The Ultimate Guide to Dealing With Disputes for Merchants
No matter the industry, no merchant can evade the dreaded chargeback. At least not completely. Luckily, there are ways to reduce your losses. In this guide, I’ll teach you some insider tips and strategies for managing disputes effectively.
The root of the chargeback problem: Lack of understanding and consumer perception
As much as 40% of businesses lose 1% or more of their revenue to chargebacks. As a merchant, I don’t have to tell you how bad this loss can sting. You know it first hand.
But have you ever wondered why chargebacks are so common?
A big part of my job is helping customers mitigate disputes. I’ve learned that there’s a lot of confusion around the dispute process and the card brand rules that come along with it.
While 80% of chargebacks are from some form of fraud, two other major factors are consumer perception and lack of understanding on the business’s part. For instance, 33% of merchants have little to no understanding of how chargeback evidence works and 17% didn’t know there was such a thing!
On top of that, 72% of customers think filing chargebacks is an alternative to returns—75% of customers think returns and chargebacks are pretty much the same.
This means a lot of chargebacks could be avoided with some good ol’ education. And as nerdy as it sounds (I am a payments geek, after all), I’m excited to share my knowledge with you!
Let’s jump into the nitty gritty details!
Friendly fraud vs payment fraud: How to recognize legitimate chargebacks
One of the most impactful ways to minimize chargebacks is knowing the difference between genuine payment fraud and friendly fraud.
Payment fraud is when cybercriminals use stolen credit card data or credentials to make fraudulent purchases.
Friendly fraud is when real customers make online purchases, receive the goods or services, and file chargebacks under false pretenses to get something for free, or when they use the chargeback process in place of making a return.
As I mentioned earlier, 80% of disputes come from a form of fraud. But that doesn’t give us the whole picture.
Let’s drill into this a little more.
According to Mastercard, up to 70% of fraudulent transactions are from friendly fraud—costing businesses across industries more than $130 billion a year! This means your actual customers could be eating away at your bottom line rather than adding to it, whether they know it or not.
The trick is knowing when a chargeback is legitimate and when it’s not. While it’s not always possible to know the difference, there are signals for when you should concede or fight back.
Become a dispute challenger
My first tip is to develop a “fighting spirit” and become a dispute challenger. If you’re a merchant, don’t just take disputes lying down. Challenge almost every dispute you receive. If you’re a platform that processes payments for other merchants, encourage your merchants to do the same.
Why?
Two reasons.
It increases your chances of winning more disputes.
It demonstrates your or your merchants’ willingness to resolve disagreements with customers over their transactions.
How to encourage merchants to challenge disputes
The best way to get your merchants onboard with challenging all their disputes is to ensure they understand their potential losses, the cost of dispute fees, and how high chargeback ratios can lead to account shutdowns or being added to the MATCH list.
Even though you won’t win every dispute you challenge, this is a win-win strategy as it helps strengthen your business’s reputation and customer relationships and minimize losses from chargebacks.
When should you concede
Of course, there will be times when a dispute is valid and the customer has the evidence to back it up. In this case, conceding and accepting liability is a viable option. But the only time you should concede is in the case of true fraud and a customer can prove their card was lost or stolen.
When you should fight a chargeback
In all clear non-fraud cases, I recommend challenging the dispute. This will help you reduce your chargeback ratio and significantly cut down on friendly fraud.
Some common examples include:
Claims of canceled services: If there is proof contrary to the customer’s claim, or it’s unclear, you should challenge the dispute.
Incorrect or duplicate transaction amounts: You should always investigate and verify any transaction errors claimed by the customer. Even if it’s unclear, you should fight it.
Services or products not rendered: Another gray area, but a dispute you should almost always challenge unless there’s already clear proof that the customer is correct.
While some of the above examples are certainly legitimate reasons for chargebacks, they’re also the most abused.
How to challenge a dispute and win
Now that you know what to fight, let’s look at how to challenge a dispute and come out on top.
