How Do Merchants Lose a Chargeback Claim?

Chargebacks are an unavoidable part of any business, but that doesn’t make them any easier to deal with. For most merchants, chargebacks are an inevitable annoyance; but for some merchants, chargebacks can impact revenues and prevent them from getting accepted for merchant account services.

In some cases, merchants can dispute chargebacks, but the best way to deal with them is to use tools and protocols to decrease chargeback rates. This is especially true for merchants in specific high-risk industries, where chargeback ratios are significantly higher than the norm.

If you have a high-risk business and you’re looking for merchant account services, Zenti offers a full roster of payment processing solutions. With Zenti, you can offer your customers a complete range of payment options, including all major credit and debit cards, echecks and digital wallet payments, at fees you can afford.

What is a Chargeback?

A chargeback occurs when a customer contacts their credit card issuer or issuing bank and requests a refund for goods or services. In a typical chargeback, the customer makes a claim and the bank investigates. Once the chargeback is investigated and validated, the customer is refunded the full transaction amount.

Chargeback requests are made for a variety of reasons, the most common being:

• Item not delivered
• Customer dissatisfaction with goods or services
• Damaged goods
• Cancellation of a subscription
• Merchant error (the customer was charged twice or charged incorrectly)
• Unauthorized transactions (the customer didn’t make the purchase)

For business owners, customer disputes are never a good thing. And small business owners are especially vulnerable because too many disputed transactions can significantly impact their sales revenues.

Fortunately for merchants, it’s possible to dispute a chargeback and win. However, there are certain situations where a merchant has to accept the loss of a chargeback, even when it’s not their fault. Ultimately for the merchant, the outcome depends significantly upon the type of chargeback that was issued.

Types of Chargebacks

When asking, “What is a chargeback?” it’s important to understand that there are three different types of chargebacks:

• True fraud
• Friendly fraud
• Merchant error

Here’s a breakdown of what they mean and how they can affect your business.

Merchant error

A merchant error chargeback refers to any charge made accidentally by the business owner. These can include incorrect transaction amounts, duplicate charges or failure to honor a refund policy. Merchant errors can’t be disputed by the business owner.

While transaction accidents can happen to everyone, merchants will still be held responsible for these chargebacks. Each instance can impact your chargeback ratio score. And if that score gets too high, you’ll end up paying higher fees, or you may be denied merchant services altogether.

Friendly fraud

Friendly fraud can happen under certain specific scenarios. And while it’s not typically considered malicious fraud, the results can be just as devastating for business owners.

In cases of friendly fraud, the cardholder may decide to dispute the charge because it’s simply inconvenient for them. For example, if someone patronizes an adult entertainment club and is billed for the charges, and a significant other or employer accidentally sees the bill, the customer may claim that it’s a fraudulent charge. This is done without malicious intent against the merchant, but the merchant still loses the revenue and takes a loss on their chargeback ratio score.

Many customers unwittingly commit another type of friendly fraud whenever they cancel a subscription service. Even though these cancellations are allowed and expected, they’re still considered friendly fraud and can significantly impact business revenues.

Friendly fraud also happens when kids “borrow” their parent’s credit cards and make unauthorized purchases. With the advent of in-app gaming purchase options, it’s especially easy for kids to make these unauthorized purchases unless savvy parents put some essential protections in place.

How much money do merchants lose on friendly fraud chargebacks? According to NASDAQ, in 2021, US merchants lost more than 32 billion USD because of friendly fraud. Additionally, economists say that by 2023, friendly fraud will account for 61 percent of chargeback transactions.

How widespread is friendly fraud? Research indicates that friendly fraud accounts for 40 percent to 80 percent of merchant fraud losses. Additionally, according to Cybersource’s Global Fraud Report, friendly fraud is now one of the most prevalent types of fraud to impact merchants.

True fraud

As the name implies, true fraud chargebacks occur due to fraudulent purchases made on a cardholder’s credit or debit card. In cases of true fraud, the fraudulent purchase was made without the cardholder’s knowledge or consent through a stolen credit card, hacked account or identity theft.

Chargeback fraud has grown significantly in recent years. Identity theft increased by 53 percent from 2019-2020, with credit card fraud increasing by nearly a third in 2020. Likewise, almost a third of global credit card fraud cases occur in the US, where losses reached as much as 11 billion USD in 2020.

Although merchants aren’t at fault for criminal credit card fraud, they’re still held responsible. This results in merchants being doubly victimized by fraud, both in loss of sales and penalties incurred by higher chargeback ratios and lower credit scores.

If excessive chargeback rates have caused you to be denied payment processing, Zenti can help you get accepted for the high-risk merchant services you need, even if you’ve applied and been denied before. With Zenti, you’ll be able to accept credit, debit, echeck and mobile app payments, no matter what type of business you’re in.

How Do Chargebacks Impact Merchants?

According to Chargeback Gurus, here’s a breakdown of the prevalence of each chargeback type:

Merchant error: 15-35 percent

Friendly Fraud: 60-75 percent

True Fraud: 10-15 percent 

Merchants are penalized in loss of revenue and loss of reputation for every chargeback, regardless of reason.

