Common Reasons for Chargebacks and How to Avoid Them

With the remarkable rise in digital payments, the perceived risk of fraud also increases. Chargebacks play a crucial role in preventing fraud and protecting customers in the eCommerce payments ecosystem. While chargebacks offer consumers recourse in the digital payments ecosystem, they can present challenges for merchants. However, by understanding the common reasons for chargebacks, merchants can take steps to avoid them.

What is a Chargeback?

A chargeback, simply put, is a type of transaction reversal, usually on a credit or debit card that is initiated by a customer via their bank. Customers can dispute a transaction on their debit or credit card statement by submitting a chargeback. Although chargebacks are a necessary defence against fraud, they can be problematic for businesses and erode customer trust if not handled appropriately.

Let’s look at an instance of chargeback. A consumer orders a book online but does not receive it. They contact customer service, and the company claims the order was delivered. The customer confirms non-delivery by checking with their neighbours and the mailbox. They initiate a chargeback by providing proof of purchase and communicating with customer care.

Why Do Chargebacks Commonly Occur? 

There are several reasons, deliberate or unintentional, why a customer may initiate a chargeback. Here are some common causes for chargebacks:

• Friendly Fraud - Friendly fraud is a common cause of chargebacks. In this type of fraud, the customer initiates a chargeback for a legitimate purchase while claiming false justifications – intentionally or mistakenly. There could be a variety of reasons for this, such as the consumer forgetting about the purchase, buyer’s remorse, the order being placed by a family member, or the expectation that they will not receive a refund. For example, a consumer buys a video game online but forgets about it. When they notice the unfamiliar charge on their bill, they claim it is false.
• Cyber Fraud - Another common reason for chargebacks is cyber fraud, which involves making unauthorised purchases using a customer’s credit card. Cyber fraud is the unauthorised use of a cardholder’s information to make fraudulent purchases. It is a serious crime that can be committed using a variety of tactics, such as stolen credit card information and phishing attempts. For instance, suppose a person loses their credit card. Shortly afterwards, someone uses their credit card details to make an online purchase on a website they’ve never visited. As a result, the person disputes the charges as fraudulent.
• Affiliate Fraud - This is a more complex form of fraud in which partners (affiliates) promote a merchant’s products. Fraud occurs when affiliates use misleading techniques to generate sales and earn commissions, such as:
• Hidden Fees - Affiliates may fail to disclose additional fees associated with the products, resulting in customer disputes when they receive the final payments.
• Misrepresentation of Products - Affiliates might exaggerate product features or benefits, leading to customer dissatisfaction and chargebacks when expectations aren’t met.
• Unsatisfactory Product or Service - This is a valid reason for a chargeback if the customer receives a product or service that does not meet their expectations and fails to get a refund. Common instances include broken or defective products, non-delivery, and customer service issues.
• Subscription Cancellations - This occurs when a customer forgets to cancel a subscription or has difficulty cancelling, leading them to dispute the charges. It could be due to confusing cancellation procedures or inadvertent sign-ups. For example, a customer signs up for a free trial of a music streaming service but fails to cancel before the trial period expires. They see a charge on their account and dispute it because they no longer require the service.
• Billing Errors - This is a basic reason for a chargeback – discrepancies between actual charges and what the customer expected. Recurring charges, incorrect charges, and missed refunds are all common billing issues. For instance, a customer buys a shirt online for INR 400. However, their statement shows a charge of INR 500. So, they dispute the charge since it exceeds the agreed-upon price.

Tips to Avoid Chargebacks

By implementing proactive measures, businesses can significantly reduce the likelihood of encountering chargebacks. Here are some key strategies that can be employed -

• Prioritise transparency - Clear product descriptions, upfront pricing, and easily accessible terms and conditions establish expectations and reduce uncertainty.
• Implement robust security - Secure payment gateways such as Worldline Payment Gateway with fraud detection systems protects consumer data and deters unauthorised transactions.
• Provide excellent customer service - Prompt and friendly support resolves issues quickly, resulting in customer satisfaction.
• Offer clear return policies - A well-defined return policy outlines the steps for returning damaged or defective products, demonstrating customer focus.
• Communicate Effectively - Clear information about order confirmations, delivery updates, and subscription adjustments enhances trust and minimises misunderstandings.

In Conclusion

Chargebacks play a crucial role in safeguarding customers in the digital payments ecosystem. While chargebacks may benefit customers, they can be disadvantageous to businesses. Thus, businesses should focus on reducing chargebacks while providing customers with an excellent purchasing experience. This can be achieved by providing an exceptional purchasing experience and soliciting continuous feedback and improvement.

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