eCommerce Chargebacks: Expert Researched Best Practices on How to Safegaurd Your Revenue as a Merchant

ChargePay Team
September 8, 2023
All posts

Running an online store comes with its own set of challenges, and most challenging one is to handle eCommerce chargebacks. Do not just talk our words. As per reports, ecommerce has second high chargeback rate and that of 0.56 percent as of 2022.  

Ecommerce Merchants put all their effort to sell quality products, provide top-notch service, and ensure seamless transactions. But suddenly, they find a chargeback notification in your inbox.

A chargeback is when a customer disputes a payment made to your online store, asking their credit card company to reverse the charge. Such Chargebacks happen for various reasons, for example if customer didn't get what they ordered or were just not satisfied with your product.

These chargebacks will severely reduce your business profit margins. Not only do they result in loss of the sale, but there are also extra platform fees to deal with. Plus, your business reputation takes a hit, which can spoil your customer relation and trust. 

As an eCommerce store owner, you're in a constant struggle to protect your revenue and maintain a good standing with your customers.

Here, ChargePay breaks down the ins and outs of eCommerce chargebacks in simple terms. We'll explore why they happen, what they cost, and most importantly, how you can prevent them from happening in the first place. 

Whether you're new to the eCommerce world or a pro, these expert insights will help you safeguard your hard-earned ecommerce revenue and keep your online business on the right track.

What is an eCommerce Chargeback?

An e-commerce chargeback is a transaction dispute initiated by a customer who believes that an online purchase should not have been charged to their credit card.

When a chargeback occurs, the customer contacts their credit card company to request a refund.

If approved, the credit card company reverses the payment, and the seller is debited for the purchase amount. Chargebacks represent a loss of both the sale and potential additional fees for the seller.

How Do eCommerce Chargebacks Work?

E-commerce chargebacks can be complex, but let's simplify the process. As an online store owner, it's crucial to understand how these ecommerce disputes works.

  1. Customer Dispute: It all starts when a customer, who has made a purchase from your online store, decides that something isn't right. For example, they received a product that didn't meet their expectations or they do not recognize with the transaction.
  2. Contacting the Bank: Instead of reaching out to you first, the customer contacts their bank or credit card company to dispute the charge. They have their concerns, claiming they didn't receive the product or service they paid for.
  3. Bank Investigation: The customer's bank takes their complaint seriously, aiming to protect their customers. They initiate an investigation into the dispute. At this point, your involvement is limited.
  4. Gathering Evidence: The bank collects evidence from both the customer and the merchant (you). This evidence may include transaction records, order details, shipping information, and any communication between you and the customer.
  5. Decision Time: The bank acts as an impartial judge, carefully reviewing the evidence from both sides. They make a decision on whether to approve or deny the customer ecommerce chargeback request.
  6. Outcome: If the bank approves the chargeback, they refund the disputed amount to the customer, and the funds are deducted from your merchant account. It's a loss for you as a store owner. However, you do have the option to appeal the decision, but banks often uphold their initial ruling.
  7. Chargeback Fees: In addition to losing the sale, you may also incur chargeback fees. These fees vary but can further impact your revenue.

After knowing that how ecommerce chargeback works, it is essential to prevent chargebacks. At first, maintaining records of transactions, orders, and customer interactions is crucial. Clear communication with customers and resolving issues timely can also help avoid chargebacks.

If you have too many chargebacks, banks might think something's not right with your business. That's why it's super important to prevent chargebacks in the first place.

6 Ecommerce Chargeback Example To Understand Customer Perspective

Understanding various scenarios from the customer's perspective can help e-commerce store owners comprehend chargeback situations more effectively.

Here are some examples of e-commerce chargebacks disputed by customers:

1. Product Quality Issue

One customer ordered a new phone from an online retailer, but when it arrived it was damaged. Despite contacting the retailer for a refund, they were refused. Consequently, the customer initiated a chargeback with their credit card issuer and was refunded the full amount.

2. Event Cancellation

In another case, a customer purchased tickets to a concert on a ticket resale website.

Unfortunately, the concert was cancelled, and the customer couldn't secure a refund from the website. Subsequently, they initiated a chargeback with their credit card issuer and received a full refund.

3. Unwanted Subscription Charge

A different customer subscribed to a monthly subscription service but forgot to cancel it before the trial period ended.

Despite not using the service, they were charged for the first month. Consequently, they initiated a chargeback with their credit card issuer and were refunded the charge.

4. Incorrect Product Received

Another example is when a customer ordered a dress from an online retailer for a special event.

However, the dress arrived two days before the event, and it was the wrong size. Despite immediate contact with the retailer, they were informed that it was too late to return the dress.

As a result, the customer initiated a chargeback with their credit card issuer and received a full refund.

5. Defective Product

One customer purchased a computer from an online retailer, only to discover that it arrived with a defective screen.

