A transaction dispute occurs when a customer claims a transaction made through their cardholder account is invalid or the customer has a problem with the goods or services purchased. More often than not, these disputes escalate to a chargeback, where the transaction is reversed and the consumer is automatically refunded their money from the merchant, oftentimes instantaneously and without much say from the seller.

Chargebacks are very costly to businesses and banks, resulting in billions of dollars in lost revenue every year. Many businesses view them as largely unavoidable, simply accepting their chargeback situation as “the cost of doing business” until the sheer volume of claims forces them to act. But at this point, unnecessary damage - both monetary and reputational - is done.

I use the term “unnecessary” because it’s possible to reduce chargeback volume substantially. In fact, the average merchant can reduce chargebacks by 40% or more—provided there is a solid plan, specialised tools, proven experience, and the right tactics.

6 steps to reduce chargebacks

Some of these tools and practices that I’ll explore may eliminate the need for customers to file disputes caused by merchant error or oversight, while others provide the opportunity to prevent disputes from officially escalating to chargebacks. Following these tips and guidelines could help protect businesses’ bottom lines from administration fees, chargeback penalties, and other residual effects that could damage their merchant account and customer standing.

The following steps are designed to provide some immediate relief and keep businesses from breaching chargeback thresholds while they work out their future strategy. Additionally, by following these steps, businesses will be building a solid foundation for a more comprehensive chargeback management strategy that includes both preventing criminal and friendly fraud, as well as contesting illegitimate claims.

Enroll in alerts programmes

Chargeback alerts can serve as immediate stop-gap tools for reducing chargebacks. Alerts programmes provide notifications about pending disputes that will result in chargebacks unless prompt action is taken. Advance knowledge of a pending chargeback means a customer’s concern can be addressed by the merchant before the dispute escalates. Once the matter is appeased, the customer’s complaint is considered resolved, and will not be filed as a chargeback. Although in some cases the revenue and merchandise involved in the transaction may be lost, the chargeback fee and the damage to a company’s chargeback rate will be avoided.

Sign up for network inquiries

Usually, a cardholder calling their bank to question a charge results in a chargeback. However, if enrolled in network enquiry programmes like Verifi Order Insight from Visa and Ethoca Consumer Clarity from Mastercard, these questions can be answered without a chargeback being issued. Network inquiries are tools that allow for real-time communication between sellers and issuers at the time of inquiry.

Automate responses

In most cases, the preference is to refund a customer rather than get hit with a chargeback. Visa’s Rapid Dispute Resolution (RDR) enables this. It’s an automated platform; users can create custom rule sets to automatically refund certain Visa transactions and avoid a chargeback. Merchant-specific parameters dictate which disputes a business would like to automatically accept and refund, without the need for further input.

Ensure up-to-date fraud detection

Pre-transaction fraud prevention tools are not a full solution, but they can still help reduce chargebacks. Automated systems typically use adjustable parameters to detect potential fraud prior to processing. But if those parameters aren’t correctly calibrated, then the tool could end up flagging or declining sales simply because one element seems suspect, resulting in a false decline.

Many merchants feel that using wide parameters to catch as much fraud as possible is worth losing a few sales. In reality, reports show that the cost of declined sales due to false positives will cost exponentially more than what’s saved through fraud prevention. Fraudsters are also constantly looking for ways to subvert filters. To protect against the latest attacks, it’s critical to use the most updated tools. This includes AI-powered fraud scoring for automated decisioning based on larger datasets and sophisticated algorithms.

Review and optimise policies and rulesets

A staggering number of chargebacks can be caused by minor missteps, simple mistakes, and lack of oversight. Fortunately, chargebacks resulting from merchant error are entirely preventable; the only trick to reduce chargebacks from merchant errors is identifying the source. To do this, businesses must do a comprehensive evaluation of all aspects of their operations—including policies and chargeback data—to identify and fix potential triggers. This also applies to fulfilment, shipping, and return policies because frustrating or hard-to-understand rules could encourage unhappy customers to file chargebacks. Clear, concise, and flexible policies show that issues can be resolved with an email or phone call.

Review and overhaul CX

It’s essential for any business to put themselves in the shoes of their customer to consider how easy or difficult it is to purchase from their own store or website. If sales are turning into disputes on a regular basis, the answer may lie within a business’s own purchasing process. Brands need to examine their customer journey in detail, understanding what customers must go through to make a purchase. That includes getting input from their employees, reading online reviews of the organisation, and reviewing customer correspondence. These insights can be used to pinpoint areas that may need improvement, ones that work well already, and what can be done to streamline and improve the entire process.

Reduce chargebacks in the long term

By following these steps, merchants can reduce chargeback volume but for the long term, businesses will need to address the underlying issues that caused those chargebacks in the first place. This includes regular, ongoing audits of customer service policies and procedures, staying up to date on card network rule changes and policy updates, as well as ensuring marketing efforts reflect the products and services your business offers.

In addition, it is important to optimise billing descriptors to accurately reflect the brand, make subscription cancellations a quick and painless process, as well as reconfigure site design to ensure a smooth, seamless experience.

Overall, these steps can aid in creating a solid strategy for minimising and managing chargebacks, as well as help enhance customer satisfaction and ensure a smooth and secure experience for shoppers. However, many businesses don’t have the kind of specialised knowledge and skills necessary to make the effort worthwhile. In this case, my advice would be to seek the help of third-party experts to fully improve customer service to prevent and mitigate chargebacks.