Chargebacks are easier to manage than you may think

The restrictions caused by COVID-19 have impacted every industry. Overall, this has meant a much lower rate of transactions, especially for payments at point of sale.

On the other side, customer behavior and purchasing volume through delivery companies, online marketplaces and platforms, online retailers and electronic stores have increased. With more online orders, it’s inevitable that refunds will be higher than usual. In fact, online purchases are three times more likely to be returned than in-store purchases.

In most cases when buying goods and services, customers can ask for a refund directly from the business within a refund policy. Sometimes though, the refund request may not be accepted by the business, for a variety of reasons such as a damaged product being returned when stated otherwise. If this differing of opinion occurs, the customer may request a chargeback.

Chargebacks sound like refunds but they’re very different. With a chargeback, the customer contacts the bank directly to take money from the account of the business concerned. As opposed to a refund where the customer only deals with the business.

Any fees associated with chargebacks are significantly higher than the refund ones too, which makes chargebacks quite expensive to process.

In this article we’ll help you understand how to handle chargebacks, disputes, and the risk of fraud you may face. And, provide a clearer picture of why chargebacks are a good thing for you and your customers in the long run, if you handle them properly.

A chargeback is a transaction reversal initiated by a customer’s bank after the shopper disagrees with a charge on his or her card. It is meant as a consumer protection mechanism against fraudulent activity committed by illegitimate merchants or individuals.

The chargeback process can be very different for each payment provider. On a basic level, once a customer requests a chargeback, and the bank confirms that it’s a valid request, funds are then removed from the merchant’s account and returned to the customer. In a bit more detail, it usually looks like this:

During this unpredictable time, you can reflect and focus on smaller details in your business that can impact the amount of chargebacks you may face. Creating a solid strategy now will help you avoid chargebacks and further solidify your business for when normal service resumes.

Go above and beyond: Your customer experience needs to be outstanding.

Act quickly: Focus on premium customer service.

Stay alert: Not all fraud is the same.

After you receive a chargeback you can either accept it, or defend against it. If you’re experiencing an increased volume of requests, here are some best practices we recommend.

Keep an eye on what chargebacks you’re receiving. It’s an ongoing reviewal process and only when you have strong evidence that the transaction was legitimate should you dispute.

Example situations when you would accept a chargeback

Explore the possibility of setting up a refund reserve to ensure there’s a sufficient balance if you wish to send refunds automatically.

Ensure you have optimal risk processes in place to combat payment fraud such as refund fraud and account takeovers.

Both Mastercard and Visa are suspending their Excessive Chargeback Compliance programs for the next four months for applicable merchants. Under these programs, the schemes set thresholds to define “normal” chargeback levels for businesses. COVID-19 might hamper some merchants’ ability to deliver their products or services, which could increase the number of chargebacks they experience.

By suspending their programs it means these merchants will not be flagged in the case of an elevated chargeback-to-sales ratio and, correspondingly, no financial penalties will apply during this time.

These programs are risk-monitoring solutions and have no impact on chargebacks. Merchants still can, and do, receive chargebacks from these schemes, but they won't be considered "risky" if their chargeback to transaction volume ratio grows.

With the continued uncertainty surrounding the coronavirus outbreak, it’s a good time to be proactive and take steps to prevent and fight disputes. We are one of the payment industry’s leading experts in risk management and we are here to help.

For more information, we have in-depth documentation on Risk Management in our docs environment, and if you’re an Adyen customer you can head over to the updates section in the Adyen Customer Area.