eCom Chargebacks 101

Hey 👋

Chargebacks. We all hate them 😤 

You acquire that customer, he buys a product, you get that sweet Shopify new order notification.. and on the next day — a chargeback.

The product’s gone, the sale is gone, and now you have to win a dispute. But with the right know-how, you can reduce the amount of chargebacks you get and protect your profits.

In this post we’ll cover A-Z everything you need to know about chargebacks — why they happen, how to handle them, and most importantly, how to stop them before they start.

Let’s get into it 🔥

1. What Are Chargebacks? 💬 

Chargebacks are a customers way to reverse a transaction — just a refund request, but instead of reaching out to you directly, the customer just asks the bank for a refund instead.

Here’s how they happen:

1️⃣ Transaction & Chargeback — a customer purchases a product from your Shopify store, and once that transaction appears on their card statement and notice something off (they don’t recognize the purchase, never received the order etc).

The customer then initiates a chargeback with their bank — and card issuers are legally required to offer this option to customers within 60 days of the transaction’s billing date.

2️⃣ Chargeback Request To Merchant — after it’s received, the customers bank reaches out to the merchant’s payment processor.

This is where the disputed amount is debited from the merchant’s account, along with the processing fee, which can range anywhere from $20-$100.

3️⃣ Merchant Provides Evidence — if the merchant wants to fight the chargeback, they can submit supporting evidence. This can be proof of delivery, order confirmations, customer communication logs.

4️⃣ Card Issuer Review — the customer’s bank can take up to 75 days to review the merchant’s response and make a final decision, whether the merchant’s evidence was strong enough to overturn the chargeback.

5️⃣ The End? — the case ends with either the merchant accepting the chargeback and eating the loss; customer cancels their chargeback after resolving things with the merchant; or the bank sides with one party, closing the case.

6️⃣ If A Party Disagrees — if the merchant or customer disagrees with the bank’s decision, things move to arbitration. This is the actual last step of the chargeback process.

The card network (Visa, Mastercard, etc) steps in to settle the dispute. If the merchant wins, they get the disputed amount returned to their account. If the chargeback is upheld, merchants have to pay additional fees.

As you can see, the process is an absolute nightmare for anyone trying to run a successful Shopify store, not just stress-wise but the fact that this can drag on for months 😬 

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2. Why Chargebacks Happen 🤔 

So we know how chargebacks go down, but why would a customer even start one?

There are generally 4 reasons, and each of them uses a special code that the card company uses to indicate the reason for the reversal.

1️⃣ Fraud — these types of chargebacks are most common, and most annoying to deal with. They occur when a transaction is flagged as suspicious (mostly because the cardholder didn’t approve the purchase).

Here’s a breakdown along with the codes:

P.S — Make sure your POS systems support secure payment methods like EMV chip cards and 2FA to reduce fraud chargebacks ❗️ 

2️⃣ Quality Issues — if the product didn’t meet the customer’s expectations, arrived damaged, didn’t arrive at all, or there was a problem with a subscription, quality is case. Here’s another chart:

3️⃣ Technical & Clerical Errors — sometimes, chargebacks can happen from honest mistakes. The customer hit the wrong button or bought a product twice, for example. Technical errors are declined transactions, website errors, or missing payment information.

The top chart is for technical, lower is for clerical:

4️⃣ Friendly Fraud — one of the worst reasons why chargebacks happen. When a customer is unfaithful to your brand, they might file a chargeback even though they received the product as described, with no issues from your end at all.

Friendly fraud can happen for one of these reasons:

⚫️ The customer forgot about their purchase

⚫️ They don’t recognize the merchant on their statement

⚫️ They’re unhappy (or happy) with the product and want to keep it for free

It’s estimated that 61% of chargebacks result from friendly fraud 🤨 

Nicholas Tranchant, founder of Vivalatina, says that the biggest reason for their chargebacks has been the client’s dishonesty.

This makes sense, but there’s no way to increase the goodwill of your shoppers, this is just something that will happen no matter what.

And here’s a little nightmare story from Reddit on the matter:

This deceitful customer firstly refunded the purchased goods (multiple times, by the way), then proceeded to file a chargeback through their bank.

There’s a way to avoid this exact issue: you can capture payments manually after fulfilling an item, but, luckily, situations like these are few and far in between.

And of course there are many more chargeback horror stories, like this one where a merchant lost $15,000 (at that point its a crime, not just “friendly” fraud), but in rare cases like these it’s best you go the legal route & hire a lawyer.

Even though chargebacks of various sizes might happen every so often, there’s ways to fight any of them and win the disputes (and stop most of them from happening altogether) — let’s get into that 😄 

Check out our eCom Subscriptions Guide to learn Nik Sharma’s secrets on running successful sub models (he worked with Feastables, Cadence & Jolie 👀)

3. How To Dispute Chargebacks 💸 

There are three steps to disputing a chargeback:

1️⃣ Gather Info — identify the customer and the transaction that was charged back. Source as much info on the transaction as you can, including warehouse data, delivery status, any confirmations from your end.

It’s also worth noting that you can contact the customer directly to see if you can resolve their issue that way, though they might not always be open to communication.

