I'm thinking of tightening my refund policy, how will that affect my skin care ecommerce store?  

Q: I’ve noticed a big increase in my refunds in the last couple of months.  Customers are using my skin care products and then requesting a refund.  They even flat out refuse to send back the product.  I’m thinking of adding more steps for customers to get a refund.

My contacts who have nutra businesses tell me that avoiding refunds will increase my chargeback ratio. I’m not sure what the best strategy is here.  My losses from refunds and chargebacks are substantial and cutting into my margins more than ever before. Please give me any tips or strategies to ensure I keep my merchant account safe and recoup some of my recent losses.

DirectPayNet’s experts can help you lower losses from refunds and chargebacks. Contact us today to find the best strategy for your business. 

A: Typically in most high-risk businesses, when you make it harder for your customers to get a refund, they will often times contact their issuing bank and start a chargeback dispute. This will lead to the loss of the sale revenue and an additional chargeback fee. 

It is an inherent right for cardholders to be able to chargeback a purchase made with a credit card.  Visa, Mastercard and American Express make it a part of their basic program which includes purchase protection.  If a customer claims fraud, it is up to the retailer to prove that the transaction actually occurred.

In a physical store, it is much easier as there could be a pin entered for the transaction or a signed receipt. As an ecommerce merchant, proving a transaction occurred requires some technical information.  Even if you provide the customer’s card issuer with several pieces of info that can prove the transaction was made, if you’re selling nutraceuticals, info products or a business opportunity, you may be out of luck as the customer’s bank will usually side with the customer anyway. This is what merchants call friendly fraud.  A customer legitimately buys your product but then has buyer’s remorse and contacts their card-issuing bank to file a chargeback. Given consumer protection laws, the burden of proof falls on the merchant who has little recourse to prove the validity of the transaction.

Whether your customer uses a credit card or a debit card, it yields a similar result. Although, debit card purchases don’t offer the same consumer protection as credit cards.

Making it more difficult for your customers to get a refund will likely cause your chargeback ratio to increase.  

Given you sell nutraceuticals, and this is deemed high-risk, if your chargeback ratio gets too high it could spell trouble for you with your payment processor and can lead to your merchant account being terminated.  Also, your payment processor may not only terminate but they can also add you onto the MATCH list or TMF (Terminated Merchant File), which can make it very difficult to run your ecommerce business.

A refund means you lost a sale, but a chargeback means you lose the sale plus a chargeback fee.  A fee of $25 – $35 per chargeback dispute is typical for a high-risk merchant.  In addition, it’s time consuming to file a representment for a disputed transaction. A representment is a document you put together to show proof that the transaction actually occurred.  It’s required if you want to try to recoup the sale. You will need to pull records of the original transaction and gather up as much information as possible to show to your bank who will then relay it to the customer’s bank.

If you offer subscriptions and have recurring billing, these transactions are tougher to represent. Given you didn’t have the customer’s expressed consent at the time the transaction occurred, most credit card companies favour the customer in this case.

How can you effectively dispute a chargeback to recoup your losses?

Collect as much information as possible from your customers at the time of purchase.  This includes: full name, full address, phone number, card numbers with CVV and expiry date, email address, IP address, browser information.  The more data that is collected the better.

It is also important to ensure you haven’t already refunded the customer.  A chargeback can be filed even if the transaction has been refunded.  This can happen because the timeframe from when the customer starts the chargeback process can take several days.  If the customer emailed you and it took 3 days to get a reply, he may have gotten impatient and contacted his bank to begin the chargeback process. This could spell a double refund and double loss for you!

How can you prevent friendly fraud? 

Unfortunately, all ecommerce businesses can expect a certain level of chargebacks. Friendly fraud costs ecommerce merchants 130 billion in lost revenue.

There are several things you can do as a merchant to prevent some of those losses:

1 – Consider adding 3D secure.  3DS v2 is much more user friendly than version 1.  In Europe, this will soon be a requirement for all merchants.  In the US, it is not yet although it will likely become a requirement as well.  There are several providers, such as Paay.co that offer a frictionless 3D experience.  This will lead to less cart abandonment from customers as this verification is occurring without their input.

2 – If you offer a free trial with recurring billing, ensure to get consent from your customer before you rebill.

3 – Have clear pricing terms on your checkout page.  This will avoid any miscommunication and client frustration when they receive their credit card statement.

4 – Offer multiple ways for your customers to get support.  Have active social media channels your customers can reach out to you through. Offer chat, phone and email options.  Ensure you respond within 24 hours and confirm when they have sent you a request.

5 – Shipping delays should be clear before your customer checks out. If any delays occur, communicate with your customer.  Offer a refund or cancellation to avoid a potential chargeback or complaint.

6 – Your return policy should be on your checkout page.  A link at the bottom of the page is helpful for your customers to get all the information they need to return their purchase.

7 – Use fraud prevention tools in your gateway that will limit customer purchases and other obvious fraud triggers.  Fraud scoring software that works with AI has been gaining popularity at curbing fraud and chargebacks for ecommerce merchants.

8 – Once the transaction is complete, send your customer a receipt with all pertinent information from their purchase.

Whether you work with a 3rd party processor that’s very trusted like PayPal or Stripe, chargebacks will occur.  It’s important to be flexible with your customers and offer refunds when necessary.

Keep in mind avoiding refunds will not help you in the long run.  Having a clear return policy and pricing on your checkout page plus offering excellent customer service will help you minimize complaints and losses.

Work with an expert that can help you with all the tools you need to fight friendly fraud  and to keep your merchant account guarded against unnecessary losses. Contact DirectPayNet today!