How to Reduce Merchant Chargebacks
January 29, 2021
It is estimated that 2.14 billion people now buy products or services online, 27.43% of the global population, but increased demand provides increased risk and challenges.
With the lack of human interaction we all now experience, businesses need to be prepared to deal with these challenges. One area fraudsters are increasingly targeting is merchant chargebacks and any business accepting payments needs to ensure their processes are up to task.
What are Chargebacks?
In simple terms, a chargeback is the reversal of a card payment that comes directly from the bank.
The chargeback process occurs when a shopper makes a purchase and for a range of reasons, does not recognise the transaction later and requests their money back. This may appear similar to a refund, but there is a slight difference between the two:
The shopper going straight to the issuing bank to request their money back, instead of contacting the merchant with the demand. Funds are then returned to the customer, forcing the merchant to lose revenue, before the bank investigates the situation and whether the shopper’s request is valid.
“If a customer disputes a charge with their bank (or issues a chargeback) they are reimbursed the money immediately. It’s then left up to the business to fight to get their money back by proving the transaction was valid.”
Chargeback fraud occurs when a customer makes a legitimate purchase, then requests a chargeback from their bank. If it’s approved, the customer not only keeps the purchase, but also receives a full refund. Fraudsters will often look to exploit the chargeback process in an attempt to gain free products and services from a business.
Chargebacks not only cause obvious financial problems to businesses, but having too-high a chargeback rate can land a business in a lot of difficulty – financial and reputational.
The industry standard chargeback threshold in most cases is around 1% of transactions, but it’s seen as a maximum, not a good average. Issuers want proportionate rates; the lower the better. If a business’ chargeback-to-transaction ratio sits at or above the 1% mark month after month, credit card companies will label them a high-risk merchant and require them to join a chargeback monitoring program.
‘Monitoring’ in this case doesn’t just mean a business is being ‘watched’; it means they need to be investigated by the issuer and pay for the service. Expenses to a ‘merchants monthly excessive chargeback program’ can soon add up for businesses under investigation.
Ultimately, the best way businesses can work to reduce their chargeback rate is by building trust in their brand and processes. If customers feel their information is safe, secure and enjoy an excellent user experience, they’re less likely to request chargebacks.
The initial interactions a new customer has with a business set the tone for the entire relationship; the likelihood of a customer sticking with a business (and recommending them to others) increases with the level of emphasis they put on creating an excellent customer experience.
Continual communication between customer and provider in a systematic way throughout the life cycle will also instil trust and improve user experience, building emotional, lasting relationships which translate to higher customer lifetime value.
The period between the consumer paying for a product or service and receiving it is critical; communication is vital to manage expectations. The more information a business provides their customer at the point of sale helps minimise returns or questions around the service they have provided.
According to a study from Harvard Business Review, ‘an increased focus on onboarding offers significant or moderate positive impact over the life of the contract for revenue, client renewals, and client referrals.’
Employing robust KYC checks in the onboarding process not only ensure your customers are exactly who they say they are, they will:
- Onboard customers quickly and effectively with a lower number of false positives & negatives.
- Increase approval rates by utilising a number of legitimate, high-quality data sources.
- Get customers using your product sooner, accelerating brand affinity.
- Increase customer satisfaction with your level of data security.
- Reassure customers of the diminished risk of fraud and account takeover.
The more a business knows about their customers, the more they not only build further trust within their brand but can tailor customers experiences to expand loyalty, improve overall customer lifetime value and obtain revenue retention.
How We Can Help
Acuant’s suite of KYC solutions can help onboard your customers faster and more efficiently with more accurate results. Onboard up to 68% more customers than with traditional identity verification methods, using our single universal API, Sodium.