Despite their request for a replacement, the retailer refused. Subsequently, the customer initiated a chargeback with their credit card issuer and was refunded the full amount.

6. Service Accessibility Issue

In a different instance, a customer subscribed to a streaming service but encountered difficulties accessing the content. Despite seeking assistance from the streaming service, they were unable to resolve the issue.

Consequently, the customer initiated a chargeback with their credit card issuer and was refunded the charge.

These chargeback types or reasons illustrate situations where customers felt compelled to dispute charges due to various issues they encountered during their online shopping experience.

Understanding these common scenarios can help e-commerce store owners proactively address these concerns and minimize the occurrence of chargebacks.

Why eCommerce Chargebacks Happens: Merchants Must Know These 4 Reasons

eCommerce chargebacks happen for several reasons, and online store owners like you need to understand them for comprehensive chargeback management in the future. 

Here's why chargebacks can occur:

1. Fraud

E-commerce chargebacks occur primarily due to fraudulent activities involving stolen or counterfeit credit card information. Essentially, this involves unauthorized individuals using someone else's credit card details to make purchases.

Such actions are considered fraudulent and often result in chargebacks.

2. Customer Disputes

Customers may not be satisfied with their purchases, either due to product dissatisfaction or concerns about overcharging.

In such cases, they request a chargeback from their banks to address the issue.

3. Merchant Mistakes

Merchant errors, which are a common reason for e-commerce chargebacks, occur when businesses make mistakes in their transactions.

These errors can take various forms, such as overcharging customers or failing to send the correct items as ordered.

When customers encounter such discrepancies, they often seek to rectify the situation by requesting chargebacks. These chargebacks serve as a means for customers to address and resolve the issues stemming from the merchant's errors.

4. Friendly Fraud

Friendly fraud, a common cause of e-commerce chargebacks, occurs when customers falsely claim they didn't receive the items they ordered, even when they did.

This can lead to chargebacks, impacting both the store's revenue and reputation.

eCommerce Chargeback Rate

eCommerce chargeback rate is like a measuring tool that helps online store owners understand how many chargebacks they're facing compared to the total number of transactions they handle.

You can think of it as a way to see if things are going smoothly with your sales or if there are issues that need attention.

Calculating this rate is not too tricky and with basic knowledge you can also calculate that.

Store Owners just need two numbers: the total number of chargebacks you got and the total number of transactions you processed. 

For instance, let's say you had 10,000 transactions in a month, but you received 100 chargebacks.

If you plug these numbers into the formula, your chargeback rate comes out as 1%.

Now, what's considered a good chargeback rate?

Well, that can vary based on what you're selling, how long you've been in business, and the kind of industry you're in. But here's a helpful tip: It's generally smart to aim for a chargeback rate below 1%.

Remember, a high chargeback rate can indicate trouble.

It might mean customers are not happy with something they bought, or maybe there's an issue with the products you're sending out. And that's not good news for your online store.

That’s why, keeping an eye on your chargeback rate is like checking the health of your business.

If it starts climbing, it's a signal that something might be going wrong. By monitoring and managing your chargeback rate, you can help keep your online store running smoothly and your customers happy.

How to Calculate the eCommerce Chargeback Rate?

To figure out your eCommerce chargeback rate, you'll need to gather some important numbers and follow a simple formula. Don't worry, it's not as complicated as it might sound.

This calculation helps you understand how often customers are requesting chargebacks, which can give you insights into your business's performance.

Here's what you need to do:

  1. Gather the Data You Need: First, collect the necessary information. You want to know two things:
    The total number of chargebacks you've received during a specific period (like a month or a quarter).
    The total number of transactions you've processed during the same period. These are all the purchases customers have made on your online store.
  2. Use the Formula: Now, let's calculate the chargeback rate. You can use this simple formula:
    Chargeback Rate = (Number of Chargebacks / Total Number of Transactions) x 100
    For example, if you had 10 chargebacks out of 1000 transactions, your calculation would look like this:
    Chargeback Rate = (10 / 1000) x 100 = 1%
    This means that 1% of the transactions resulted in chargebacks.
  3. Compare to Industry Benchmarks: Once you have your chargeback rate, it's a good idea to compare it to what's typical in your industry. Many websites and resources online provide industry benchmarks. 

These benchmarks help you understand whether your chargeback rate is high, low, or within the expected range.

If your rate is significantly higher than the industry average, it might be a sign that there's room for improvement in your processes.

Keep in mind that chargebacks can impact your revenue and reputation. By calculating and monitoring your chargeback rate, you can take steps to reduce it and keep your customers satisfied.

Reducing eCommerce Chargeback Rate: 6 Proven Strategies

Reducing your chargeback rate is a crucial task for online store owners like you. By taking a few simple steps, you can safeguard your business from revenue loss and keep your customers satisfied. 

