The Merchant’s Guide to Management

WHITEPAPER Don’t count your chickens before they hatch. To some extent, are like eggs that did Introduction not hatch. You already counted a sale as revenue, only for it to be disputed by the customer, then reversed by the bank a few days later.

A chargeback occurs when cardholders ask their banks to reverse a charge. This could be because the transaction is fraudulent, unauthorized, or due to an unsatisfactory shopping experience with a merchant. If the bank approves the request, it’s forwarded to the merchant who is legally required to reimburse the payment.

As intended, the ability to request a charge be reversed gives shoppers protection against . However, it’s also fertile ground for both real fraud and friendly fraud to flourish.

The most obvious impact of chargebacks on merchants is revenue loss. However, it cuts much deeper, especially considering how competitive the current ecommerce landscape is. For instance, incurring chargebacks leads to wasted customer acquisition spending.

Luckily, merchants are not powerless in the face of chargebacks. There are several things online retailers can do to fight this problem. The key is to know how chargebacks work, the best practices to manage costs and how to increase your success rate.

trustvesta.com 02 A brief history of chargebacks

Chargebacks: 1946 The first multi-merchant credit card During the first half of the 1900s, most of the basics the credit cards that were being issued were proprietary. In 1946, New York banker John Biggins created Charg-It Card, the first card Though you likely that was honored in multiple merchants, but understand a few basic only clients of the Biggins’ Franklin National things about chargebacks, Bank were eligible to get one. the information here is meant to enrich or fill the gaps in your understanding of the history, how they work and other foundational knowledge. 1958 The first card with In 1958, BankAmericard was launched, which was the first credit card with revolving credit and could be used at any participating merchants. Here’s something interesting... Instead of applying for a card, BankAmericard shipped cards to random people. This created a problem as some of those who received a card in the mail didn’t have the financial capacity to repay the money they owed.

1968 Creation of the Truth in Lending Act In 1968, the Truth in Lending Act (TILA) was passed to calm fears associated with using bank cards. The TILA required lenders to disclose credit terms that consumers could easily understand.

trustvesta.com 03 Launch of the Fair Credit Billing Act 1974 (FCBA)

In 1974, Congress amended the Truth in Lending Act which gave birth to the Fair Credit Billing Act. This was arguably the first law that enabled credit card holders to dispute charges. The FCBA allowed cardholders to dispute charges that were at least $50 and met the following conditions: • Unauthorized charges • The amount charged was incorrect • Charges for goods that the customers did not receive or accept • The charge reflects a wrong date • Calculation errors • The goods were not as described or damaged

Enactment of the Electronic 1978 Fund Transfer Act

The TILA and the FCBA only covered credit card holders. In 1978, the Electronic Fund Transfer Act was passed to give the same protection to holders, although its provisions were not as comprehensive as the FCBA.

trustvesta.com 04 One of the most crucial steps in fighting chargebacks is knowing the reasons The 5 most why customers file for refunds with their common banks in the first place. reasons for Let’s get into the minds of your chargebacks customers and explore their top motivations and intentions when they file for chargebacks.

“I believe I’ve been the target of fraud.”

Fraud is the most legitimate reason for chargebacks and exactly why chargeback- 1 related laws were created in the first place.

30% of all chargeback claims 30% are filed due to unauthorized transactions.

trustvesta.com 05 “I didn’t receive my order.”

Lost parcels, issues with courier services, stock issues, delays in order preparation —there are a host of reasons for goods not 2 reaching your customers. How do you know whether your customers are telling the truth or just avoiding paying for some reason? (More on this later).

Not receiving an online order is the second most common reason shoppers file 26% for chargebacks, accounting for 26% of all claims.

“This isn’t what I ordered.”

If a customer ordered a fitted sheet for a queen size bed and received one for a king size bed, they can (and will) file a chargeback if unable to sort things out on their own with 3 the merchant.

This type of chargeback 15% represents 15% of all claims made.

trustvesta.com 06 “Item is not as described.”

This is arguably the most disputed, sensitive and controversial type of chargeback. When customers feel they were deceived into buying a product, they (understandably) 4 want their money back. This is closely related to another common chargeback reason: customers filing for credit charge reversals when the items they received didn’t match their expectations. These claims may be legitimate or may be due to unreasonable consumer behaviors.

