How to Fight Chargebacks on the Sell Side

Subscription-based services depend on auto-renewal for forecasting and continued revenue. However, when customers don’t know that they’re being charged on a recurring basis, they are more likely to initiate a chargeback for a refund of their money. This blog post highlights not just how to fight chargebacks, but how to prevent chargebacks when they arise.

A chargeback is the process by which a bank returns money to a cardholder who has filed a dispute against a merchant. Chargebacks are a common way for cardholders to get back their money from merchants when they received faulty or wrongly-advertised products, in the event of fraudulent charges, or if they simply want a refund. Chargeback fraud occurs when a cardholder initiates a credit card chargeback despite intentionally purchasing a product.

The true cost of chargebacks is wild. Not only do issuing banks refund the cost of the item to the cardholder, but the merchant also spends millions on chargeback fees. Further, past a certain threshold, chargeback fees increase, or issuing financial institutions can prevent the merchant from transacting. In fact, every $1 in chargebacks actually cost $2.40 in associated fees, effectively more than doubling its financial impact.

In 2017, sellers lost $31 million due to chargebacks, and even more in fees. While customers are encouraged to file chargebacks only if they cannot resolve the issue with the merchant, 80% will file chargebacks because they didn’t have time to request a refund from the seller.

Understandably, B2B and B2C companies hate chargebacks because of its financial cost, but also because of its reputational cost. Businesses can begin to develop a poor reputation with banks/financial institutions, as well as with customers who rapidly take to social media to air grievances and are quick to leave one-star reviews online.

Most companies just accept chargebacks because they feel ill-equipped to contest them. Fighting chargebacks requires excellent recordkeeping, which most businesses lack. Lots of online marketplace and eCommerce businesses have experienced massive amounts of litigation due to chargebacks. And while there is no fool-proof way to prevent them, there are certain strategies you can implement to reduce the likelihood significantly and win the chargebacks you come against.

Despite the cost, sellers don’t often fight chargebacks because they do not think they can win a chargeback. Many businesses often lack documentation necessary to prove that a purchase was intentionally made. The chargeback process is kinder to cardholders than to merchants, giving the latter between one to two weeks to file the paperwork necessary to contest the chargeback.

Even more, businesses don’t have the time or employ the technology needed to strategize around which disputes to contest and which to leave be. But there with better recordkeeping and sufficient conspicuous notice, you can prevent and fight credit card chargebacks more efficiently.

The chargeback process is a super complex one that is skewed in favor of the consumer rather than the merchant. After a cardholder files a chargeback claim with their bank, the merchant can either accept or reject it.

When merchants accept the chargeback, the money is refunded and the merchant pays the chargeback fee. If a merchant decides to contest the chargeback, however, then the merchant often has less than 2 weeks to review the claim, gather evidence, and present their documents to the acquiring bank.

There are far more steps involved with varying levels of complexity, and unless a business keeps excellent records that they can pull up with a moment’s notice, it’s hard to fight and win chargebacks.

Though implementing these changes can help reduce chargebacks significantly, there is no way to get rid of them completely, especially because of the prevalence of “friendly fraud.” But rather than just accepting all the chargebacks disputes brought against you, be prepared to fight them via representment with excellent recordkeeping. This is how you win a chargeback as a seller.

Representment is the process of contesting a chargeback. In order to successfully dispute a chargeback, merchants must be prepared to present compelling evidence proving that the purchase was intentional and that there was no error on your part. Evidence includes:

• Information about the credit card
• Order forms
• Data stamps with IP addresses that can be cross-referenced with past transactions.
• Information about any terms or contracts accepted as part of the checkout process.

However, depending on the credit card or bank, merchants typically have less than two weeks to gather sufficient evidence to challenge a chargeback. Because the turnaround time is so small, most merchants don’t bother to challenge the dispute. This is why it is crucial that businesses have robust recordkeeping with the ability to pull records quickly. If you’re listing auto-renewal terms in your checkout flow, for example, you need to prove what the screen that displayed your terms looked like.

Without these records, you will have a hard time recouping the money you’d lose to chargebacks.

Fighting chargebacks may be difficult, but not impossible. When a customer uses your subscription-based service, it is important that they know they are signing up for monthly payments. This seems like it goes without saying, but you may be surprised by the number of companies that don’t notify customers of recurring charges.

Provide conspicuous notice of your online legal agreements to users

Like any contract you enter, both parties need to be clear on the terms of engagement, otherwise the likelihood that one party will bring a dispute against another increases significantly. This has been the case for subscription-based services that don’t notify customers when they will receive a recurring charge. These companies often failed to provide conspicuous notice of auto-renewal, which left customers confused about charges to their account and eager to initiate chargebacks. Transparency goes a long way in helping merchants keep their money.

Including language about your auto-renewal in the text below/near your sign up or check out button is another conspicuous way to notify customers that will be charged multiple times. This way, when they do go forward with the purchase, you can point to the notice as evidence that the customer was notified before completing their purchase. 

Present the auto-renewal notice as its own clickwrap agreement

Some companies include notice of a recurring charge inside their Terms of Use, which are hyperlinked near the sign-up/check-out buttons. However, most consumers don’t bother reading the Terms before making a purchase, and this is therefore not enough to provide notice of recurring charges.

Rather than hide crucial terms about your auto-renewal policy in your clickwrap Terms of Service (which may or may not be enforceable), make the auto-renewal clause its own clickwrap. That is, during the sign-up or check-out flow, in addition to having users accept your Terms and Conditions and Privacy Policy, include another clickwrap agreement which users check to indicate that they understand they are signing up for a recurring fee.

Maintain back-end records about which customers accepted your agreements

Unless you can prove that a specific user assented to being charged multiple times by accepting an agreement that outlined this, it will be difficult to win a chargeback as a seller. A clickwrap transaction platform is a great solution that allows you to track and manage each agreement you’ve entered into with each customer. 

If you’re ready to dispute your automatic renewal chargeback and win, get a demo of Ironclad’s clickwrap transaction platform.