Chargebacks - Understanding, Preventing, and Mitigating

Team Bond
Date Published
July 1, 2023
Read Time

Often, when Non-Financial institutions start offering financial services to their customers they don’t give much thought to chargebacks. Some think that chargebacks are a problem for merchants to deal with. Not so. This reflects the reality that chargebacks are a common but often misunderstood aspect of launching a branded card. In this explainer, we will dive into the world of chargebacks, covering everything from what they are and why they occur to how they can impact your business and customers. We will also explore strategies to reduce chargebacks and the role of experienced partners in mitigating these potentially costly disputes.

What Are Chargebacks?

A chargeback is a reversal of a credit or debit card transaction initiated by the cardholder. It is a consumer protection mechanism designed to address issues such as unauthorized transactions, billing errors, and dissatisfaction with products or services.

Imagine Jane Dough has signed up for your card and she promptly goes out to make a purchase at an online electronics store using her card. She receives the product but is dissatisfied with its quality, and her attempts to resolve the issue with customer support go unanswered. Frustrated, Jane contacts her card issuer (you) and disputes the charge. The issuer, in turn, initiates a chargeback, effectively reversing the payment and debiting the merchant account.

Why Do Chargebacks Occur?

Chargebacks occur for various reasons, and understanding these reasons is crucial for issuers, merchants and consumers alike. Here are some common causes of chargebacks:

1. Unauthorized Transactions: A cardholder may notice a transaction on their statement that they did not authorize or recognize. This often results from stolen card information or fraudulent activity.

2. Billing Errors: Mistakes in the billing process, such as double charges or incorrect amounts, can lead to chargebacks.

3. Dissatisfaction with Products or Services: Customers may dispute a charge if they are unhappy with the quality of a product, received a damaged item, or believe they did not receive what was promised.

4. Subscription Renewals: Recurring subscription charges can sometimes go unnoticed by customers, leading them to dispute these charges.

5. Failure to Receive Goods or Services: If customers do not receive the goods or services they paid for, they may file a chargeback.

6. Friendly Fraud: In some cases, customers may dispute a charge as a first course of action without attempting to resolve the issue with the merchant, even if the transaction was legitimate.

How Do Chargebacks Impact Your Business and Customers?

Impact on Card Issuers

1. Financial Responsibility: When a chargeback is initiated, the issuer is responsible for refunding the cardholder's money while the investigation is ongoing. This means the issuer temporarily covers the cost of the disputed transaction, which can result in a short-term financial burden.

2. Operational Costs: Chargeback investigations require time and resources. Issuers must allocate staff to review and process chargeback claims, which can lead to increased operational costs.

3. Customer Satisfaction: Issuers are responsible for maintaining customer satisfaction. If cardholders repeatedly experience issues with chargebacks, it can lead to dissatisfaction and potentially influence their choice of which cards they use.

4. Regulatory Compliance: Chargeback regulations can be complex and vary by region. Issuers must stay compliant with these regulations, which may require ongoing updates to policies and procedures.

5. Dispute Resolution: Issuers are responsible for managing the dispute resolution process between cardholders and merchants. This involves communicating with both parties, collecting evidence, and making fair decisions.

6. Reputation: An issuer's reputation can be affected by its approach to chargebacks. A fair and efficient chargeback process can enhance an issuer's reputation, while mishandling disputes can have a negative impact.

7. Reserve Funds: In some cases, issuers may need to set aside reserve funds to cover potential future chargebacks. This ties up capital that could otherwise be used for investment or other purposes.

Impact on Merchants:

1. Financial Loss: Chargebacks result in the reversal of revenue, and merchants often lose not only the sale but also the cost of goods or services provided.

2. Fines and Fees: Excessive chargebacks can lead to financial penalties imposed by card networks and acquiring banks.

3. Increased Operational Costs: Managing chargebacks and disputes can be time-consuming and require resources dedicated to resolving them.

4. Damage to Reputation: High chargeback rates can damage a merchant's reputation, making it challenging to secure partnerships or maintain customer trust.

Impact on Customers:

1. Temporary Resolution: While chargebacks can provide consumers with a temporary resolution to their issues, they may not address the underlying problem with the merchant.

2. Inconvenience: Chargebacks can be a lengthy process, and customers may experience inconvenience during the investigation.

3. Risk of Being Blacklisted: Excessive chargebacks can lead to customers being blacklisted by merchants, making it difficult for them to make online purchases.

What Can You Do to Reduce Chargebacks?

To minimize chargebacks and their impact on your business, there are a few steps a brand can take in conjunction with its embedded finance partner:

1. Enhanced Authentication Methods: Issuers can implement advanced authentication methods such as two-factor authentication (2FA) to ensure that cardholders are the legitimate account holders. This reduces the likelihood of unauthorized transactions and subsequent chargebacks.

2. Transaction Monitoring: Continuous transaction monitoring using artificial intelligence and machine learning can help issuers detect unusual or suspicious activity in real-time. Unusual patterns can be flagged for further investigation.

3. Customer Education: Issuers can play a role in educating cardholders about safe online shopping practices, recognizing phishing attempts, and promptly reporting lost or stolen cards. Educated cardholders are less likely to fall victim to fraud.

4. Risk-Based Authorization: Implementing risk-based authorization means adjusting transaction approval or denial based on the perceived risk of a transaction. Issuers can set thresholds for different types of transactions to prevent high-risk ones from going through.

5. Chargeback Analysis: Analyzing the reasons for chargebacks can help issuers identify common issues and patterns. By addressing the root causes, they can implement preventive measures.

6. Transaction Alerts: Issuers can offer transaction alerts to cardholders, notifying them of every transaction made with their card. This allows cardholders to quickly identify and report any unauthorized activity.

How Does Bond Help Mitigate Chargebacks?

As an experienced partner when it comes to card issuing, Bond is dedicated to helping our customers avoid the costs and the risks associated with chargebacks. To that end, there are a few things that Bond provides to our customers:

Payment Processors: Bond works with only the most trusted payment processors who offer advanced fraud detection tools and dispute resolution services to prevent chargebacks and resolve them efficiently.

Wrapping It Up

In conclusion, chargebacks are a common and important aspect of the financial world that can impact both businesses and consumers. By understanding the reasons behind chargebacks and implementing strategies to prevent them, brands can protect their revenue and reputation. Partnering with Bond can further enhance chargeback mitigation efforts, ensuring a smoother and more secure payment processing experience for everyone involved.