How to Build a Chargeback Program

Chargeback Reduction and Mitigation to Increase Win Rates

Winning chargebacks isn’t a matter of luck. It’s a strategic process.

TL;DR: How to Reduce Chargebacks and Increase Win Rates

• Understand the Root Causes of Chargebacks:
  • Find out why chargebacks are happening. Are they due to fraud, customer dissatisfaction, or merchant errors?
• Set Up Clear and Accessible Policies:
  • Ensure policies are visible and accessible on your website and during the checkout process to set clear expectations.
• Choose the Right Fraud Model:
  • Select the right fraud model that lets you quickly create and test new rules. Make sure it also uses data beyond just the transaction, like device and user behavior, to strengthen your evidence. When a dispute happens, leverage GenAI and the user data to automate your evidence, making the dispute process faster and more effective.
• Empower Your Customer Support Team:
  • Train your support team to handle disputes proactively. Offer solutions like refunds or replacements before a chargeback is initiated.
  • Provide them with Generative AI tools to automate compelling evidence gathering and PSP submission
• Build a Strong Evidence Collection Process
  • Develop standardized procedures for gathering and submitting documentation required for disputes.
• Monitor and Measure Key Metrics:
  • Track key metrics: overall chargeback rate, chargeback rate by card scheme, chargeback reversal rate, dispute volume, and time spent on disputes.

Chargeback mitigation is the bane of every merchant’s existence. Chargebacks cost, on average $400 to dispute. They waste time, erode trust, and can cripple a business if unchecked. In a world where every dollar and every minute counts, reducing chargebacks is a necessity.

But first, let's ensure we understand what a chargeback is before we begin.

A chargeback occurs when a bank forcibly reverses a credit or debit card charge after a customer disputes the transaction or returns the purchased item.

As merchants know, the chargeback is a crucial protection helping consumers reclaim funds from fake merchants and fake suppliers. However for good merchants, they are often subject to abuse, and the problem is consistently getting worse. 

This guide is for fraud prevention experts and beginners. It will help reduce chargebacks, increase win rates, and improve profits.

Understanding the True Cost of Chargebacks

We need to confront the obvious issue: chargebacks are expensive.

For every $100 in chargebacks, merchants face about $240 in costs. This includes all fees and expenses. 

Chargeback costs include:

• Chargeback fees: $15 to $100 per chargeback.
• Lost merchandise: If goods were shipped, the merchant loses the product as well.
• Transaction fees: The original processing fees, typically 1.5-4%.
• Operational costs: Expenses like shipping, packaging, and inventory management. They are often about 20% of revenue.
• Marketing and acquisition costs: Typically 30-40% of revenue spent to acquire the customer.

When all of these costs are combined, the total impact of a $100 chargeback can easily double or more.

But the real cost goes beyond the obvious loss of revenue. Consider the time and resources spent on disputes. Also, think of the risk to your merchant account and the loss of customer trust. Not to mention, each chargeback represents a missed opportunity to resolve the issue before it escalated.

These factors show the need for a strong chargeback reduction strategy.

Diagnosing Your Chargebacks

The first step in reducing chargebacks is diagnosing the underlying issues driving them.

It means analyzing your chargeback data. You need to find trends, common triggers, and possible root causes.

Are most of your chargebacks fraud-related?

Do they stem from customer dissatisfaction due to unclear policies?

Or are they primarily the result of operational errors within your business?

Chargebacks happen for many reasons.

They generally fall into three main categories: fraud, customer dissatisfaction, and merchant errors.

• Fraud: Chargebacks occur when unauthorized transactions are made using stolen payment information.
• Customer Dissatisfaction: Chargebacks occur when customers' expectations aren't met. This is often due to unclear policies or poor communication.
• Merchant Errors: Chargebacks result from mistakes like billing errors or shipping issues.

By categorizing your chargebacks, you can better understand where your vulnerabilities lie.

For example, if a significant portion of your chargebacks is due to fraud, this signals a need for stronger fraud prevention controls. If customer dissatisfaction is common, you may need to rethink your customer service and communication strategies.

Review your chargeback data regularly, breaking it down into these categories. This can help you find the areas that need attention. This diagnosis is key to a good, tailored chargeback prevention strategy.

Importance of Reducing Chargebacks

Have you ever considered how much chargebacks are really costing your business?

Every chargeback takes away revenue, cutting into your profits. But the impact doesn’t stop there. Poor chargeback management can lead to fines from card networks. In some cases, you could even lose the ability to process card payments entirely.