“I was billed incorrectly.”

Incorrect credit card charges can manifest in different ways. This could mean getting billed twice for the same purchase, getting charged for shipping when it’s supposed to be free, 5 and other clerical errors.

These are just the top overarching reasons customers file for chargebacks. If you’ve experienced chargebacks before, you probably already know that there are additional causes represented by reason codes. That said, understanding the above-mentioned reasons cover the most common—and most costly—types of chargebacks that plague merchants.

trustvesta.com 07 An overview of the chargeback process One major complaint of merchants when it comes to the chargeback process is it’s too complicated. In an attempt to simplify things, we created the diagram below.

The issuing bank Is the dispute Yes valid? immediately issues credit to the customer and forwards the dispute to the card network. No Customer calls their Issuing bank reviews issuing bank to file the dispute and a disupute decides whether it’ End of the valid or not. chargeback process

No

Does the merchant dispute the chargeback?

The merchant reviews The The card network facilities the chargeback and forwards the chargeback the reversal of funds from the Yes decides whether to to the merchant. merchant’s bank account via dispute it or not. an acquirer. This part of the process involves fees that are later passed on to the merchant The acquiring bank Is the reviews the evidence compelling and forwards evidence The merchant wins and the it to the card network. sufficent? Yes chargeback is reversed. The The card network customer loses the credit that passes the evidence was initially given. The merchant gathers to the issuing bank for No compelling evidence related final review. to the transaction in question and forwards it to the The merchant loses acquiring bank. and the customer retains the credit.

The above diagram can have additional steps if $250 charge or more (some card networks the cardholder decides to dispute again. If the impose fines from $500 to $900). cardholder opts to do so, the entire process starts again. This is called pre-arbitration. If This is why a number of merchants are the merchant wins the pre-arbitration, the hesitant to dispute chargebacks, especially cardholder can dispute again and the issuing because only 21% of chargeback disputes are bank starts the arbitration process. This will ruled in favor of ecommerce retailers. automatically incur a $250 charge against the merchant. The merchant will recoup this That leads to the billion-dollar question amount if they win the arbitration. However, if (figurative and literal: How can chargebacks the merchant loses, it will incur an additional potentially cripple your business?

trustvesta.com 08 $40 A multi-billion dollar problem Merchants are currently losing upwards of Billion $40 billion annually to chargebacks. In many The of these cases, the online retailers were not at fault, but they still shoulder the burden frightening of lost revenue, unrecoverable goods and chargeback fees for the disputes they lose. facts on how These chargeback-related costs force several merchants to raise their prices to recover chargebacks some of their losses. impact e-commerce 49% A product of fraud As mentioned earlier, fraud accounts for most businesses of the chargeback claims filed by shoppers. It’s not surprising that 49% of the revenue merchants lose due to fraud can be attributed The facts are frightening: to chargebacks. Repercussions of chargebacks in the e-commerce industry are well documented. They’re 20% Growing at an alarming rate widespread and they Chargebacks are bulldozing the e-commerce hamper the growth of landscape, and increasing at an alarming hardworking merchants like rate. The number of chargebacks online yourself. merchants need to deal with is growing by 20% annually. It’s time to face some scary statistics:

Consumers are pulling the 58% trigger on filing chargebacks

In an ideal world, chargebacks should be the last resort of consumers. In the case of unmet expectations, defective goods, and wrong products delivered, the customers should reach out to the merchants first to sort things out. However, 58% of shoppers immediately contact their banks to file for a chargeback.

trustvesta.com 09 Merchants on the losing 18% end of chargeback disputes

Merchants are not taking chargebacks lying down. In fact, 80% of merchants dispute chargebacks they believe are illegitimate. However, only 18% of online retailers are winning more than 60% of their chargeback disputes. This means that most of the time, the majority of merchants are losing and are bearing the high costs involved in the chargeback dispute process.

