When a merchant is faced with a chargeback, the total expenses involved can often end up totaling twice the amount initially charged to a customer – taking into account any fees and penalties involved, the return of the original funds, and the labor costs of dealing with the chargeback. As a result, it is no surprise that most merchants focus on structuring their operations to reduce chargebacks as much as possible.
Another reason for keeping chargebacks down is to avoid intervention by acquirers and payment processors. These firms typically establish chargeback thresholds for merchants who utilize their services. For instance, both Visa and Mastercard have established programs for chargeback mitigation.
Acquirers and payment processors actively monitor the chargeback ratios of the merchants they work with. When chargebacks exceed a certain threshold — typically 1% of the total monthly transaction volume — the merchant will have to submit a chargeback reduction plan. Such a plan is required to return a merchant’s chargeback ratio to acceptable levels and to maintain its account in good standing.
These plans add extra financial requirements and monitoring of a merchant’s business until the merchant succeeds in bringing their chargeback ratio to a satisfactory level for a specified period of time. In conjunction with this enhanced monitoring, the merchant is generally required to turn in a plan specifying how they will improve their chargeback numbers.
This article will cover how to create a plan for reducing chargebacks, both for those cases where you as a merchant are required to formally create one and for merchants who simply want to enhance their existing procedures in order to keep their chargeback rate low.
Tip #1 How to Develop a Chargeback Reduction Plan
Before drawing up a plan to reduce chargebacks, the first step to take is to analyze your chargeback activity so you know what is driving it; identify the types of transactions and customers generating the preponderance of the activity. Data analysis software can be helpful in this effort by enabling you to pinpoint the source of your chargebacks.
Once you’ve determined exactly where your chargebacks are coming from you can diagnose what has gone wrong in your chargeback prevention procedures. It might be that your anti-fraud measures weren’t strong enough, or your customer service could be causing the problem.
Perhaps customers aren’t aware of your return policy, leading them to resort to chargebacks instead. Your analysis should take issues such as these into account in determining areas where improvements in your chargeback reduction strategy can be made.
Tip #2 When Should You Create a Chargeback Reduction Plan?
From your perspective as a merchant, all of the elements involved in a formal chargeback plan can be valuable parts of your efforts to keep your chargeback rate low even if you aren’t officially placed in a chargeback mitigation program. As a result, it makes sense to develop a plan of this type as soon as possible as part of your chargeback reduction strategy, even if you aren’t required to submit it to your acquirer or payment processor.
Taking this approach has the double benefit of helping to reduce chargebacks and preparing yourself to write up a formal chargeback reduction plan if it ever becomes necessary. Given the disruption and fees associated with chargebacks, even if you never enter into a formal chargeback mitigation program, the savings to your business in terms of time and expense from reducing chargebacks this way are likely to be well worth the effort involved in setting up a plan.
Tip #3 Elements of a Chargeback Reduction Plan
When a merchant must enter into a chargeback monitoring program, they must submit a plan with the following elements:
- Business model summary: This explains what products you are selling, how you go about marketing those products, the characteristics of your customer base and the billing methods you employ.
- Chargeback analysis: What is causing the chargebacks you receive and from what products? Identify whether your chargebacks stem mainly from errors, actual fraud or “friendly fraud” — where cardholders either don’t recognize the transaction or they’re intentionally stealing through chargebacks.
- Chargeback prevention strategy: How are you currently defending against chargebacks. What steps are you taking to reduce their occurrence? This includes the tools you are using as well as the procedures you and your staff members employ against fraud and friendly fraud.
- Proposed improvements: This element of the plan should enumerate the actions you will be taking to reduce chargebacks within an acceptable range. It should include any lasting changes you will make to your chargeback prevention process, how you’ll evaluate the success of these changes, and how to adjust them if they are not working.
Besides the plan itself, you should also provide documentation relevant to your plan and its implementation. This might include:
- Information relating to your refund and return policies
- Purchase terms and conditions
- Customer correspondence such as order confirmation emails, billing information, etc.
- Any documentation pertaining to the cause(s) of rising chargebacks at your business.
Tip #4 Leave Room for Flexibility
When writing up your plan, it is important to detail the changes you will be making to your current procedures to improve your chargeback prevention. The focus should be on explaining where your chargebacks are being generated and how you are adjusting your processes as a result to deal with the situation.
This could involve taking steps such as signing up for a chargeback alert service or working with chargeback management professionals, in addition to any changes in your company procedures. The plan should also cover how you intend to monitor your chargeback reduction initiatives so you can make changes to your plan if necessary to reach your goals.
The Importance of Chargeback Prevention Planning
Whether you have been placed in a chargeback mitigation program or simply wish to reduce your chargebacks, planning is crucial to achieving the desired results. That is why it makes sense to work on a plan to reduce chargebacks, with expert assistance if needed, even before you are placed in a formal mitigation program.
If you do so, if the time comes when you are required to submit a formal plan, you will already have experience with the process. It might even turn out that drawing up a plan on your own will keep your chargebacks far enough below the threshold that you never have to worry about actually submitting a formal plan to your acquirer or payment processor.