If your chargeback ratio gets too high, you risk being placed in card network monitoring programs like Visa’s Dispute Monitoring Program or Mastercard’s Excessive Chargeback Program. These programs can result in fines, higher fees, or even the loss of your ability to process card payments.

Operationally, managing chargebacks also drains resources.The time and effort spent gathering evidence and filing disputes add up quickly. And never mind the frustration your customers feel—good luck winning them back. 

Their lifetime value? It goes straight to zero.

A strong chargeback strategy is essential for long-term business success.

How to Reducing Chargebacks

Create Clear and Understandable Policies

Confusing return and refund policies frustrate customers, causing chargebacks.

When customers don’t understand what to expect, they’re more likely to dispute a transaction. To reduce disputes and build trust with your customers, make sure your policies are straightforward and easy to find. 

• Avoid legal jargon and provide clear instructions on how to handle returns, refunds, and exchanges. 

This transparency sets customer expectations. It reduces misunderstandings that could lead to chargebacks.

Clear and understandable policies are your first line of defense against chargebacks.

Predict and Prevent Chargebacks

As fraud experts, we know that the key to effectively predicting and preventing chargebacks lies in balancing the approval of legitimate transactions while keeping fraud rates low.

Prevent: An advanced fraud prevention system must do two things. 

1. It must identify fraudulent transactions. It must also ensure that legitimate ones aren't blocked unnecessarily. Accurate risk scoring is crucial. 
2. It minimizes false positives and maximizes revenue. It does this by allowing more genuine transactions without adding friction.

We understand the challenges of reducing fraudulent chargebacks while improving conversion rates. That’s why a comprehensive system that partners closely with your team is essential. By offloading the heavy lifting—fraud detection and risk management—you can focus on growth, not on operations.

Predict: Predictability in fraud costs is another critical component. Variable fraud costs can disrupt forecasting. So, a system to ensure stable, predictable fraud costs is vital. It reduces risk and allows for better financial planning.

As fraud experts, you know the signs of stolen card use. These include sudden spikes in transaction volume and inconsistent activity across locations. 

• A fraud model should analyze thousands of signals. It should detect patterns early to help you block fraud while keeping high acceptance rates. The goal is to catch fraud before it impacts your operations, without disrupting the experience for legitimate users.

Use a predictive approach that guarantees chargebacks when good users go bad. This lets you stay ahead of potential issues. It makes your fraud prevention strategy both proactive and effective.

Choose the Right Fraud Models

When it comes to preventing fraud, there are two primary types of models that merchants can choose from: standard fraud models and chargeback-guaranteed fraud models.

• Standard fraud models detect and prevent fraud. They analyze data points like transaction history, customer behavior, and risk indicators. These models are highly effective at minimizing fraud, and they offer merchants the flexibility to fine-tune their risk tolerance levels.

But, the merchant is liable for chargebacks.

If a fraudulent transaction slips through, the merchant must cover the costs, including chargeback fees and losses.

• Fraud models with chargeback guarantees assume liability for some chargebacks, taking the burden off the merchant. These models typically come with a higher level of scrutiny and stricter risk limits, as the service provider guarantees that it will cover the cost of any chargebacks that occur due to fraud.

This extra protection can appeal to merchants. It helps them reduce fraud costs and financial risk. With a chargeback guarantee, merchants can focus more on growth and less on the potential financial impact of fraud.

Why Some Merchants Choose Both

Some merchants use both standard fraud models and chargeback-guaranteed models. This is part of a layered defense strategy. By combining the strengths of both models, they can better prevent fraud and manage financial risk.

Standard fraud models allow greater flexibility and control over approvals. This can be crucial for maximizing revenue and customer experience.

The chargeback guarantee offers peace of mind. It ensures that, if fraud occurs, the merchant won't absorb the full loss.

This dual approach can help businesses in high-risk industries or have diverse customer bases with varying levels of risk.

Empower Customer Support

Empower your customer support team to resolve issues before they escalate to chargebacks.

Many customers prefer to solve a problem with the merchant. They want to avoid the hassle of filing a chargeback. This makes customer support mediation a critical component of your chargeback prevention strategy.

• Train your support staff to resolve disputes quickly. Offer immediate fixes, like refunds. This will greatly reduce chargebacks. Empowering your team to quickly resolve disputes can boost customer satisfaction and loyalty.

Good customer support can prevent chargebacks. However, disputes can still happen.

Next, we'll discuss how to gather strong evidence to win these disputes.