71% Not-so-friendly fraud Among all chargeback claims filed, 71% are chargeback fraud and friendly fraud. There’s a slight difference between the two. Friendly fraud involves chargebacks filed because of honest mistakes from customers (i.e. they didn’t recognize a specific legitimate charge on their credit card). Chargeback fraud involves customers trying to use their right to file chargebacks to avoid paying for goods they purchased.

$45.27 Wasted Customer Acquisition Spend The average cost per acquisition (CAC) or the cost to acquire a new customer in ecommerce is $45 This means that aside from the revenue and the fees that merchants lose due to chargebacks, the money they spent in acquiring new customers also goes down the drain.

trustvesta.com 010 If chargebacks are left unchecked, you can easily hemorrhage hard-earned revenue. There are other risks associated with chargebacks. For instance, a high chargeback ratio can lead to the cancellation of your merchant account. The account preventing you from accepting payments from that specific payment channel. This will lead to further customer and revenue loss.

The statistics are indeed scary.

Fortunately, it’s not all doom and gloom for merchants. In fact, merchants are far from being helpless when it comes to preventing or minimizing chargebacks.

trustvesta.com 011 The 10 “The worst time to develop a plan is when you get a chargeback. Chargebacks can catch owners by commandments surprise very often, but then they have a minimal of chargeback amount of time to respond, so there’s no time to management learn what it is or how to respond.” – Chip Rogers President and CEO, Asian American Hotel Owners Association

The question is not whether chargebacks will happen, but rather: How strong are the defenses you put in place to minimize their effects and how prepared are you to mitigate loss if you get hit with a chargeback claim?

trustvesta.com 012 Vesta’s 10 commandments • The chargeback amount cannot exceed the transaction amount of chargeback management • Chargebacks cannot be claimed as a chargeback remedy for cashback transactions

• For orders that were delivered late, customers should first attempt to return the products to get a refund from the merchant before filing for a chargeback

• For chargebacks with reason codes Know thy requiring customers to sort things out with the merchants first, the issuing rights as a bank has the responsibility to verify that a customer has contacted the merchant merchant before entertaining a chargeback claim • In cases of returned items, the issuing bank should wait 15 days Just as consumers have rights to file before processing a chargeback to give for chargebacks, the law also affords the merchant an opportunity to respond merchants certain rights to protect themselves from malicious chargeback • A chargeback should be filed within the claims. These rights include the following: allowable time period

• All chargeback process steps should be completed before moving the dispute to pre-arbitration and arbitration

• All merchants have the right to chargeback representment or to dispute chargebacks using all legal means

You shouldn’t be shy in exercising these rights to protect your business from chargebacks, especially if you have compelling evidence to prove that a chargeback was lodged against you incorrectly. 1 trustvesta.com 013 • Choose a secure payment gateway Strengthen your that uses a dynamic risks database to increase fraud prevention fraud protection while allowing legitimate orders to go through

• If available and possible, choose The equation is quite simple: a merchant solution that combines Low fraud = low chargebacks. merchant processing and settlement, fraud prevention, and Of course, this is easier said than done. chargeback management It takes a strategic mix of good fraud detection and prevention practices and • Use a multi-layered authorization and technologies to achieve this: verification system

• Use automated fraud detection and prevention tools. Budget permitting, invest in artificial intelligence or machine learning fraud prevention technology

• Use manual reviews periodically to allow your fraud managers to understand what transactions were automatically accepted, declined, and submitted for further evaluation

If you win the battle against fraud, you’re preventing the biggest potential source of chargebacks that might hurt your business.

2 trustvesta.com 014 • Proof of delivery Signed delivery receipts to prove that your customers received the goods you shipped Thou shall • Communications log Documented communications between you and your customers pertaining to the collect data disputed transaction • Address matches Proof of a matching for possible addresses bolster your chance that the transaction was legitimately made (customer name matches billing address, disputes customer name matches shipping address, shipping address matches billing address). Data is the biggest ally of merchants in disputing wrongfully filed chargebacks • Purchase history If a customer against them. The only way to win has purchased an item from you before, chargeback disputes is to gather compelling especially if the customer has purchased evidence that you held up your end of the a similar item involved in the transaction bargain. in dispute

• Email Should match with the email Here are the important data that you need provided by the customer during the time to collect: of the transaction

• Successful payment results The billing/shipping address of the transaction matches the billing address of the cardholder in the issuing bank’s records. This also refers to previous transactions made by the same cardholder using the same identity and card information that didn’t result in a chargeback.

