Addressing chargebacks: impacts, prevention strategies, and merchant success with payments orchestration
Chargebacks can dramatically impact your end-of-month sales reports.
When too many payment reversals occur due to chargebacks, you may quickly find your business facing a slew of operational and financial challenges.
As a result, most merchants try to avoid chargebacks like the plague.
According to the 2023 Global Ecommerce Payments and Fraud Report, first-party misuse ranks as the second most prevalent fraud attack, with 34% of merchants experiencing it.
While some payment disputes are inevitable, the growing availability of payment methods demands merchants practice exceptional due diligence regarding chargebacks.
A chargeback is a term used to describe the reversal of a payment due to a customer dispute.
Several participants in the payment process can initiate a chargeback, including the cardholder, the cardholder’s bank, or even the card network. Chargebacks can occur for varied reasons depending on the circumstance, such as:
The cardholder’s bank most commonly initiates a chargeback. Following the chargeback initiation, most card networks debit funds from the merchant’s account back to the cardholder’s account.
Customer disputes that lead to chargebacks present significant financial, operational, and administrative implications, making chargeback prevention immensely important.
Although you can dispute chargebacks, the dispute process can be equally daunting, requiring you to collect and provide adequate evidence that a payment was correctly authorized and processed.
The dispute process can take weeks to months of effort, increasing your business’s administrative and operational burdens. In the event of an unsuccessful dispute, you must not only refund the money to the customer but also pay an additional penalty fee to the bank in question.
Even when you successfully dispute a chargeback, accruing too many chargebacks can lead to your business being classified as high-risk by card networks and banks. As a result, you may struggle to find future partnerships with banks and financial institutions.
Aside from the operational toll of chargebacks, additional consequences can include:
Moreover, chargeback fraud can be a pervasive issue for your business, making it pertinent to inhibit the occurrence of chargebacks. Chargeback fraud occurs when customers intentionally dispute a payment despite receiving the correct products or services they purchased.
Preventing chargeback fraud — and chargebacks in general — often requires the following improvements to your payment processing system:
To avoid the consequences of chargebacks, it is vital to consider two additional types of payment reversals that can impact your business as a merchant:
As more time passes between a payment initiation and a reversal, the more complicated it becomes to return funds to a cardholder’s account. Utilizing authorization reversals and refund reversals whenever possible helps you avoid costly fees and operational inefficiencies.
While both authorization and refund reversals can save merchants time, refund reversals can still result in extra interchange fees and lost funds. However, both types of payment reversals are preferable over chargebacks.
Dealing with chargebacks can be a true hassle for merchants, hindering your ability to spend time on business innovation and growth.
At Spreedly, our payment orchestration platform helps prevent and avoid chargebacks by optimizing each transaction for authorization success.
Solutions like Smart Routing and Spreedly’s Advanced Vault help you ensure success during payment processing and keep stored payment information refreshed and secure. Plus, Spreedly provides Level 1 PCI compliance, keeping your system up-to-date on the latest regulatory developments.
Discover how Spreedly works today to experience the advantages of payment orchestration.