Chargeback Management 101 [Full Guide] | Chargebackhit Blog

Chargeback Management Essentials

chargeback management

Sellers must bring together expertise, strategy, and tools to prevent and fight chargebacks. This article will dive into what a chargeback management strategy should comprise. We will also get into details about how it can be implemented from an internal and external perspective.

What Is Chargeback Management?

It is a part of a strategy to reduce the negative impacts of chargebacks. It can help a company manage and prevent disputes but also recover revenue from fraud. A chargeback management approach focuses on identifying disputes by the source, finding prevention solutions, and fighting them when a non-valid claim is the core issue. Solutions like the ones Chargebackhit offer will help you manage these disputes and avoid more revenue losses.

Chargeback Management Resources

There are different solutions for chargeback management with various features and prices. Merchants should choose the ones that best serve their business. The management tools can be divided into three categories:

  • SaaS (Software as a Service) – Less expensive than an outsourced solution and fully controlled by the merchant.
  • Fully Managed – Outsourced chargeback management from an experienced provider is more expensive, but the seller has less responsibility.
  • Hybrid Solutions – A mix of SaaS and outsourced services that gives more flexibility but requires more coordination across systems.

A seller can either allocate an internal team, hire an external team, or have a hybrid solution. According to the 2021 Payment Risk Mitigation Survey, 31% of the merchants had their dispute management under the responsibility of an outsourced provider. Still, 18% of sellers referred to having a hybrid model with internal teams and external vendors.

Chargeback Cost

Some chargebacks costs should be known by sellers, such as:

  • Fees – the amount to cover banks’ costs resulting from processing these disputes
  • Marketing – the cost of promoting the item
  • Merchandising – the costs for a lost sale and the item
  • Operations – costs from production until its delivery

Ultimately, the cost for merchants will be to have the debit and credit transactions blocked by the bank.

Why Do Chargebacks Happen?

Chargebacks happen when a cardholder disputes a commercial transaction. Its primary purpose is to refund the client with a valid claim, but there are numerous reasons for disputes, and sometimes they are not legitimate.

In theory, they exist to protect cardholders from fraud or merchant errors. Nowadays, everything seems like a reasonable reason for it. Friendly frauds are getting more frequent, representing 70% of credit card fraud (FIS Global, 2020).

Chargeback Management Strategy

It is essential to find the real reasons behind each case to identify the type of dispute and be able to adapt the strategy. This is the first step to reducing chargebacks, and merchants should not underestimate it. Only then can you match it to the source.

There are three primary sources of chargeback: criminal fraud, merchant errors, and friendly fraud. Criminal fraud happens when a third party uses a stolen payment card or account, whereas friendly fraud is an illegitimate claim from cardholders. In fact, according to FIS, 9 in 10 sellers lost revenue because of payment fraud. On the other hand, merchant errors are an internal issue of the company, related to how its operations and processes are handled.

For each one, sellers need to have a different strategy with specific tools and tactics:

  • Criminal fraud – Many solutions are available here: fraud scoring, verification tools from card brands, internal processes review, and implementation of detection procedures.
  • Friendly fraud – It is hard to prevent. Alerts are a great option to let merchants provide additional transaction information to try to stop the dispute. Another option is to reverse it through representment by fighting illegitimate claims.
  • Merchant errors – Easy to prevent. However, a thorough evaluation of the business is needed, and it is more effective if done by a third party. In this case, policies and processes usually need to be reviewed.

Can I Handle Chargeback Management Internally?

Having an internal team responsible for chargeback management is always a possibility. This means that its structure is based on a framework built by the company, except for some technology infrastructure that a third party can eventually provide. The seller will be responsible for all the data collection and analysis, vulnerabilities evaluation, and decisions. Such an approach can reduce costs, and the company keeps total control of the process. However, it also means full responsibility for the management process with limited transaction data to make a decision.

On the other hand, if sellers outsource chargeback management, they can have a customized solution with access to a larger volume of precise data and an automated decision based on Artificial Intelligence. The service provider’s expertise also plays a big part in optimizing practices. Moreover, they are usually more informed about card network regulations. In this case, the main weakness can be that some providers may not have a complete offer that covers merchants’ specific needs.

In summary, in-house management is viable but not the most efficient option. If you are not contemplating completely outsourced chargeback management, combining both may be an excellent option for your business. You just have to find the existing solutions that fit your strategy.

Essential Aspects of Dispute Management

According to FIS, 55% of merchants have higher chargeback levels. Therefore, implementing dispute management is vital, but there are various aspects to consider, as highlighted below.

Chargeback Management Software

It is a platform to automate prevention, stop disputes and contest illegitimate ones. A chargeback management software is crucial to save time, recover revenue and lower the chargeback ratio. Incorporated in a management strategy, it will assist with analyzing data, identifying potential fraud, and discovering processing errors. Usually,​ the management software integrates tools such as Order Insight, Consumer Clarity, and Ethoca Alerts.

Chargeback Ratio

It is the number of chargebacks compared to the sales, and each card network calculates it differently. For instance, Visa and Mastercard have ratio limits fixed at 0.9% and 1% of monthly transactions, respectively. It offers insight into how well your business manages these disputes.

Net Win Rate

It is a KPI as necessary as the chargeback ratio because it gives the proportion of chargebacks you have fought and recovered through representment. Basically, it helps you understand if you have a successful dispute strategy to fight friendly fraud effectively.

Customized Chargeback Reporting

It is a crucial factor in mitigating risk. In fact, merchants should invest in an efficient reporting system to analyze all the available data from chargebacks and avoid future disputes. The data that can be included depends on each merchant and business necessities, but it is usually related to chargeback liabilities, as well as operational, fraud, and transaction variables. Some examples are reason codes, merchant ID, chargeback amount, transaction method, product/service type, and cardholder activity.

Policies

The reasons for refunding a client must be explicit and easy to understand. It should be at least outlined in your Terms and Services to help you prevent customer disputes.

Comprehensive Chargeback Management Services

Merchants can profit from tailored dispute management software to collect and analyze data. This software can then give automatic responses based on previously defined parameters and help you with operational improvements to reduce chargebacks.

A chargeback management software should include:

  • Fraud detection tools – some options are geolocation, proxy piercing, device fingerprinting, address verification, velocity checks, biometrics, fraud blacklists, machine learning, 3-D Secure, and fraud scoring.
  • Blacklist integrated with CRM – you can identify customers’ past behaviors related to chargebacks.
  • Analytics and solution integration – you must choose the right tools and services for your business to ​​detect and prevent chargebacks.

Chargebaсkhit as a Part of Your Chargeback Management Strategy

Indeed, managing chargebacks is not free from costs. However, with a good strategy implemented, the benefits outperform them. Investing in management may be an adequate alternative for merchants that often have to deal with disputes.

Chargebackhit provides a complete set of solutions to prevent, resolve and recover chargebacks. It is essential for every management strategy so that you can prevent and fight chargebacks with reliable data. After all, good management reflects secure transactions and customer satisfaction.

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