How to prevent chargebacks

Jessica Malnik
Jessica Malnik
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How to prevent chargebacks

Chargebacks are not a new issue for tours and attractions, but they can be time-consuming and costly. For instance, chargebacks costs often exceed the disputed amount, with businesses losing about 1.5 to 2.5 times the disputed amount once fees and operational costs are included.

So, choosing a booking platform that not only helps you prevent but also successfully reverse chargebacks pays off. In fact, less than 1% of all transactions on Xola end up as disputes or chargebacks.  Our successful chargeback reversal rates are 42%, which is considerably better than the industry average of 30%. 

In this guide, you’ll learn how to prevent chargebacks in the first place, how to respond and reverse them along with general chargeback rates.

What are chargebacks?

Chargebacks are a process where customers can challenge a credit card transaction on their statement directly with the issuing bank, credit card company, or payment processor. In this payment dispute, the credit card holder directly asks their issuing bank or payment processor to reverse the charge — bypassing the business. 

This process was created through the 1974 Fair Credit Billing Act as a consumer-protection method against credit card fraud. Consumers can also use chargebacks for assistance with billing errors, unresolved customer complaints directed to the business, and unrecognized charges. 

Dispute vs. Chargeback vs. Fraud: What’s the difference?

You may see dispute and chargeback used interchangeably, but there are differences between the two and with chargeback fraud.

Disputes occur when customers have a complaint or disagreement with a business. In a dispute, the customer takes action by either contacting the business, their credit card company, or the issuing bank.

Chargebacks occur when an issuing bank or payment processor directly reverses a credit card payment by a customer. The business has to refund the money and is charged additional fees. A chargeback can be the end result of a dispute and is a process that involves the issuing bank.

Fraud occurs when a customer disputes a valid, legitimate transaction through the payment processor or issuing bank, which results in a chargeback. Not all types of chargeback frauds are the same though. 

Chargeback fraud is a malicious act where the person is deliberately initiating a false dispute with the goal of getting their money back and keeping the item purchased. But, friendly fraud can occur when the consumer makes an honest mistake.  

Most common reasons for chargebacks

There are three primary causes of chargebacks:

  • Mistakes by the business
  • Friendly fraud
  • Criminal fraud

Some common reasons customers file for chargebacks include:

  • The consumer was charged the wrong amount or experienced a billing error. This situation occurs when the business makes a mistake. These billing errors may include charging the wrong amount due to a data entry error, an incorrect billing date, or not providing credit for a return. 
  • The item was different than expected. When products don’t meet consumers’ expectations, they may file for a chargeback instead of contacting the business directly for a refund or exchange. This situation may occur if the customer felt the item didn’t match the product description, expected size, color wasn’t as anticipated, and more.   
  • The item arrived defective, damaged, or missing parts. When the purchased item isn’t in good condition or never arrived, the consumer may opt to contact the issuing bank to handle the issue and get their money back instead of talking to the business.  
  • The item didn’t arrive in a reasonable amount of time or was never received. Customers may file a dispute with the issuing bank if businesses don’t provide the product in an expected amount of time or communicate about delays. 
  • The cardholder didn’t make the purchase, but a family member did. This situation is a type of family fraud or friendly fraud. Many people are unaware that these cases are considered legitimate authorized purchases by issuing banks because household members (including children) are considered legitimate account users. 
  • The consumer was confused about the business’s refund or return policy. Sometimes, people don’t understand the merchant’s return or refund policy, so they request a chargeback instead. 
  • The customer requests a chargeback for a purchase they regret. Buyer’s remorse is a case of friendly fraud. The customer tries to work around a return policy to gain a refund despite not having a good excuse.  
  • The cardholder doesn’t recognize the business name on their credit card statement. When a cardholder doesn’t recognize a purchase, they are likely to dispute the charge through the issuing bank or payment processor. 
  • The cardholder is trying to end a subscription. Instead of canceling the subscription through the business, a consumer may decide it’s easier to initiate a chargeback process to get out of a subscription. 
  • The cardholder forgot they made the purchase. Additionally, sometimes consumers forget they made a purchase, especially if it’s not something they normally buy or it’s from a website or app they haven’t used before.   
  • Information from a stolen credit card was used to make the purchase. Cardholders are legally protected against this type of criminal fraud. However, merchants may not be protected and may still have some financial responsibility in these situations. 
  • The consumer is intentionally trying to get the product for free. Some customers will deliberately initiate a dispute with the issuing bank to try and get the item for free, which is an example of chargeback fraud, sometimes called cyber shoplifting. They ignore return policies and won’t wait for refunds. 