Working with the cardholder
A surprising amount of disputes are rooted in misunderstandings. So the first thing you should do when you receive one is to reach out to the cardholder and try to work it out. In most cases, cardholders are willing to cancel the dispute with their issuing bank if you offer them a refund or a replacement.
Remember, many consumers don’t know the difference between a refund and a chargeback, and most have no idea how the process works or how it affects you as a merchant. Showing a little understanding and addressing their needs can go a long way. This not only helps you avoid a chargeback but also helps you create stronger customer relationships.
Get your transaction forensics on
If a customer is unwilling to work it out with you directly, and you don’t agree with the dispute, you’ll need to collect your evidence to support the validity of the transaction. The card brands call this “compelling evidence,” which can include the following:
Address Verification System (AVS) and Card Verification Value (CVV)
Email and physical mailing address of the cardholder
A scanned copy of the cardholder’s photo ID
Accurate records, such as email chains, chats, and other correspondence between you and the customer
Transaction receipts
Service or product descriptions
Proof of usage (e.g. user login tracking, screenshots, and activity tracking)
Reservation confirmations
Bills or invoices
Delivery and tracking information
Customer signatures, signed receipts, or signed agreements
Proof of acknowledgment of terms and conditions
IP address used for online transaction
Establishing the cardholder has previously undisputed transactions with the merchant
Provide a return or refund policy and show the cardholder’s approval of the terms
You’ll also need to include a rebuttal letter that details everything that transpired around the transaction in question.
Representment: Steps of the process
When a merchant fights a dispute, it’s called a representment, which is the process of gathering and submitting your evidence and communicating with the issuing bank.
Be prepared for some back-and-forth communications between you and the card brands. The issuing bank can request more evidence if the cardholder continues to contest the charge.
However, my advice is to treat the first stage of the representment like a “one and done” scenario. Upload as much evidence as you can, as it’s possible it’ll be your only chance. In many cases, the issuer reviews the requested evidence and declines it—case closed.
If this happens, it’s a final decision. You’re not only out the disputed funds but also have to pay out any associated chargeback fees. For example, Finix’s fee is $15 per chargeback. Some providers charge even more. This can really add up, especially for high-risk merchants, so it’s in your best interest to submit any evidence you have right away even if you don’t think it’s pertinent.
How disputes work with Finix
There are measures Finix takes to ensure the individual who used the credit card is the actual cardholder, which helps weed out most fraudulent transactions. This is through our fraud solution, which detects and prevents fraud via sophisticated rulesets, machine learning, and AI.
But what really sets us apart is our dispute management system. With it, you're able to monitor and track disputes and upload evidence without ever having to leave the Finix dashboard.
If you’re a platform that manages other merchants, this helps streamline the dispute process, removes friction, and provides additional value for your merchants. You’re able to upload evidence on behalf of your merchants and work with them to improve their win rates.
But you’re not on your own!
At Finix, you have a team of industry experts to advocate for you. For instance, we’re here to offer advice on how to approach disputes or explain something if the situation’s unclear.
Once you upload evidence to the Finix dashboard, we submit your documents and rebuttal directly to the card brand portals so you don’t have to. This saves you a significant amount of time as dealing with the card brands directly is a lengthy and frustrating task.
Tips for managing disputes in the Finix dashboard
I recommend checking the disputes section daily. Setting up reminders or calendar blocks can be especially helpful. That way, you’re always up-to-date with any disputes related to your business or your merchants.
Additionally, it’s a good idea to configure dispute notifications so you’re alerted any time a new dispute is submitted or an existing one is updated. This increases your business’s efficiency and helps you resolve disputes quickly.
The right payment solutions make all the difference
Even though you can’t avoid disputes and chargebacks entirely, there are ways to reduce your losses. If you develop a habit of challenging disputes and follow the strategies I’ve outlined in this blog, you’ll be well on your way to lowering your chargeback ratios and improving your profit margins as a result.