How do I manage chargebacks for a high-risk merchant account?

Chargebacks are the worst, especially if you are an owner of a high-risk company and deal with them more frequently. With the rise of e-commerce, intentional chargebacks are getting more common and not all businesses can handle the challenge. However, there are means and technics that are very helpful in preventing and managing chargebacks, and Maxpay‘s team has decided to share them in this blog post.

But first, let’s find out more about high-risk companies and chargebacks to understand what we are dealing with.

What is a high-risk merchant account?

The answer is really in the name – it is a type of bank account for high-risk businesses to accept credit cards and alternative payments for their products and services. As a rule, this type of a merchant account will require bigger service fees than a low-risk one, as high-risk companies are more likely to face chargebacks and fraudulent transactions.

As you can see, having a high-risk business is the foremost factor predetermining that you will need a high-risk merchant account. But why a company may be classified as a high-risk one? We have covered this topic in Maxpay’s previous blog post called “How does a high-risk credit card processing work?”, but let’s go through the most common reasons.

Chargebacks, obviously. The more you get, the bigger your chances of becoming a high-risk company. To stay in a low-risk lane, the number of chargebacks you get must be less than 1% of all the sales, as in one chargeback per 100 pleased buyers. If you get more than that, you will likely be classed as a high-risk company.

A specific industry you work in. Some industries are automatically considered high-risk, as they deal with a lot of fraudulent transactions and chargebacks. These are gambling, online gaming, adult and dating, tourism, telemarketing, and healthcare services, as well as subscription-based businesses.

A country of operation. As in the case with industries, some countries are more prone to chargebacks. Some banks and PSPs have a list of countries deemed high-risk placed on their websites.

What is a chargeback?

A chargeback occurs when a customer initiates a payment reversal through their car-issuing bank after a transaction to a merchant. Though some merchants may find this process unfair, a chargeback is an important part of buyer’s financial safety and the notion that you can always get the money back encourages them to make purchases in the first place.

There is also a different procedure called refund, which happens when a cardholder reaches out to a merchant directly, asks to return their money and gives a valid reason to do so. If the merchant agrees, the money will be returned to the customer no bank being involved.

But what’s going to happen, if a buyer decides to go with a chargeback? Let’s go through the whole process:

• Firstly, after making a purchase, a cardholder decides to dispute the transaction. To do so, a customer needs to contact their card-issuing bank.
• The buyer’s bank reaches out to the merchant’s bank or PSP and communicates the situation. The later can provide any evidence that the transaction was valid, like receipts, invoices, or documents proving the delivery.
  
• After getting the evidence of a successful purchase (if there are any), a card-issuing bank must decide, what to do next. If the evidence is insufficient, the customer will get the money back. If the transaction was legit, the card-issuing bank notifies the buyer and they can either agree to pay for the purchase or dispute it once again, launching the arbitration process.
  
• The arbitration means that the card issuing companies like Visa, Mastercard, etc. will review and consider the evidence provided by both parties to decide on the chargeback’s fate. If the merchant loses the case, they can still seek justice in court.

Why do chargebacks happen?

To prevent and manage chargebacks, you first need to understand the reason a customer is demanding one.
The product comes not as described. Sometimes it’s just unavoidable: either a product has poor quality, was damaged during shipping, or a buyer wasn’t paying enough attention and ordered something they didn’t actually like.
The delivery does not deliver. Customer purchase can be lost, or the delivery process is too long and a buyer loses their patience.
A failed refund. An unpleased customer can reach out to a merchant to settle things quietly and without banks. Still, it doesn’t mean the parties will resolve the problem, hence the buyer will demand a chargeback.
The forgotten subscription. A client may forget that they have subscribed for service and issue a chargeback after a monthly subscription charge occurs.
“I don’t remember buying that”. Usually, there is a couple of options: a customer’s card or personal data have been stolen and a fraudulent transaction occurred; a member of a customer’s family member used a card without notifying them, or a customer really forgot about buying something and/or doesn’t recognize a merchant’s company name.
Buyer’s remorse. A customer may regret purchasing a product or a service and ask for a chargeback. This type of chargeback can be devastating for a merchant, as people sometimes regret buying expensive things.
Friendly fraud. Unfortunately, the situation is not friendly at all – it occurs when a customer files for a chargeback intentionally – to both get the product and their money back. To deceive banks, a customer will use one of the aforementioned reasons to seem honest while disputing a transaction.