How high chargeback rates can negatively impact your business

Chargebacks impact more than your finances. High chargeback rates can also negatively affect your business’s reputation and, if your chargeback rates are too high, cause you to lose banking privileges.

Chargebacks can lead to additional fees.

Financially, you will lose the money from the sale when you have to reverse the charges. But, you may also have to pay a chargeback fee to the payment processor to cover the costs of resolving the dispute. Additionally, you lose costs you paid to process the original transaction, shipping costs, handling costs, and more. 

Fees vary per payment processor, and some don’t have an additional charge. Also, some will refund the fee if your business ultimately wins the dispute.

Chargebacks can negatively affect your business reputation.

High chargeback claims can result in banks and card issuers negatively viewing your business. If you have too many claims filed against you, you can even be required to enroll in a monitoring program, which can be costly.

Entry into dispute monitoring programs, like the Visa Dispute Monitoring Program, can result in significant consequences for businesses. Dispute monitoring programs are designed to help businesses with high chargeback rates reduce the rate. But if you don’t, you can be charged additional fines, increased processing fees, and required to undergo audits. 

Continued high chargeback rates can result in losing credit card or banking privileges.  

Businesses with continued high chargeback rates are considered high-risk. Some payment processing companies may decide it’s more cost-effective to terminate these high-risk business accounts, especially if remediation efforts haven’t helped.

Some merchants who lose their ability to process credit card payments through regular channels may be able to sign with a processor who specializes in high-risk processing accounts. But this will mean higher costs for your business and the need to maintain a larger account reserve.

However, some accounts that are terminated due to high chargeback rates may be added to the Merchant Alert To Control High-Risk (MATCH) list. If you’re added to this list, you will not be able to qualify for a standard merchant account for at least five years.

What tours and attractions can do to prevent chargebacks from happening in the first place

Regardless of the reason for a chargeback, there are proactive steps you can take to reduce and avoid chargebacks from occurring.

  • Be transparent on your website and in your marketing materials. You should include your terms and conditions clearly on your website and in your marketing materials. Additionally, make it easy for customers to find your business’s contact information, such as email address, website, and phone number, to encourage people to reach out to you with problems instead of their bank. 
  • Make sure you are up front about pricing. People who understand your pricing from the start will be less likely to make a dispute due to pricing concerns. Additionally, providing clear pricing can help you if you need to dispute a chargeback. 
  • Have accurate tour descriptions. Having accurate tour descriptions can reduce the risk of people being dissatisfied. Additionally, providing clear descriptions can make it easier for you if you need to dispute a chargeback. 
  • Don’t engage in shady sales and marketing tactics. Shady sales and marketing tactics leave you open to having dissatisfied customers who don’t trust your business. As a result, they may be more likely to initiate a complaint directly with their issuing bank instead of you. 
  • Address customer complaints in a timely manner. Provide efficient and effective customer service so customers know their concerns are being addressed. This can help reduce the risk of a dissatisfied customer contacting their bank after talking with your business. 
  • Include a clear billing descriptor on statements. When cardholders don’t recognize a charge on their credit card statement, they may initiate a dispute due to suspected fraud. Ensuring your customers can easily recognize your business on their credit card statements can help reduce these chargebacks.  
  • Have a clear and friendly refund policy. Communication with your customers is essential to reduce chargebacks. You want to make sure customers have easy access to your refund policy and that the terms are easy to understand. Additionally, you’ll want customers to be able to start the process when it’s convenient to them, so make sure they can initiate it 24/7. 
  • Use automated booking confirmation emails. Automated booking confirmation emails and texts help remind customers of their transactions, reducing some types of chargebacks. This can also be used as proof in the event of a dispute later on. 