• Browsing data The transaction was made using devices used by the cardholder in other transactions 3 trustvesta.com 015 Make sure your customers can easily Use a clear recognize that a charge on their credit card statement came from you. Using your payment company’s trade name instead of your online store’s name can create confusion descriptor among shoppers and may flag a legitimate transaction as fraudulent. 4

trustvesta.com 016 “Padding” your product descriptions to Provide accurate make them more attractive and lure buyers is a surefire way to incur chargebacks.It product creates unrealistic expectations among shoppers. This will not only cost you money descriptions in chargebacks but will also ruin your reputation.

When shoppers read your product descriptions, they should clearly know what they will be getting in the mail. Provide a detailed description, photos, and other visual aids. If there are discrepancies from product to product because of production, 5 make sure to mention them.

trustvesta.com 017 To avoid chargebacks due to late Ensure deliveries, make sure that you have a solid procurement/production, assembly, and thy delivery shipping timelines. Employ good stock management practices. Your fulfillment timelines center should be aware of your delivery schedule. The courier you use should be reliable. In the event that you cannot meet are met the agreed delivery date, communicate with the customers and take the appropriate 6 steps, before the delivery date arrives.

trustvesta.com 018 Instead of filing a chargeback with their banks, you want your customers to reach Communicate a out to you and facilitate a refund and return for products that did not meet clear return and their expectations. Make sure that your return and refund policies are prominently refund policy displayed on all relevant channels such as your website, social media channels, order confirmation emails and receipts. 7

trustvesta.com 019 If your customers feel that it would be Provide five-star easier to talk to their banks than to sort things out with you, they will immediately customer service file for a chargeback to get their money back instead of using it as a last resort. Excellent customer service is not only a non-negotiable when it comes to customer acquisition and retention. It is also a necessary ingredient for chargeback minimization. 8

trustvesta.com 020 Investing in fraud-related chargeback guarantees is similar to investing in insurance policies. For instance, Vesta’s Invest in Payment Guarantee solution covers funds for all accepted CNP transactions with no liability to merchants for fraud- fraud-related related chargebacks. Merchants incur zero chargebacks, fines or fees related to third- chargeback party fraud and unauthorized charges.

guarantees The reality is at some point, you will be hit with fraud-related chargebacks. The volume of chargebacks can be higher or lower depending on the season (i.e. peak shopping seasons are often associated with higher chargebacks). Having a chargeback guarantee minimizes the financial loss on 9 your end.

trustvesta.com 021 While we all want to dispute every chargeback that comes our way, we do not recommend fighting all chargebacks Choose thy tooth and nail. Remember, the chargeback process favors customers more than merchants. Evaluate the situation. Does the chargeback chargeback include a minimal amount? Is the reason behind the chargeback (i.e. lost battles wisely goods) difficult to challenge? Do you have enough compelling evidence to argue your case? There will be times when disputing a chargeback will only result in more lost money and time. Choose your battles strategically.

Implementing these 10 strategies does not guarantee that your chargebacks will disappear overnight, nor can it guarantee that you will have zero chargebacks moving forward. Realistically speaking, no merchant is chargeback-proof.

That said, implementing these 10 chargeback management commandments gives you a comprehensive defense against chargebacks. They also ensure that chargebacks will not make a significant dent on your profitability.

10 trustvesta.com 022 While chargebacks are not inherently evil, using it inappropriately and maliciously can hurt merchants. It’s an Final words: ugly truth everyone in the ecommerce business has to face, manage and You’re in charge mitigate. And just like any crisis, your preparedness to deal with chargebacks can spell the difference between failure and success.

Are you looking for a chargeback mitigation and management partner you can trust? Vesta is here for you. Vesta Corporation is a pioneer in processing fully guaranteed Card Not Present (CNP) payment transactions for ecommerce merchants. We offer scalable protection payment solutions and patented fraud protection services. We focus on protecting your revenue from chargebacks and fraud so you can focus on your company’s strategic growth. Our team is ready to help you.

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