Let's walk through some effective strategies:

1. Implement Strong Fraud Prevention Measures

Protecting your store from fraudulent transactions is essential.

Consider using fraud screening tools that automatically detect suspicious activities. Also, verify the identities of customers, especially for high-value orders to minimize the risk of chargeback fraud

Encourage customers to use strong passwords to secure their accounts, adding an extra layer of ecommerce chargeback protection.

2. Provide Clear and Accurate Information

Transparency is key to reducing chargebacks stemming from customer dissatisfaction. Ensure your product descriptions are detailed and accurate, leaving no room for misunderstandings. 

Clearly outline your shipping policies, including estimated delivery times and any potential delays. This helps manage customer expectations and minimizes disputes.

3. Maintain Responsive Customer Service

A quick and responsive customer service team can nip potential chargebacks in the bud.

Address customer inquiries and concerns promptly, assisting them through any issues they might face. 

By resolving problems before they escalate, you can prevent customers from resorting to chargebacks out of frustration.

4. Use a Reputable Credit Card Processor

Partnering with a trusted credit card processor is essential.

Reputable processors come equipped with built-in fraud prevention measures and can guide you through the chargeback dispute process. Their expertise can be invaluable in managing and preventing chargebacks effectively.

5. Regularly Review Chargeback Reports

Make it a habit to review your chargeback reports frequently. Look for patterns and trends in the reasons for chargebacks.

This analysis can provide insights into areas that may need improvement, allowing you to take proactive measures to prevent future chargebacks.

6. Stay Informed About Chargeback Regulations

Chargeback rules and regulations are subject to change, and staying informed is vital.

Keep yourself up-to-date with the latest industry standards and regulations. This knowledge ensures that your business remains compliant and helps you adapt your strategies accordingly.

What is the Actual Cost of eCommerce Chargebacks and Disputes?

The real cost of eCommerce chargebacks might differ based on a few things, like what kind of things you sell, how big your shop is, and the specific chargeback involved.

But in general, a chargeback can end up costing you about double the original amount of the sale.

Here are some of the costs you need to know about when it comes to such chargebacks:

  1. Chargeback Fees: When you get hit with a chargeback, you usually have to pay a fee to the company like Wells Fargo that handles your payments. This fee can be anywhere from $20 to more than $100, depending on the agreement you have with them.
  2. Product Costs: Sometimes, you might have to give the customer their money back for the item they're disputing. This can be a big deal, especially if what you sell is expensive.
  3. Running Costs: Dealing with chargebacks takes time and effort. You might have to spend money investigating what happened, talking to the customer, and handling the refund. All of this can add up.
  4. Harm to Your Brand: Chargebacks aren't just about money as they can also hurt your reputation. If people see that your business has a history of chargebacks, they might not want to buy from you anymore. This means you could lose out on future sales.

To avoid feeling the financial hit, it's important to do what you can to stop chargebacks from happening in the first place. 

It's a good idea to have clear descriptions of your products, make sure you're delivering on time, and put measures in place to spot and prevent fraud.

How Can You Prevent eCommerce Chargebacks Effectively in 12 Steps?

As an eCommerce store owner, safeguarding your business from chargebacks is crucial to maintaining your revenue and reputation. 

Here are some straightforward and actionable steps you can take to prevent eCommerce chargebacks effectively:

1. Use a Strong Fraud Prevention Program

Protect your business from fraudulent transactions by implementing a robust fraud prevention program. Verify customer identities through methods like email confirmation or phone verification.

Utilize fraud filters that flag suspicious transactions for manual review before processing.

2. Provide Clear and Accurate Terms and Conditions

Transparent communication is key to preventing customer disputes. Ensure that your terms and conditions, refund policies, and shipping details are clearly stated on your website.

It helps customers understand what to expect and reduces the likelihood of chargebacks due to misunderstandings.

3. Respond Quickly to Customer Inquiries

Address customer concerns promptly and professionally. Timely responses show that you value your customers and are committed to resolving issues.

By resolving problems before they escalate to chargebacks, you can maintain customer satisfaction and loyalty.

4. Have a Clear Chargeback Policy

Establish a clear and fair chargeback policy that outlines the steps customers should take if they have an issue with their purchase.

Make sure this policy is easily accessible on your website. Clarity in the process can discourage customers from filing unnecessary chargebacks.

5. Use Available Prevention Tools

Leverage available tools such as address verification services (AVS), card security codes (CVV), and 3-D Secure authentication.

These tools add an extra layer of security to transactions, making it more difficult for fraudulent activities to go unnoticed.

6. Improve Customer Service

Outstanding customer service goes a long way in preventing chargebacks. Train your customer service representatives to be friendly, helpful, and responsive.

A positive shopping experience can dissuade customers from resorting to chargebacks.