There is also a second category of people who are considered friendly fraudsters – these are customers who don’t mean to deceive merchants, but request a chargeback anyway – either because they are not aware of company’s refund policies, or find it more convenient than to figure out the problem with a merchant.

Still, whether a friendly fraud is intentional or not, it is very common. According to the “2019 Chargeback Situational Field Report”, conducted by Card Not Present and Chargebacks911, 58% of companies believe that most of their chargebacks (46%) are the result of friendly fraud.

But all these types of chargebacks can be avoided if a merchant follows a set of rules and recommendations that we will list further.

How to prevent chargebacks

Making sure that you follow the procedures and use all the instruments available to prevent chargebacks should be a merchant’s number one priority, especially if you are a high-risk business owner.

First of all, the merchant website should be compliant with all the security standards and use a 3D-secure protocol to verify the identity of a client. 3D-secure has a double authentication feature, which means that a buyer needs to fill in their card details, and then enter a one-time password sent to their phone, a permanent 3Ds password or use a fingerprint. Thus, it significantly reduces the chances of a fraudulent transaction, as a thief will need a card owner’s phone to complete the purchase.

Setting comprehensible and fair refund policies is crucial – ensure clients that you are always ready to return the money if the cause is justified. Make sure the refund option is clearly displayed on your website.
The product/service descriptions should be detailed and contain accurate photos of goods. Your clients should be 100% sure they have purchased the same thing as was depicted on the webpage.

Your customer service must be top-notch. Use as many channels to communicate with customers as possible, be polite, don’t ignore calls and e-mails. Reach out to clients not only when they demand a refund, but also if they have any questions/concerns about your product.

The approximate time of delivery should be established even before a customer makes a purchase. Use online tracking and notify your clients if the delivery is running late – make them feel you care about their order. Also, ensure the delivery company you are going to use is reliable and has a minimum of negative reviews.

Keep all the receipts, invoices, and other documents that you might need to prove the purchase was made/received in case of a chargeback. Sending a receipt to a customer via e-mail after they’ve finished a transaction is also necessary.

Your billing statement, which will appear on a customer’s credit card bill, should be coherent and recognizable.

If you provide subscription-based services notify your customer about the upcoming monthly charge a couple of days prior to that.

How to manage chargebacks

Unfortunately, you can’t avoid chargebacks altogether, no matter how many preventive actions you take. And if you are a high-risk merchant your management of payment disputes is very important for the future of your business.

So, what should you do, if a chargeback occurs:

• Identify the reason for a chargeback. If it indeed was a fraudulent transaction you will need to accept it and upgrade your safety systems to make sure it will not happen again. If there is another reason – you can dispute the chargeback.
• If you have been following our advice on chargeback prevention, you already have what it takes to dispute it and win. If a customer claims that they didn’t buy your product – show receipts and other documents. If a client complains that a purchase looks nothing like on the website – share the product description and photos, etc.
• It is important to file a dispute if you suspect a friendly fraud – next time a fraudster will think twice before demanding a chargeback.
• Learn from your mistakes: whether or not you win the dispute, you will need to take into consideration all the problems you faced because of chargebacks. For example, change your refund policies, choose another delivery service, implement more safety precautions.

Do you know what also helps with chargeback prevention and management? A secure and reliable payment gateway service provider like Maxpay. We provide in-depth business analysis and acquiring solutions for risk merchants. Maxpay partners with an anti-fraud platform called Covery which significantly decreases chances for chargebacks. Covery has a set of rules that allow to filter out fraudulent transactions.

Our risk team works with merchants, monitors, and analyzes their performance to recommend the most reasonablefuture actions.

Maxpay also provides chargeback representation services – we can process the merchant’s chargeback and give recommendations on whether to dispute it.