How to Reduce Credit Card Chargebacks Online

Some merchants see credit card processing as an expensive and risky proposition. After all, high fees can cut into an already slim profit margin, and the news is full of stories about stolen credit cards and data breaches.

Get tips to boost ecommerce $$$ by downloading "25 easy ways to blast  last-minute buyer resistance and increase online sales."

Chargebacks are particularly dangerous for merchants. Many of them are associated with online shopping, where the risk of credit card fraud is even higher. That has left many wondering how to reduce credit card chargebacks online.

What Is a Chargeback?

A chargeback occurs when a customer disputes a charge with the credit card issuer. Unlike a return or refund, the customer is not negotiating directly with the merchant; rather, the customer has gone to the credit card company.

When the credit card issuer receives a complaint, it will immediately withdraw the funds from your merchant account. It will hold those funds while it investigates; if the charge is deemed fraudulent, the issuer will keep the funds.

Who Is at Risk?

When you are shopping in a brick-and-mortar store, the risk of credit card fraud is reduced. You need to have and present the physical card for payment, and there are measures merchants can take to reduce the incidence of people using cards that are not theirs.

That means that getting a “chargeback” is somewhat rare; merchants usually deal with returns or refunds, which means getting the merchandise back. With a chargeback, the merchandise is not returned.

Online stores using online payment processing are much easier targets for chargebacks, since the merchant never has contact with the customer, and the customer does not need the physical card. The real credit card owner later discovers the fraudulent charges and disputes them with the credit card company—which then takes the money back from you, leaving you without the money and without the merchandise. Some fraudsters themselves will even dispute charges this way!

How to Reduce Credit Card Chargebacks Online

Clearly, chargebacks are a risk for merchants who do much of their business online. They are also a problem for high-risk merchants, who may already have a higher chance of being hit by fraud. Luckily, there is an excellent way for merchants to solve the conundrum of how to reduce credit card chargebacks online.

The answer is very simple: A pay-later option discourages fraud and reduces chargebacks.

How Pay-Later Options Help

At first, you might think that a pay-later option would actually make the situation worse: Customers can purchase services or items, then make off scot-free with them, never paying you for your services or the merchandise they receive.

Fortunately, pay-later options do not work that way. Customers hit the pay-later button during checkout, but they will often be sent an invoice or bill prior to the services or items being delivered; they will be asked to pay then.

If shipping a physical item is involved, it can be shipped pay-on-delivery, which means the item will be paid for when it is delivered—and if the customer refuses to pay, you can hang onto your merchandise. Services can also be billed once the service is delivered. Customers might also have accounts that they need to keep topped up, making it more difficult and complicated for fraudsters to make purchases.

Reducing Chargebacks

How does pay-later reduce chargebacks? Quite simply, it is not nearly as easy to purchase something on a stolen credit card. The bill comes along later, often before you have delivered the service or item and the customer has a chance to cancel the order or say they did not purchase services from you.

Pay-on-delivery means you can recover the merchandise. And since the customer’s credit card has not yet been charged, the customer has no reason to dispute the fraudulent charge with the credit card company—which means there is no chargeback on your account.


Text Size

Lisa Gibson

Lisa is the Credit Manager of BNA Smart Payment Systems and has over 18 years of experience in diverse roles of credit and credit risk management. She graduated from the financial program at Boreal College and is an expert in personal loans and line of credit, mortgage underwriting, private label commercial credit cards, small business loans, and merchant account underwriting. Lisa is also an avid railfan and HO scale train modeler, and enjoys curling.

Find Lisa Gibson on:

Subscribe to our blog