US chargebacks can be a roadblock to future growth for foreign merchants.
Any online merchant with sales in North America knows that US chargebacks are inevitable. It happens to so many successful companies. They have a cool product or service. They launch to great fanfare in the UK, EU and other foreign regions like Australia and New Zealand. However, when targeting the US consumer market, America poses a sometimes insurmountable challenge. But why?
In short, chargebacks. US chargebacks are part and parcel of running an e-commerce business in what is the biggest online market on earth. An ever-increasing share of the 600 billion dollars spent online in America falls foul of chargebacks issued by customers. But why is this the case?
The reasons are numerous, with some ingrained within the very culture of this nation. In this article, we’ll do our best to explain the reasons why US chargebacks are so high. After, we’ll give you tips on how to beat them and remain prosperous in your quest to dominate this consumer territory.
Why Americans love chargebacks
It’s hard to put a precise finger on why Americans love chargebacks so much. But a lot of it stems from a consumer culture made up of credit spending and normalizing personal debt. There is also a general lack of awareness about when a chargeback should be issued.
Many in the e-commerce space know that friendly fraud is a reality. It accounts for up to 77.25% of all chargebacks. This occurs when a customer doesn’t recognize an item on their credit card statement and disputes it. Even if they did actually make the purchase. Sometimes it’s intentional, in order to score free products and services without much chance of a reprimand. In other words, chargeback fraud.
As mentioned there seems to be a pervasive lack of understanding in America of how and why chargebacks are used. Forty-nine percent of friendly fraud chargebacks resulted from a misunderstanding. The cardholders weren’t even aware that they’d filed a chargeback.
A lot of consumers don’t even care about the stress it causes merchants. A whopping 81% of consumers freely admit that they issued a chargeback out of convenience more than anything else. Ultimately, they should have canceled or asked the merchant for a refund.
But chargebacks are anything but convenient for online merchants. While all the customer has to do is query the charge with their card issuer, acquiring banks then have to help investigate each transaction. Once completed, they then come back to the issuing bank with receipts, invoices, and proof of delivery provided by the merchant. This is in the hopes that they show that the transaction was a valid one.
This process costs a lot of time and money. In turn, part of the expense is passed on to the merchant. And, if a merchant account has a lot of chargebacks, the acquiring bank may increase rates. This is to reflect the increased costs associated with doing business with them. Some may even levy fines. In extreme cases, they may terminate their relationship with a merchant altogether.
Scared of chargebacks derailing your plans to target the US consumer market? Read our comprehensive guide for reducing high chargeback rates here.
How a chargeback works in practice and the best payment solutions
The chargeback process has four main steps:
- The process starts with a payment dispute for which the cardholder issues a chargeback, querying the charge.
- The issuing bank then begins an investigation and lets the merchant’s bank know.
- The merchant in conjunction with the acquiring bank then issue evidence to the contrary. Proving the transaction was genuine.
- The issuing bank then makes a determination. If the chargeback is judged to be valid, the cardholder will be credited from the merchants account (including fees). If not, the merchant retains the funds and the cardholder loses any temporary credit that was added during the investigation.
Customers have a set number of days to be able to issue a chargeback which differs depending on the card issuer. Those with Visa and Mastercard-issued cards have 120 days (with 75 and 90 days respectively for authorization queries). American Express and Discover have no limitations on when a chargeback can be issued. With regards to refuting those chargebacks, merchants have 30 days for Visa, 45 for MasterCard, and 20 for both American Express and Discover cards.
High-risk merchants who use payment aggregators such as Stripe or PayPal often struggle when faced with chargebacks. The aim of these third parties is to minimize time spent disputing chargebacks. Therefore, they often side with the cardholder, costing merchants’ revenues. In other cases, they will freeze or terminate processing without warning. Leaving merchants high and dry.
With specialist high-risk merchant accounts, acquirers are more tolerant of chargebacks. Merchants have more control and access to transactional-level data. Payment providers understand the issues faced by online sellers in these verticals. Which is why they commit more time to support entrepreneurs through the dispute process.
