What is a Chargeback Mitigation Plan?

Card schemes like Visa and Mastercard impose chargeback thresholds on merchants. These thresholds indicate the point at which a merchant can be designated as “high-risk.”

In response, acquiring banks track merchants based on their chargeback-to-transaction ratio. If a merchant comes close to breaching the imposed threshold, their acquirer will typically take action, up to and including termination of the merchant’s processing account. Of course, acquirers will often try to take corrective measures first. One of these is to develop what we call a chargeback mitigation plan.

Ideally, merchants should work to create a strategy to mitigate chargebacks before they become a problem. But, when a merchant’s monthly chargeback ratio spikes to dangerous levels, card scheme rules require said merchant to develop a formal chargeback mitigation plan.

A successful mitigation plan is designed to help the merchant prevent future chargebacks. It is a comprehensive, detailed strategy aimed at recovering lost revenue and preventing ongoing disputes. In the long run, this produces a long-term lowering of the merchant’s chargeback-to-transaction ratio.

Components of a Solid Chargeback Mitigation Plan

There’s no uniform “standard” for a mitigation plan. Unfortunately, there’s no basic template one can copy to reduce chargebacks. Because chargebacks are a dynamic problem, they demand a dynamic strategy.

When developing a chargeback mitigation plan, it’s helpful to begin by identifying the issues to address. From there, one can develop strategies to address each need. For instance, a typical chargeback mitigation plan will include a clearly-defined strategy for how to:

• Identify valid transactions and decrease false positives.
• Lower the merchant’s acceptance rate regarding unauthorized transactions.
• Identify the source of each chargeback.
• Eliminate preventable chargeback triggers, like merchant errors.
• Challenge illegitimate chargebacks.
• Improve industry relationships.

When effective, a merchant’s chargeback mitigation plan can increase profits, recover revenue, and ensure business sustainability.

Actioning the Chargeback Mitigation Plan

After identifying which key issues to address, merchants must then go about implementing their strategy.

A good chargeback mitigation plan possesses two key components. First is a proactive strategy that strives for long-term reduction in chargeback filings. Then there is the reactive element, which addresses chargeback filings in a tactical manner. Each plays a unique role in this process.

Proactive Chargeback Prevention

The key to preventing chargebacks is to identify their source. While reason codes may help to some degree, they generally fail to provide a useful, holistic impression of the merchant’s true chargeback situation. Instead, merchants need to delve deep, conducting substantial transaction data analysis to get to the bottom the problem. Hiring a chargeback specialist to diagnose chargeback triggers could come in handy with this process.

Merchants should focus on the three fundamental chargeback triggers: criminal fraud, friendly fraud, and merchant error. Each has a unique set of causes, and each demands a different solution to mitigate.

For merchants whose chargebacks are the product of criminal fraud, for instance, they can deploy tools like fraud scoring, geolocation, and address verification. For merchant error, a merchant compliance review conducted by chargeback specialists can pinpoint internal errors and policy missteps that cause chargebacks.

Reactive Chargeback Representment

Long-term chargeback prevention is the goal. In the meantime, though, merchants still need to contend with chargebacks when they’re filed.

There’s little one can do about chargebacks caused by genuine fraud or merchant error; in these cases, the seller must simply accept the dispute. More often than not, though, chargebacks only appear to present as fraud or errors. Friendly fraud represents between 60-80% of all disputes. The way to engage with friendly fraud is through tactical chargeback representment.

Merchants must assemble compelling cases in response to each dispute identified as friendly fraud. There is more about how to accomplish this here.

Does Every Merchant Need a Chargeback Mitigation Plan?

According to industry rules laid out by laid out by the card schemes, only merchants in danger of breaching chargeback thresholds require a mitigation plan. In practice, though, we recommend all merchants develop a plan for contending with chargebacks.

Merchants should work side-by-side with their acquirer and processor to develop a workable, substantial fraud mitigation plan. This way, one can do the work of preventing chargeback before they become a problem.