2️⃣ Submit Your Response — submit your evidence in a dispute response. This document is returned to the bank/card issuer that sent you the chargeback letter (in some cases, you might need to initiate your own chargeback dispute).

Make sure you respond directly to the chargebacks reason code (we mentioned them all in the last section above).

Yup, it feels a lot like this when you’re fighting a chargeback 😂

For disputed fraud or “no authorization” chargebacks, you should provide evidence that the cardholder was indeed aware of and authorized the transaction — this means AVS matches, CVV confirmations, signed receipts, and contracts can be a massive help.

3️⃣ The Waiting Game — after you submit a rebuttal, you have to wait till the bank reviews the information. The cardholder’s bank makes the final decision, and they’ll inform both you and the customer of the decision.

P.S — If you run your business on Shopify, you get Automatic Dispute Resolution (which almost doubles your win rate from unnecessary chargebacks).

There’s also a few apps on the Shopify store that can nearly automate the process for you, the best we’ve found is Chargeflow.

We can all tell chargebacks are super unpleasant to deal with, and can hurt both your business and your relationships with shoppers, so let’s see how we can prevent them altogether 🔥

While we’re still in January — you should check out our guide on Leveraging Low CPMs while the big brands are still broke (they wont be for long 😢)

4. How To Prevent Chargebacks ✋ 

There are a few steps you can take to reduce the chance of chargebacks happening (plus a feature from Shopify themselves to prevent fraudulent chargebacks):

1️⃣ Avoid Manual Processing — human error is impossible to control, so avoiding typing in information manually can help.

Automated records of customers’ card transaction dates, amounts, authorized information, and from your end proof of shipments and deliveries should all be kept.

2️⃣ Fraud Protection Software — investing in such software will help avoid fraudulent transactions. The top picks we’ve found are NoFraud and Seon, both available on Shopify Apps (look through both carefully to find the best fit for your business).

3️⃣ Easily Recognizable — making yourself easy to recognize and reach can help a ton, especially if customers don’t recognize your business name or forget they’ve bought from you.

Be sure the name on card transactions matches your brand name, and adding a phone number to your card transactions can also help (something like “Your Brand 111-111-1111” makes it easy for customers to remember you & call you if any problems appear).

4️⃣ Store Policies — clearly describing your products & service policies is a must, this way your customers are more likely to assume liability for their own purchases.

If your return policy is well-written, you can avoid a chargeback by processing it as a return instead. Another thing you can take action on is encouraging customers to call you with questions before filing chargebacks.

You can also prevent fraudulent chargebacks with Shopify Payments, here’s how:

1️⃣ Open your Shopify Dashboard

2️⃣ Click on “Settings”, then “Payments”, into “Manage” for Shopify Payments

3️⃣ Scroll down till you see “Customer Billing Statement”

4️⃣ Add your “Company Name” + “Number Code” in the Customer Statement Descriptor. For example, “SP * Ecom Zone 8426”

Be sure to update this code occasionally, every month or so.

Once you have this set up, for any medium-high risk orders, email the customer and ask them to verify the number code on their bank statement. Like above, they’d have to provide you the code “8426”. Then place this order on hold until they actually send you that number.

Most fraudulent shoppers would only have the card details, and not full access to the cardholders’ bank account to verify this code — if they cannot provide this code to you, simply cancel the order.

Plus, if the customer provides this 4-digit code and still opens a chargeback after the order, it’ll be very likely you win your chargeback as long as you provide the bank all of the evidence, including this cool little unique code 😄 

5. How Shopify Fraud Protection Works 🔐 

Along with everything you now know on chargebacks and how to protect your store, Shopify has an in-built fraud “detector” that can identify ill will before it damages your brand.

If your store is running on Shopify, you’ll get the following Fraud Analysis features:

1️⃣ Indicators (Basic & Plus)

2️⃣ Support for 3rd party fraud apps (Basic & Plus)

3️⃣ Fraud Recommendations (Shopify Plus only)

You can access Fraud Analysis by scrolling down in your Orders page, following the visual below:

You can see the risk of fraud at the very top, along with the indicators below showing you in colours how risky certain aspects of the order are (green being good and warmer colours showing risk).

The more risky factors, the higher likelihood of the order being fraudulent. The best practices for when dealing with a high risk order are:

1️⃣ Verify The IP Address — check whether the location of the IP address is in the general area of where the shopper claims to be, as well as whether the IP address is from a proxy service (bad) or for a web hosting company (good)

2️⃣ Contact Information — in the order, you’ll see a number and an email address (if given by the customer). It’s best to call them up or email them, asking questions regarding the address, phone number, and email named on the order.

If they can’t answer correctly or struggle, it’s likely someone with ill will trying to get the best of you & your brand 😢 

You can also check whether the phone number on the order is from the same location of the IP & billing address using sites like 411.com.

Once you’ve investigated an order using Fraud Analysis, you get to choose whether you fulfil or cancel the order — but keep in mind, Shopify does not return money lost due to fraudulent charges.

And that’s that! We covered everything you need to know about chargebacks as a merchant 🔥

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Daniil from ECORN