A rising chargeback rate should serve as a warning to your digital goods business. It is a signal that you must improve your customer experience, and ignoring this alarm will devastate your business. If you don’t reduce chargeback rates and they climb too high, card associations like VISA and MasterCard will put your business into an “Excessive Chargeback Program,” and, in a worst case scenario, these card associations will stop processing your credit card payments altogether.
There are many reasons customers initiate chargebacks. Sometimes they experience legitimate fraud and sometimes they’re engaging in not-so-friendly fraud. It’s also true that a high chargeback rate is the result of customer frustration at your policies and procedures.
Even if your business is below the threshold for an Excessive Chargeback Program, chargebacks are costly. Indeed, they cost your business more money than a simple refund does. When your customers turn to their banks to initiate chargebacks:
- You have to pay a fee when a chargeback is initiated against you
- You have to pay an additional fee if you decide to dispute the chargeback and try to save the revenue from the transaction.
- The more chargebacks initiated against your business, the higher those fees will become
- You may still lose the revenue from the sale
- Your employees spend time and effort fighting the chargeback
- Enough customers can complain about your product or customer experience online and tarnish your online reputation
How to Reduce Chargeback Rates
There are several tactics that have a significant impact on reducing chargebacks lowering costs to your business.
Define, Monitor and Improve KPIs
When your revenue depends on processing millions of card-not-present transactions every year, a minute amount of chargebacks is inevitable. But is your current rate normal or heading toward trouble?
You first need to find out what your chargeback rate is and define what an acceptable chargeback rate is. Once you’ve decided that, your task is to set your baseline and improve it. It is important to do this sooner rather than later because once you are at a dangerous threshold it is too late. Whatever changes you make could take months to have an impact on your chargeback rate. That’s why you need a dedicated resource that monitors your chargeback rate along with a mechanism for sounding the alarm when your chargeback rate starts climbing too high.
Review and Revise Your Refund Policy
An unclear refund policy or a cumbersome process for obtaining refunds is often the cause of more chargebacks. To combat these types of chargebacks, ensure that your refund policy is fair to your business and fair to your customers. Our recommendation is to offer 30-60 day money back guarantee. (Note: this recommendation is primarily directed at B2C companies with high transaction volumes. B2B companies have other concerns when defining a refund policy. But whether you decide on unlimited refunds or absolutely no returns allowed whatsoever, the main thing is to be transparent and consistent with the policy you promote.) There is a possibility that this type of liberal refund policy may cause a surge in refund requests, but more often than not, your customers are reasonable people acting in good faith. They are not trying to scam you. They tried, they bought and for whatever reason, they are not satisfied. Implementing a stricter return policy is far more costly if it results in customer frustration.
It’s also important to keep in mind that the card associations allow customers to initiate chargebacks well after most companies allow no questions asked refunds. Even if you offer a generous 60 day money back guarantee, card associations will accept chargebacks up to 120 days.
Whatever you decide, your policy has to be clear to buyers before, during and after they complete their purchase, and your internal policies must align exactly with the external policy you promote to the market. The main thing is to not advertise one policy but practice another. If you say no questions asked, then don’t ask any questions.
Once you revise your refund policy, you have to ensure that customers receive accurate, timely and relevant summaries of their transaction/subscription agreement immediately before AND after the order is completed. In the case of subscriptions, make sure that the customer understands when their subscription is going to be renewed well in advance of the next billing event.
Your least savvy user must be able to understand and take action on everything involved from sign-up to renewal. Everything in this case includes terms and conditions, payment information, next billing dates, refund options, login, access and activation information, options to upgrade or downgrade plans, an ability to add or remove license seats, an ability to easily cancel future renewals, etc.
And don’t forget to localize your content for your global customers.
Develop a Highly Trained Customer Service Staff
Minimizing fraudulent transactions and fighting friendly fraud is critical to reducing chargebacks and saving money. The more fraud you prevent from going through your system, the fewer resources you spend managing the fallout from it. A system that effectively eliminates high volumes of manual review combined with expert agents with the knowledge and experience to accept or decline risky transactions will save you money in the long run.
As we mentioned above, you probably have certain segments of your customers who feel frustrated: their payment information has been stolen; they do not recognize a charge on their monthly statement; or they require tech support but have not received a response from your tech support team.
The frustration these customers experience causes them to seek out a refund. Quick and effective resolutions by highly trained customer service agents can not only prevent chargebacks — they can also prevent refunds. In fact, these types of interactions can turn a frustrated customer into a highly satisfied customer who write glowing reviews of your business.
The added benefit of a highly trained Customer Service team is that they become your front line for discovering and solving recurring issues.
Chargebacks often occur when your customers don’t trust you to resolve their problem. To effectively prevent chargebacks, you need to first define a KPI that you can measure and influence, implement a fair and reasonable refund policy, clearly communicate pertinent information about your customers’ initial transactions and renewals, and train your staff to resolve any issues that come their way.