Industries that are most affected by chargebacks
There’s no doubt that chargebacks impact all online industries. However, there are some verticals that are more affected than most. This earns them a “high-risk” reputation. So, if you sell things like online education courses, digital adult content, credit repair and consolidation services or female and male enhancement supplements, you are in this category.
Nationally the average online chargeback ratio to sales is 0.60%. But software and financial services exceed that figure at 0.66% and 0.65% respectively. A big contributing factor to the larger than usual chargeback numbers is the subscription business model. Chargebacks are particularly high for SaaS platforms.
Churn rates for these platforms can reach as high as 12.71%. Many customers often choose to file a chargeback instead of canceling the subscription. This is particularly the case if the subscription business tempts customers with a free trial. Many individuals forget to cancel and then don’t recognize the descriptor on the credit card statement. This is yet another case of so-called friendly fraud.
How non-US merchants can crack the American market and mitigate the risk of chargebacks
Finding success in a foreign country is hard enough, but America presents a unique challenge. Customers often rely on chargebacks when they shouldn’t. Which means as an online merchant coming from Europe, Asia or some other non-US region, you’re going to have to watch chargebacks like a hawk. Remember, chargebacks have been the downfall of many successful businesses. Even if they had thousands in revenue coming in every day.
With that in mind, how can high-risk merchants keep chargeback rates at acceptable levels for merchant account providers?
1. Clear and relevant descriptors
As mentioned, one of the biggest reasons for a chargeback is not recognizing the transaction on a statement. If you sell LED soccer balls, and your descriptor on the statement reads “MAGIC FREEWAY INC”, then the customer is going to immediately contact their card issuer.
2. Provide unrivalled customer support
Customers issue chargebacks when they feel it’s easier to do so than to go through the effort of canceling. Therefore, go overboard with customer service. Provide a toll-free number, live chat, and have customer service representatives available 24/7. Making cancellation and issuing refunds as easy as possible should be your goal. On that note, look to extend the refund window from 30 to 60 days. Make sure this is visible on the home and terms and conditions page of your website.
3. Launch a war on fraudulent transactions
Fraud is the most common cause of chargebacks. Therefore, you need to take every step you can to prevent these transactions being approved. There are many steps you can take within this category. Here are just a few ideas:
- Use machine learning anti-fraud tools to bring the instances of incorrectly approved transitions down.
- Blacklist and block IP addresses associated with known fraudulent purchases.
- Create and maintain a database of credit cards associated with fraud (including “friendly”) for blacklisting.
- Make a similar list for fake and/or phony mailing addresses.
- Make CVV/CV2, AVS, and phone numbers mandatory at checkout. With genuine efforts made to follow up.
4. Change your subscription model
This business model is particularly vulnerable to chargebacks. With that in mind, shorten renewal periods down from one year, to six months or even 30 days. That way customers don’t feel trapped or the need to issue a chargeback to get out of the agreement.
5. Have a dedicated in-house chargeback manager or outsource a chargeback management company
Disputing chargebacks can be time-consuming. With a dedicated in-house staff member, other key personnel can continue to concentrate on their areas of expertise. If the company doesn’t have enough sales volume to justify that cost, hire a third-party company to do it for you. Many chargeback reduction specialists have proven track records of improving ratios.
Winning the war on chargebacks is more than half the battle
Chargebacks are a big obstacle for merchants looking to export their home-grown success to America. Some international big-hitters have withdrawn from American soil after failing to control US chargeback rates. Don’t let your company become the next victim!
By taking preventative measures you can do exactly that. Implement dedicated chargeback management. Provide clear and easy-to-understand refund and cancellation policies. Make sure a customer can cancel their purchase as easily as possible. Educate your customers on subscriptions. Have a clear descriptor for your statements. Finally, go to war with fraud of every type. Don’t let fraudulent transactions ruin your entire US operation.
At DirectPayNet, we have decades of experience helping high-risk merchants navigate chargeback minefields. We help to secure understanding payment processors for our clients that won’t desert you at the first sign of trouble.