.
Gather Evidence Start by collecting all relevant documentation and evidence related to the transaction. This can include:
Submit Evidence via Shopify Admin Log in to your Shopify admin panel and navigate to the chargeback section. Here, you can upload the evidence you’ve gathered. Be thorough and ensure that all documents are clear and legible. The more comprehensive your evidence, the better your chances of successfully disputing the chargeback.
Detail Your Response Along with submitting documents, provide a detailed explanation of the transaction and the steps you took to fulfill the order. Highlight any inconsistencies in the customer’s claim and reinforce how your evidence supports your case.
Monitor the Process After submitting your evidence, Shopify will compile the information and send it to the credit card company. The resolution process can take up to 120 days. During this period, keep an eye on any updates or requests for additional information from Shopify.
Contact the Customer:
Provide a Return Shipping Label:
Set a Deadline:
Document the Process:
Follow Up:
Review Policies:
Assess the Cost:
Chargeback Reversal:
Legal Options:
Third-Party Mediation:
Chargebacks can be a significant challenge for ecommerce stores, leading to lost revenue, increased costs, and potential damage to your business reputation. However, by implementing proactive strategies and best practices, you can minimize the risk of chargebacks and protect your ecommerce store. Here’s how:
"When you let your customers use credit cards on your store, there is a chance of getting chargebacks or inquiries. You can follow some general steps to prevent some chargebacks and inquiries:
Handling chargebacks efficiently and professionally is crucial for maintaining a good relationship with your customers and protecting your business. The first step in responding to a chargeback is to communicate effectively with the customer. Here’s a detailed guide on how to approach this situation, including crafting a response email and what information the customer should provide.
When you receive a notification about a chargeback, your first action should be to reach out to the customer. This proactive approach can help resolve the issue amicably before it escalates. Follow these steps to craft your response:
Acknowledge the Chargeback:
Be Professional and Courteous:
Request Information:
Offer Assistance:
Subject: Resolving Your Recent Chargeback – [Your Store Name]
Dear [Customer’s Name],
I hope this message finds you well. I am writing to you regarding the recent chargeback you filed for the transaction on [date] for the amount of [amount]. We strive to provide the best possible experience for our customers, and I regret to hear that there was an issue with your order.
To help us resolve this matter promptly, could you please provide us with the following information:
We aim to address and resolve any concerns you may have as quickly as possible. If there has been a misunderstanding or if there is any way we can assist you further, please let us know. Your satisfaction is important to us, and we are here to help.
Thank you for your cooperation and understanding. We look forward to resolving this matter promptly.
Best regards,
[Your Name][Your Position][Your Contact Information][Your Store Name]
To effectively resolve a chargeback, you may need the customer to provide specific information and documentation. This helps in understanding the issue better and preparing a strong case if the chargeback needs to be disputed. Here’s what you should ask the customer to provide:
Proof of Purchase:
Transaction Details:
Communication Records:
Evidence of the Problem:
Reason for the Chargeback:
Subject: Additional Information Needed for Your Chargeback – [Your Store Name]
Thank you for your response. To assist us in resolving your chargeback, could you please provide the following information:
Your cooperation in providing this information is greatly appreciated. It will help us understand the situation better and work towards a satisfactory resolution for you.
Thank you once again for your understanding and assistance.
A well-crafted chargeback policy on your website can help manage customer expectations, reduce disputes, and provide clear guidelines for resolving issues. Here’s what your chargeback policies should include:
Introduction At [Your Store Name], we are committed to providing excellent products and services to our customers. This chargeback policy outlines the conditions and processes for handling chargebacks to ensure fair and transparent resolution of disputes.
Conditions for Chargebacks Chargebacks may be initiated under the following conditions:
Return and Refund Policy If you are not satisfied with your purchase, please follow our return and refund process:
Customer Responsibilities To ensure a smooth resolution process, customers are responsible for:
Business Responsibilities Our responsibilities include:
Fraud Prevention Measures We use the following measures to protect our customers:
Dispute Resolution Process To resolve disputes, we follow these steps:
Consequences of Fraudulent Chargebacks Filing fraudulent chargebacks may result in:
Documentation and Evidence Requirements When disputing a charge, customers may need to provide:
Contact Information For any questions or concerns, please contact our customer service team at:
By clearly outlining your chargeback policies on your website, you can help manage customer expectations, reduce disputes, and protect your business from fraudulent chargebacks.
A chargeback is the reversal of funds following a debit or credit card purchase, typically initiated by a customer who disputes a charge with their bank or credit card provider.
Common reasons for chargebacks include:
Friendly fraud occurs when a customer disputes a legitimate charge with their bank or credit card issuer, falsely claiming that the transaction was unauthorized or unsatisfactory. This can include buyer’s remorse, avoiding payment, or misuse of the chargeback system.
To reduce the risk of chargebacks, you can:
When a chargeback is initiated, you should:
If a customer does not return the item after a chargeback, you should:
To resolve a chargeback, request the following information from the customer:
Your chargeback policies should include:
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