7. Better Order Communication

Make sure your customers are fully informed about your return, refund, and cancellation policies before they make a purchase.

Clearly state these policies during the checkout process and in confirmation emails. This minimizes misunderstandings and potential disputes.

8. Eliminate Merchant Error

Thoroughly review your checkout process and billing information to avoid errors.

Any discrepancies can lead to customer frustration and chargebacks. Double-check the accuracy of every transaction before processing.

9. Provide Authentic Marketing

Ensure your marketing materials accurately represent your products or services. Misleading claims can disappoint customers and result in chargebacks.

10. Manage Recurring Payments

If your business involves recurring payments or subscriptions, prioritize security and ease of cancellation.

Customers should be able to manage their subscriptions effortlessly, reducing the likelihood of unauthorized transactions and subsequent chargebacks.

11. Combat Friendly Fraud

Counter-friendly fraud by staying vigilant and responsive.

Quick responses to customer inquiries and having solid fraud prevention measures in place can discourage customers from exploiting the chargeback process.

12. Seek Professional Assistance

If chargebacks remain a challenge, consider enlisting the expertise of a chargeback management company. These professionals specialize in reducing chargeback rates and mitigating financial impacts for businesses like yours.

By implementing these practical strategies, you can significantly reduce the risk of eCommerce chargebacks, protecting your revenue and fostering customer trust. Remember, proactive prevention is the key to a successful and thriving online business.

eCommerce Chargeback Dispute Management with ChargePay

Looking for a way to manage the tricky world of eCommerce chargebacks, ChargePay has got your back.

If you're an online store owner, you know how challenging it can be to deal with chargebacks – those pesky disputes that customers file to reverse payments.

But worry not, because ChargePay is here to simplify the process and help you safeguard your hard-earned revenue.

> Win Chargebacks on Autopilot, Reclaim More Revenue

ChargePay is like your personal chargeback superhero, equipped with AI-powered tools that make winning chargebacks a breeze. Imagine this: over 80% of chargebacks are being tackled and won while you're catching up on some well-deserved sleep.

Yes, you read that right – ChargePay AI takes the reins, contesting chargebacks without you lifting a finger.

> Simple Pricing, No Upfront Fees

Worried about hidden costs? With ChargePay, what you see is what you get. Their straightforward pricing ensures you're not hit with unexpected fees, giving you the peace of mind you deserve.

4 top benefits of using ChargePay services

> AI-Powered Chargeback Wins

ChargePay AI isn't just impressive; it's a game-changer. It automatically generates winning representations for new chargebacks, boosting your chances of success.

This means less manual effort for you and more time to focus on what truly matters – growing your business.

> Real-Time Action for Faster Resolutions

Time is of the essence when it comes to chargebacks. ChargePay responds to chargebacks in real time, ensuring you're on top of things and increasing your chances of resolving disputes quickly.

That's real-time action for real-time results.

> Incredible Win-Rate for Maximum Recovery

Losing revenue to chargebacks hurts, but ChargePay is on a mission to change that. With its remarkable win rate, you can recover up to 80% of the revenue that was once lost. That's money back in your pocket, where it belongs.

> Recover Lost Revenue While You Sleep

Ready to take action? ChargePay empowers you to start recovering lost revenue today.

Their AI-driven chargeback resolution works tirelessly while you sleep, so you can wake up to a healthier bottom line.

> Boost Your Brand Trust and Reputation

As you consistently win chargebacks and protect your revenue, your brand's reputation grows stronger.

Payment providers and customers alike will view your business as trustworthy and reliable, giving you an edge in the competitive eCommerce landscape.

before and after betterment on using ChargePay ecomerce chargeback management

> Integrate with Any Payment Provider

ChargePay is all about convenience. It seamlessly integrates with over 30 payment processors, including big names like PayPal, Shopify, and Stripe.

You don't need to overhaul your payment setup – ChargePay fits right in.

> Win More Chargebacks, Reclaim Lost Revenue

ChargePay AI responds to chargebacks in real time, boosting your chances of winning.

With an average recovery rate that's 3.5 times industry standards, you can rest easy knowing that ChargePay is working hard to keep your revenue safe.

> Easy-to-Use Dashboard for Effortless Management

Managing chargebacks is simple with ChargePay user-friendly dashboard. You can easily track and handle chargebacks, saving you time and streamlining the entire process.

> Join the Ranks of Satisfied Customers

Businesses that have integrated ChargePay rave about the results. With a 3.5x increase in chargeback win rate and a 68% boost in saved revenue, it's clear that ChargePay is making a real impact.

If you're an eCommerce store owner looking to take charge with eCommerce chargebacks management and protect your revenue, ChargePay is the ally you've been waiting for.

Let ChargePay AI-powered tools work their magic and watch as your revenue rebounds and your business thrives with our ecommerce chargeback management solution.

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