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Back to basics: What is a credit card chargeback?

Credit card chargebacks are a common feature in the life of any high risk business owner. You can take effective measures to prevent the frequency of chargebacks by implementing excellent chargeback mitigation programs and systems, but be aware that friendly fraud, fraudulent transactions, and chargebacks are practically inevitable. As high risk credit card processing service providers and experts, we want to help high risk site owners get the insights they need to succeed and grow. This is why we want to bring it back to basics in this article.

At its core, a chargeback is what happens when the issuing bank initiates a return of funds to a customer from a merchant’s bank (acquiring bank). A customer files a chargeback with their bank, resulting in the reversal of a previous credit card transaction between an unsatisfied customer and a business.

Want to find out more about our chargeback mitigation system? See what we do and how we can help decrease chargeback frequencies and mitigate chargebacks in near-real-time here.

If you need specialized high risk credit card processing, simply get in touch with us here. We’re more than happy to help.

For now, let’s get back to credit card chargebacks.

What makes a credit card chargeback happen?

Before we discuss credit card chargebacks in more detail, there is one overall recommendation we want to stress: if you’re selling high risk products you need to ensure that your high risk payment processing comes from a high risk merchant services provider. They are far better at handling and processing credit card payments for industries and businesses that routinely experience chargebacks. Now, let’s get back to what causes credit card chargebacks.

When we take all of the major credit card companies into account (American Express, Discover, Mastercard, and Visa), there is a massive list of 151 different reason codes categorizing credit card chargebacks.

However, when we want to dissect why chargebacks happen, we can usually place these 151 different reasons into five general categories: 1) fraud and “no authorization”, 2) products and/or services not as described/expected, 3) customer canceled recurring billing, 4) EMV liability shift, and 5) other.

We won’t look too much into the different category codes themselves, and we’ll focus on the most common reasons why chargebacks are initiated by issuing banks and customers.

You might be interested in the following resources offering chargeback information:

Fraud and “no authorization” chargebacks

Fraud and no authorization charges are by far the most common causes of chargebacks. In fact, they make up almost half of all the chargebacks we encounter when helping online business owners with fraud prevention.

In order to deal with these types of chargebacks, it’s important to understand the “what” and “why” behind the credit card chargeback. Since we specialize in helping high risk e-commerce websites, we’ll outline the most common fraudulent or no authorization chargebacks relevant to e-commerce:

  1. Identity fraud in a card-not-present transaction.
  2. Fraudulently charging multiple times for the same transaction.
  3. The cardholder does not recognize the transaction.
  4. The merchant violates card network rules.

How to minimize the frequency of fraud and “no authorization” credit card chargebacks

There are a few things you can do by yourself in order to reduce the likelihood of these types of chargebacks.

  • Issue: Identity fraud in a card-not-present transaction.
  • Action: Implement essential pre-sale tools, like AVS and card identification numbers.

It’s very difficult to truly eliminate all instances of identity fraud from the seller’s end. However, using Address Verification Systems (AVS) ensures that the address the customer entered for their billing information is the address on record with their bank. This can reduce the likelihood of identity fraud purchases being made at your online store.

  • Issue: Fraudulently charging multiple times for the same transaction.
  • Action: Correctly set up your payment gateway and e-commerce software.

Charging customers multiple times for the same transaction obviously isn’t a situation you want occurring. However, it can happen if your e-commerce software isn’t set up properly, or if your gateway isn’t used correctly. We generally recommend getting expert assistance from your provider’s customer or tech support.

  • Issue: The cardholder does not recognize the transaction or believes it to be fraudulent.
  • Action: Make effective use of your billing descriptors.

You should check with your processor whether you can use clear, helpful descriptors. If so, we can create purchase specific descriptions next to your business name which will appear on the cardholder’s statement. Also, we recommend that you double-check with your processor whether your default name is set to your legal name or your “doing business name.” If there’s a discrepancy between the two, the customer might not recognize your name, and the result will be an unnecessary credit card chargeback.

  • Issue: The merchant violates card network rules or processes an excessive amount of fraudulent transactions.
  • Action: Implement chargeback mitigation programs and software.

When it comes to dealing with card network rules and managing the amount of reported fraudulent transactions, your best option is to implement a chargeback mitigation system. This is particularly important these days, as Visa has implemented new chargeback ratios this year (2019) after issuing a new chargeback dispute process at the end of 2018.

You might be interested in the following resources on chargeback mitigation:

Get expert credit card chargeback mitigation help and high risk processing

While we’ve outlined some effective methods you can use to mitigate chargebacks, the nature of high risk e-commerce inherently means having to manage chargeback risks. At E-Commerce 4 IM, we specialize in offering expert chargeback mitigation programs and high risk credit card processing for various high risk businesses. We can also recommend merchant accounts that are ideal for high risk processing.

If you need a chargeback mitigation system or need high risk credit card processing, contact us today. We’re more than happy to help and talk about your business’ needs. You can reach us here at any time or call us at 1-800-570-1347.

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