How to spot potential dispute and chargeback warning signs

Spotting disputes, friendly fraud, and chargebacks can be challenging. However, there are things you can do to help prevent or minimize the risk of a dispute or chargeback, such as:

  • Using an automated response program that provides customers with transaction information in real-time.
  • Providing a clear and customer-friendly refund policy that encourages consumers to contact you directly with problems.
  • Sending subscribers notices before a recurring subscription or large payment is charged.
  • Responding swiftly to customer complaints.
  • Providing refunds and cancellations as soon as they’re requested. 
  • Screen for fraudulent orders. 

How to spot potential fraudulent transactions

Here are some warning signs of potential fraudulent transactions to look for:

  • Bookings that are larger than expected or from unknown locations 
  • Conflicting customer information
  • Orders using different or multiple cards and/or billing addresses 
  • Multiple transactions (e.g., three, four, or more) closely placed together using the same card
  • Seeing multiple separate transactions with different customer information from the same IP address

As a business owner, you don’t want to offend legitimate customers. However, if you suspect a fraudulent transaction, it’s important to take action and cancel these transactions early. Otherwise, you may have to pay for some of the costs if the transaction is disputed, a chargeback is issued, or even if it’s found to be a case of credit card fraud.  

Additionally, using tools like Address Verification Services (AVS) and requiring CVV can help reduce cases of fraudulent bookings. 

5 communication best practices for preventing chargebacks 

If you suspect fraud, you can and should research it and then contact the customer directly to clarify the information. 

  • Reply quickly. When a customer has a problem, they want to know you’re taking their concern seriously. Providing quality customer service, including fast response times, can instill confidence in the customer that their issue will be taken care of. 
  • Offer solutions before a dispute turns into a chargeback. Working proactively with the customer regarding their problem can help prevent a dispute from turning into a chargeback. When handling a dispute, listen carefully to their concern and issue. Then, provide several solutions as possible so the consumer can select the option that best fits their needs. 
  • Keep detailed customer support logs and transaction records. Maintaining detailed records and documentation in yoru customer management software can provide valuable evidence if you need to dispute a chargeback. Having this information can help you when you present your case to the issuers or card networks. 
  • Provide evidence quickly to your credit card company in case of a dispute. You’ll want to get your evidence to your credit card company before the time limit they set expires. If you’re late, you will lose the chargeback dispute, even if you would have been successful if you’d submitted on time.  
  • Train staff on dispute resolution. Customer complaints can often be effectively managed and resolved with a good outcome with an effective customer service team. Training your staff on dispute resolution can ensure they know how to respond appropriately to problems. So, issues are dealt with promptly and effectively.

How to win more chargebacks

Here are some steps you can take to help you deal with chargebacks.

What to do when you receive a chargeback notification

When you receive a chargeback notification, you’re provided information about the dispute, such as the details of the original transaction, the reason for the chargeback, forms to respond if you choose, and a deadline to respond.

Once you receive the notification, it’s important to decide if you play to dispute the chargeback. And if so, you’ll want to make sure you respond by the deadline. Otherwise, you will automatically lose the dispute.

How to evaluate a chargeback

Before fighting a chargeback, you’ll want to determine if the chargeback is valid and the reason for the chargeback. If you agree with the chargeback and the customer was right to dispute, then you don’t want to challenge the chargeback.

However, if you disagree with the chargeback, then you’ll want to challenge the dispute by sending a rebuttal and supporting evidence. To gather the right evidence, you must understand the reason for the chargeback.