What happens if you lose a chargeback dispute? Banks may designate your business as high-risk if you have a high chargeback ratio. And you may be charged higher processing fees or even lose your merchant service account.

Banks and other financial organizations fund credit card networks. So when these credit card companies take any kind of financial hit, the banks must step in and cover the loss. This process is known as “underwriting.” Underwriting ensures protection so credit card companies can survive revenue loss.

Banks, payment processors and credit card companies charge various transaction fees to cover these losses. These processing fees may increase substantially if a business is deemed high-risk for any reason (including a high chargeback ratio).

Typically, banks are reluctant to work with businesses with higher-than-average risks. As a result, some high-risk businesses are repeatedly denied payment processing services, even if the business is successful or in a high-revenue industry.

To give you an idea, here’s a look at some of the most popular industries that are considered high-risk for merchant account services:

• Online dating sites
• Adult entertainment websites
• Nutraceutical vendors
• Vape and CBD retailers
• Document preparation services
• Property management companies
• Travel agencies
• Fantasy sports clubs
• Collectibles and antiques sellers
• Gun retailers
• Multi-level marketing companies
• Pay-day lending services
• Gun retailers

Many of these are booming industries, yet they’re consistently turned down for even the most basic payment processing services.

If you’re in a high-risk industry, Zenti can help you get approved to accept VISA, Mastercard, Discover and American Express, plus mobile app payments, even if you’ve been turned down for payment processing before. Plus, Zenti offers tools to help streamline your monthly invoicing so you can manage your transactions and decrease chargeback fees.

How Can Chargebacks Be Disputed?

Can you dispute a chargeback made by a customer? Yes, but it depends on the circumstances. You shouldn’t dispute some chargebacks.

A chargeback due to true fraud or criminal activity can only be accepted. The customer can’t be penalized, even though you’re both victims.

In cases of merchant error, you’ll need to accept the chargeback and allow your acquiring bank to issue a refund. On the plus side, it enables you to create customer goodwill that may lead to future purchases.

In some cases of friendly fraud chargebacks, however, you may be able to dispute the refund, provided you have enough documentation to back up your claim.

If you’re worried about high chargeback rates, Zenti offers a range of security tools and solutions to help you protect your business from chargeback fraud and identity theft. With Zenti, you’ll get the help you need to decrease and prevent costly chargebacks.

Fighting and Winning Chargeback Disputes

In cases where you suspect friendly fraud, you can dispute the chargeback claim through an arbitration process. You’ll need to write a chargeback rebuttal letter and include evidence proving the customer authorized the transaction to initiate arbitration with the card issuer.

Writing a Chargeback Rebuttal Letter

Here’s what to include in your chargeback rebuttal letter:

• Your business name and address, billing address, merchant ID number and contact information 
• An opening paragraph stating that you’re disputing a credit card chargeback 
• An explanation of your evidence, with accompanying documents to prove your claim
• A closing paragraph confirming that you’re disputing the chargeback 

What type of evidence should you provide? Here’s what you’ll need:

• All relevant transaction data, including the customer’s name, date and time of the transaction, transaction ID number and a description of the goods or services that were purchased
• The chargeback reason code issued by the credit card company
• Transaction amount
• Copies of sales receipts
• Copies of delivery tracking or delivery confirmation
• IP address from the original order
• Any relevant customer signatures for the transaction or delivery
• Copies of any communication you’ve had with the customer
• Any other information that backs up your claim that the customer authorized the purchase

When writing a chargeback rebuttal letter, here are four things to remember:

• Be calm and stay professional.
• Keep to the facts.
• Keep the letter as brief as possible without omitting any relevant information.
• Always use formal business language.

Ways To Prevent Chargebacks

If you’re concerned about what happens if you lose a chargeback dispute, the vital thing to remember is that prevention is critical. Here are some tips to help you prevent excessive chargebacks:

• Have a clear-cut, easy-to-understand return policy.
• Provide detailed descriptions of your products or services. When possible, include photos and, if applicable, product demonstration videos.
• Get the customer’s billing address to compare it to the cardholder address entered in your Address Verification Service (AVS).
• Ask for the cardholder’s CVV code if it’s a card-not-present transaction. CVV codes are difficult to steal unless the entire credit card has been stolen, adding another layer of protection.
• Invest in merchant protection services such as 3-D Secure Protocol (3DS), which provides a security code for each transaction. This allows cardholders to confirm their identity on every transaction.
• Always offer top-notch customer service. Satisfied customers are less likely to ask for chargebacks.

Chargebacks can damage your business, but Zenti can give you the tools and solutions you need to decrease chargebacks, increase revenues and retain customer loyalty. Zenti can provide you with a full range of payment options for your customers, including credit and debit cards, echeck and mobile payment methods. Plus, Zenti offers tools to streamline invoicing and protect your account from chargeback fraud.

If you’re ready to boost sales and increase customer loyalty, contact Zenti to find out how you can get approved for merchant account services at low rates that you can afford.