Preventing Chargebacks

Podium uses tools like 3D Secure, data analytics, machine learning, and payment data monitoring to inform our fraud prevention rules. These rules help us detect possible fraud and help prevent high-risk transactions on our platform. Even with these robust tools in place, there is no such thing as perfect chargeback prevention and we cannot prevent all chargebacks nor can we guarantee you will win every dispute. This is why it is critical for you and your business to use your own methods and learn how to prevent chargebacks when using Podium.

What Are Disputes and Chargebacks?

The terms ”chargeback“ and ”dispute“ are often used interchangeably. While the terms are similar, they are not exactly the same. A dispute is created when a customer asks their bank to reverse a charge on their credit card or bank account. Although they are often initiated by the customer, disputes can be initiated by the customer’s bank. A chargeback is what happens after the dispute. A chargeback is when funds are forcibly removed from a business’s account and returned to a customer’s account after they submit a dispute. Disputes can be filed against almost any type of transaction, including debit and credit card transactions and ACH payments. 

How Does This Affect My Business?

Simply put, disputes and chargebacks can be expensive. The dispute process is set up to protect consumers and will generally favor the customer over you, the merchant. Unfortunately this means merchants lose far more disputes than they win.

There are several costs associated with disputes. Some such costs may include:

  • Funds from the transactions
  • Cost of the goods sold
  • Dispute fee, which can range from $15 to $100 depending on the issuing bank and the transaction
  • Time spent addressing the dispute
  • The risk of having a high chargeback ratio. If 1% or more of your business’s transactions result in a dispute, your bank (also known as the acquiring bank) and the processor (in this case, Stripe) may terminate your banking relationship or your ability to process transactions. In some cases, merchants may be unable to secure a new processor for up to five years or be charged higher processing fees since their account is considered to be high risk.

The Dispute Process

When a customer initiates a dispute for a payment processed using Podium, you’ll receive an email from Disputes usually follow a typical process:

  1. The customer files a dispute with their bank, which is referred to as the issuing bank.
  2. The issuing bank talks with the customer and assigns a reason code to the dispute.
  3. The issuing bank investigates the transaction and forcibly removes funds from the merchant’s bank account, which is known as the acquiring bank. The money will only be returned if you successfully counter the dispute.
  4. The acquiring bank reviews the chargeback and notifies you, the merchant. You may dispute an illegitimate chargeback and submit evidence against the dispute. There is a prescribed deadline for submitting evidence.
  5. The issuing bank and acquiring bank communicate back and forth on behalf of the customer and merchant.
  6. The issuing bank makes a final decision.

If you do not refute the cardholder’s claim by the prescribed deadline, or if the evidence is deemed to not be enough to refute the cardholder’s claim, the chargeback stands. 

Countering Disputes

Generally, disputes are divided into three categories: criminal fraud, friendly fraud, and issues with service or goods. Criminal fraud is the most difficult to resolve, while issues with services or goods are usually the easiest. It is much more effective to prevent disputes instead of trying to resolve disputes. The entire dispute process is designed in favor of the consumer. And, even if you resolve most of your disputes, the disputes often still count toward your chargeback ratio.

For all disputes, it is critical to understand the reason provided for the dispute. We’ve provided resources from several major credit card networks where you can look up a specific reason code and the evidence required to counter that code. Specific codes differ among the various card networks. Merchants are only allowed to fight back against the reason provided, even if the reason has nothing to do with what actually happened.

There are two parts to a strong dispute challenge:

  • Rebuttal letter. A rebuttal letter is a formal business letter stating your case to the issuing bank. The letter must summarize your case, describe the situation, and point out any highlights of your evidence. This may include submitting a text document or a PDF of a letter.
  • Compelling evidence. Having compelling evidence is necessary to resolve a dispute. Banks require specific information to demonstrate the dispute is valid, and the bank is motivated to take the side of their customer. Each credit card network and bank has different definitions of “compelling.” Providing strong evidence that creates a reasonable doubt concerning the customer’s case can greatly improve the chance of winning the dispute. Examples of evidence may include screenshots of the Podium conversation about specifications of the product, delivery confirmation receipts, evidence of a prompt refund, signed orders, pictures of the customer’s photo ID, or a signed terms of service.

What matters most is that you clearly demonstrate the validity of the transaction in question and counter the exact chargeback code provided. Acquiring banks will generally only consider evidence that directly addresses the nature of the code itself.

Preventing Criminal & Friendly Fraud

Friendly fraud is when a cardholder disputes a transaction as fraudulent even though the transaction was made by an authorized cardholder. It is different from criminal fraud in that the person making the purchase is an authorized cardholder. In cases of criminal fraud, the person making the purchase is not an authorized cardholder.

Friendly fraud is often a mistake; the customer may forget about a purchase at the end of the month or thinks that a dispute is the same as asking for a refund from the merchant. Other times it can be an instance of a family member not wanting to pay for a purchase made by another family member.

Unfortunately, friendly fraud is becoming more and more common. Preventing friendly fraud is especially difficult because most fraud prevention measures are aimed at making sure the customer is the authorized cardholder. In cases of friendly fraud, the customer submitting the dispute is the authorized cardholder.

A relatively small subset of friendly fraud does fall into the more nefarious category of chargeback fraud where consumers attempt to get a product for free. This is sometimes referred to as “cyber shoplifting.”

Some steps you can take to prevent criminal and friendly fraud are:

  • Immediately refund any transactions you deem suspicious.
  • Watch out for multiple cards on a single transaction.
  • Use the same customer name on the invoice as the cardholder name.
  • Match the photo ID to the cardholder name and the person who picks up the goods in-store, if applicable.
  • Make a copy of the customer’s photo ID for suspicious or high dollar transactions.
  • When reasonably possible, obtain a customer signature and compare it to the customer’s ID.
  • Listen to your instincts—if you think something is suspicious, chances are you are correct.
  • Enroll in premium fraud protection, if it’s available for your business. Contact your customer success manager or message to see if you are eligible.

Preventing Chargeback Related to Goods or Services

Chargebacks are sometimes related to the products or services a merchant provides. Examples include orders that were never received, people being charged the wrong amount or charged more than once, or goods being of a lower quality. Consumers may also use a chargeback to get their money back in instances of buyers’ remorse, cumbersome return processes, or not understanding the delivery schedule.

Some steps you can take to prevent chargebacks related to goods and services are:

  • Encourage customers to contact you directly with any issues or refund requests.
  • Keep records of tracking numbers for shipped goods.
  • Carefully package any breakable items for shipment.
  • Give refunds or cancellations as soon as requested.
  • Post your return policy on your website in an easy-to-find location.
  • Where possible, ask customers to acknowledge your return policy in writing via signature or text message (we recommend this especially for large transactions).
  • Communicate clearly with the customer about what to expect from a good or service. This may be a detailed description on your website or product photos from multiple angles.

Additional Resources

IMPORTANT DISCLAIMER: This article is for informational purposes only. It is not intended as legal advice or a comprehensive summary of the topic discussed. You are encouraged to retain your own legal counsel or other professional advisors to review this article and assess your unique business scenario. In addition, a business can do many things, including use of the Podium system outside its intended use, which can give rise to liabilities beyond those addressed in this article.