On the notification, there should be a reason listed for the dispute, often in the form of a code. The reason code is typically a 2 to 4-digit code. Each major card network has its own code, so you may need to investigate code lists to determine what the code means. 

Once you know the reason for the chargeback, you can tailor your rebuttal and documentation to address the issue and show why the transaction facts don’t support the customer’s claim.   

How to gather documentation

If you consistently maintain customer support logs and transaction records, gathering the necessary documentation will be a smoother process. 

The specific information you’ll need will depend on the reason for the chargeback. Be sure to provide key details that address the reason for the chargeback. 

Some commonly submitted information that provides compelling evidence include:

  • Delivery confirmation
  • IP address information
  • Receipts of purchase
  • Any communications you had with the customer
  • Transaction data that includes a date and timestamp
  • Refund or cancellation policy  

How to respond to a chargeback notification

When completing your rebuttal and providing the necessary documentation, be sure to get right to the point and respond by the deadline. Provide the key facts and avoid adding unnecessary details that don’t support your case. This makes the job easier for the person reviewing your response to the chargeback.

When possible, make key information easy to find, such as bolding or highlighting essential information, like your refund policy within your terms of service agreement. Also, present information clearly and in an organized manner so the reviewer can easily understand your point of view.

General chargeback benchmarks

Chargeback rates are one way to monitor and assess whether you’re near the high-risk merchant benchmark. The chargeback rate can be calculated by dividing your total number of chargebacks by your total number of transactions within a monthly period. 

Nearly 70% of merchants participating in the 2023 Chargeback Field Report reported an increase in chargeback rates, especially friendly fraud.

Additionally, 47% of businesses estimated their current chargeback ratio as between 0.6 – 1%, and 33% estimated it exceeded 1%. Unfortunately, having chargeback rates that are higher than 1% is likely to result in penalties from credit card companies. 

While the standard chargeback rate threshold is often considered to be 1%, Visa has set its standard threshold at 0.9%. Additionally, if your chargeback rate continues to hover around or exceed the 0.9 to 1% rate, you may be classified as a high-risk merchant. 

Yet, chargeback rates can vary by industry. These differences may be due to factors like high transaction volumes, intangible offers or services, industry regulations, and customer expectations. 

For instance, Clearly Payments reports industry chargeback rates as 0.56% for media and entertainment, 0.52% for retail, 0.66% for software and SaaS, and 0.89% for travel.    

And the industry average chargeback reversal rate stands at 30%. Or put another way, for every 10 chargebacks, a business will typically lose 7 of them.  

How Xola helps you reverse more chargebacks

The best odds of reversing a chargeback ultimately boil down to following these industry-leading best practices, which we not only follow but also incorporate features that reduce the burden for you.

  • We reply quickly. Our support team has industry-leading reply and satisfaction rates. In fact, our average response time is under 2 minutes!). This is important not only for replying to initial chargeback inquiries, but also in providing timely replies. 
  • Keep detailed customer support logs and transaction records. Maintaining detailed records and documentation can provide valuable evidence if you need to dispute a chargeback. Having this information can help you when you present your case to the issuers or card networks. 
  • Provide evidence quickly. You’ll want to get your evidence before the time limit they set expires. We make it easy for tours and attractions to auto-submit evidence to us fast. After all, if you’re late submitting any evidence, you will lose the chargeback dispute, even if you would have been successful if you’d submitted on time. 

***

While the best strategy is to avoid getting any chargebacks at all, that’s not always feasible or realistic.

That’s because by the time a chargeback request is filed, your customer will have an advantage. Credit cards are well known for favoring customers over businesses.

However, if you’ve done everything you can to avoid a chargeback, your best bet in successfully reversing it is to keep detailed customer records, ensure you (and your booking platform) replies quickly, and provide detailed, direct evidence to back up why this claim should be reversed.   

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Writer Jessica Malnik

Jessica Malnik

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