Build and Organize Compelling Evidence

Strong evidence is key to winning chargeback disputes.

When a chargeback occurs, the burden of proof is on you to demonstrate that the transaction was legitimate. Proper documentation can make all the difference between winning and losing a dispute. Merchants with strong, clear evidence have a much better chance of winning chargeback disputes.

To win, gather and organize all needed documents. These include 

• transaction receipt, 
• communication records, 
• and proof of delivery/usage. 

Using standard templates for submitting evidence can help.

You can greatly improve your ability to determine which chargeback reason codes need specific info. Use the docs and guidelines from the card brands. By aligning your evidence with these requirements, you can improve your dispute outcomes. For instance, Visa's new Compelling Evidence 3.0 gives clear guidelines. It shows the evidence needed to counter certain chargeback claims. This ensures your submissions are both relevant and comprehensive.

Well-organized evidence is essential for successfully challenging chargebacks, which is why we created over 47 
pre-configured variables for evidence packages.

Implement the Stoplight Method

A stoplight method can help you manage chargebacks. It categorizes risk levels and pre-negotiated responses.

This method uses four levels—green, yellow, red, and orange (yes, I know orange isn't on the stoplight)—to categorize your chargeback rates.

These levels are based on your business's risk thresholds.

• Green: When your chargeback rates are low and within acceptable limits, it may be time to take on more risk. This could mean exploring new markets, reassessing your rejection rate, or testing new products.

• Yellow: At this level, more monitoring is required. Chargeback rates are nearing a worrying limit. We need to be more vigilant and make some minor adjustments. This could include tightening your return policies or enhancing fraud detection measures.

• Red: You are close to exceeding the credit card networks' chargeback monitoring programs. At this stage, implement your chargeback management plan. You should have pre negotiated it. It must define who needs to know, how to communicate, and what controls can be adjusted to respond to the fraud spike. This may mean stopping risky activities, increasing fraud checks, and tightening customer communication.

• Orange: This is the most critical level. It means you have crossed the chargeback monitoring program thresholds. At this stage, we need to pull more significant levers. They are typically pre negotiated. They may involve more communication with a wider group of stakeholders. They might implement emergency controls or suspend some activities to lower chargeback rates.

A clear plan for each level allows quick action. It helps manage chargeback risks and ensures effective communication.

This stoplight method lets you manage chargeback risks. Do it before problems escalate. Next, let’s explore some out-of-the-box ideas for further reducing chargebacks.

Automate your Disputes with GenAI ⚡

After organizing compelling evidence and identifying a chargeback you intend to dispute, the high cost of assigning an analyst often means merchants won’t fight below $400. 

This is where Generative AI can help. Sardine’s chargebacks bot has reduced the cost of gathering compelling evidence and formatting it for multiple PSPs and payment partners. 

Monitor and Measure Your Chargebacks

Track key metrics to uncover chargeback trends and gauge performance.

1. Overall Chargeback Rate: It is the percent of transactions that end in chargebacks. It shows the health of your payment processes and customer satisfaction. A high overall chargeback rate suggests that there may be systemic issues within your business that need to be addressed.

2. Chargeback Rate by Card Scheme: Different card schemes (e.g., Visa, Mastercard) may have different rates. Monitoring these rates helps you spot issues with some card providers. This lets you adjust your strategies.

3. Chargeback Reversal Rate: This is the percentage of chargebacks you successfully fight and win. A high reversal rate indicates that your evidence and dispute processes are effective. A low reversal rate may suggest that your documentation needs improvement.

4. Disputes Volume: The total number of disputes shows the frequency of chargeback attempts against your business. A rise in disputes could mean more dissatisfaction or fraud. Both require attention.

5. Chargeback Losses: This metric tracks the cost of chargebacks. It includes the lost transaction, fees, and the cost of managing disputes. Understanding these losses helps you assess the true cost of chargebacks to your business.

6. Time Spent on Chargebacks: Managing chargebacks can be a big burden. Monitoring this metric shows how efficient your dispute process is. It also helps you find ways to improve it.
7. Chargeback Response Time: The time taken to respond to chargebacks, which can impact win rates and financial recovery.
8. Reason Code Trending: Tracking chargeback reason codes can reveal systemic issues. It can help you prioritize your efforts.

By monitoring these metrics, you can understand your chargeback landscape. You can identify trends and apply strategies to reduce chargebacks.

Managing chargebacks and fraud can be a complex and resource-intensive process.

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