As a retailer, refunds are bad for business. To appease a dissatisfied customer, you now have to part with money already earned. When dealing with physical goods, you may also have to pay for re-packaging and re-stocking.
While this is not good, chargebacks are even worse.
Unlike with refunds that happen exclusively between buyers and sellers, chargebacks involve third parties like credit card processors and banks. That dissatisfied customer essentially goes over your head instead of contacting you directly.
In addition to money returned and re-stocking expenses, you must now factor in tons of phone calls and paperwork. Don’t forget chargeback fees, which can range anywhere from $20 to $100 per disputed charge.
It can be a lengthy and expensive process. Rack up enough of these chargebacks, and your merchant account may even get suspended.
Worse still, many consumers knowingly abuse the system. They order goods and services online, but once they receive the product, those consumers immediately call their banks to reverse the charges.
Known as “cyber shoplifting” or “friendly fraud,” this deliberate gaming of the system costs retailers an estimated $16 billion a year. Although the practice is technically illegal, it is very difficult to detect or prove — but it is possible to reduce.
How to Limit Chargebacks within Your Business
Chargebacks can happen within any business, but the "cyber shoplifting" mentioned above happens most often to online retailers. This is because most e-Commerce sales promise a certain level of anonymity. Moreover, many goods and services are shipped — physically or digitally.
As an online merchant, what steps can you take to reduce chargebacks within your store?
A sensible starting point is to limit the amount of business you do in areas hardest hit by cyber shoplifting. According to new research from Chargebacks911, certain cities are more prone to this type of abuse than others. Below is a list of cities you might want to avoid (with their chargeback rates included):
- Show Low, Arizona — 2.2 percent
- Port Washington, New York — 1.7 percent
- San Jose, California — 1.5 percent
- Miami, Florida — 1.5 percent
- Astoria, New York — 1.5 percent
- Danvers, Massachusetts — 1.2 percent
- Philadelphia, Pennsylvania – 1.2 percent
Avoid cities like these, and your chargeback rates will likely decrease.
Simple, but not very practical or profitable. After all, by blacklisting entire cities, you’ll also miss out on countless legitimate sales.
A better solution may be to set up security barriers that limit your exposure to chargeback fraud.
For example, consider removing anonymity from the equation and require all customers to provide verifiable names and contact information. You could also keep an updated list of past offenders. Anytime someone with a blacklisted name, credit card number or billing address tries to order something else, simply reject the sale.
These strategies work, but they can consume a lot of time.
For a more hands-off approach, consider using security filters that automatically flag purchases made from certain card numbers, cities or IP addresses. The sale can still go through — but only after you’ve had a chance to review and authorize the transaction.