How to Create an Effective Chargeback Policy

May 20, 2021/ Jarrod Wright /

When it comes to chargeback management, merchants typically fall into one of two categories. First, they may adopt an overly aggressive strategy that hinders legitimate victims of criminal fraud. More commonly, though, merchants simply accept chargebacks as an unavoidable penalty without taking much action to prevent it.

An effective chargeback policy outlines a merchant’s management philosophy and the standards for preventing and disputing chargebacks. It will establish a normal set of standards for every conceivable situation a merchant might be faced with. The policy should be flexible enough to respond to the dynamic nature of eCommerce and be rooted in the analysis of relevant data.

While a chargeback policy ought to be unique to the merchant’s business, there are three universal elements that should be implemented.

#1. The Right Questions Need to be Asked

Merchants will be unable to identify the best course of action to respond to chargebacks without first defining a clear policy. Studies show that 50% of successful friendly fraud attempts will lead to a repeat request within the next 60 days. If a merchant fails to challenge these illegitimate chargebacks, they will only exacerbate the problem.

Merchants should ask themselves the following questions:

• What is my current chargeback rate?
• Is automatically refunding transactions helping the situation?
• Can I identify potential CTR breaches in time to make necessary changes?
• Am I calculating my net chargeback win rate or just gross?
• Am I disputing all possible reason codes?
• Are my front-end consumer authentication tactics causing needless friction? Are there effective back-end solutions?
• Am I being overly aggressive with my blacklist?
• What is an acceptable level of risk exposure for my industry? My business?
• How can I use chargeback data to fine tune my fraud filter rules?

After a detailed audit, merchants who take these questions into consideration will arrive at one of three conclusions:

1. They might determine that their current chargeback policy is sufficient and little improvement needed.
2. They identify weaknesses and take the opportunity to make the necessary adjustments.
3. The merchant might simply be unable to answer these questions or objectively critique their processes.

That last point should not come as a surprise or be treated as a source of shame. After all, it’s understandable for merchants not to excel at chargeback management, as it is not their area of expertise. Regardless, that can’t be an excuse for inaction.

#2. KPIs Need to be Identified

Key performance indicators (KPIs) show merchants the success of their efforts. When a merchant tracks KPIs, they can:

• Identify strengths and vulnerabilities
• Expose patterns and reoccurring threats
• Analyze their performance
• Recognize unrealized opportunities
• Make projections for where the business is headed
• Identify new challenges will present themselves going forward

If merchants make the mistake of using a generic, “one-size-fits-all” monitoring platform, they risk failing to recognize applicable errors and overlooking monetization opportunities. KPIs must be customized to each individual business to reap the full rewards.

Tracking KPIs in-house is a comprehensive process that will require trial-and-error to ensure that the data is leveraged correctly.

#3. Policy Viability Must be Determined

The method merchants use to manage and prevent chargebacks should not interfere with customer acquisition or retention.

If the tactics used are overly aggressive, merchants run the risk of alienating their customer base. To avoid this, their chargeback policy must be weighed against the following concerns:

• Does it presume good faith on the part of the customer? Customers want to feel trusted. Merchants must be willing to give them the benefit of the doubt. Each situation should be approached with the underlying belief that the customer has honest intentions.
• Is it constructive? The main purpose of a policy should be to reinforce that the merchant is as equally invested in reaching a resolution as their customer. Having this mindset will facilitate mutual respect between all parties.
• Is it solution-focused? Policies should be crafted to show customers the path to resolution. When customers don’t believe their best interests are being protected, they may file a chargeback regardless of the consequences.

At the end of the day, creating an effective chargeback policy won’t be easy. It will require merchants to ask difficult questions, take an introspective look at their organization, and analyze all aspects of the data to determine the best course of action.

Last Update: May 20, 2021