What Is Chargeback Management & Why Is It Important?

I’m paranoid when it comes to chargebacks and want to know all avenues I have to combat and prevent them. Chargeback management is how you’d achieve this.

I’ll explain what it is, the different parts of it, and how to do chargeback management.

Let’s see what it is, first.

Key Takeaways

• Chargeback management involves identifying and fighting disputes.
• Tools like chargeback alerts can help, but they can be costly.
• Choose among SaaS, fully managed, and hybrid solutions.
• The different types of chargebacks you’ll encounter include true fraud, friendly fraud, and merchant errors.
• KPIs are chargeback rate and net win rate.

One part of chargeback management is having dispute alerts. But you may not want to sign up under a company that charges thousands of dollars a month just to access them.

We make it easy to access these alerts. Learn how.

What Is Chargeback Management?

Chargeback management is a process businesses use to handle and prevent payment reversals. It involves identifying disputes, investigating claims, and implementing strategies to reduce chargebacks. Effective management protects revenue and keeps chargeback ratios within acceptable limits.

Think of "chargeback management" as preventing chargebacks.

Sometimes, software helps with this. Other times, you need to make business changes. We’ll explore both options soon.

The goals are to:

• Prevent chargebacks
• Combat friendly fraud in representment
• Keep chargeback rates within an acceptable range

You can handle this in-house, hire a company, or use a combination of both.

Before diving into these options, let’s refresh your memory on what chargebacks are.

Otherwise, how do you know what you’re preventing?

Summary: It’s what businesses use to prevent chargebacks.

What Even Are Chargebacks?

Chargebacks are forced refunds initiated by customers through their banks. They occur when cardholders dispute transactions on their credit or debit statements. Chargebacks protect consumers from fraud and unfair practices but can be costly for merchants.

We have detailed information on chargebacks in another guide.

I suggest reading it for more insight.

You should also read about the differences between debit and credit card chargebacks.

Here’s an example of a chargeback:

A customer ordered a pair of shoes online and received them in good condition. Despite this, they contacted their bank, claiming they never authorized the purchase. Instead of contacting the merchant for a return, they filed a chargeback.

This is a friendly fraud chargeback. I’ll discuss the differences between this dispute type and the others later.

But wait:

Chargebacks don’t always involve cards. Some payment processors have their own versions. PayPal, for instance, uses a claims process, and Amazon has A-to-Z claims.

These don’t carry the same consequences as traditional chargebacks, but they work similarly.

Let’s see how a chargeback management framework could help prevent this.

Summary: A forced reversal of funds from the merchant.

What Is a Chargeback Management Framework?

A chargeback management framework is a systematic process for handling transaction disputes. It aims to reduce financial losses and maintain a healthy chargeback ratio. This approach includes prevention strategies, fraud detection, and efficient dispute resolution methods.

A framework helps prevent chargebacks without using software.

Here’s what you could include in your framework:

• Defined roles and responsibilities for team members
• Tools to automate tasks and streamline work
• Standard procedures for different scenarios
• Metrics to track performance and improve
• Templates for dispute responses

Now we’ll need to know what the chargeback process looks like.

Summary: Blueprint that helps businesses effectively manage chargebacks.

And What is the Chargeback Process?

• How long it lasts: 75 – 120 days

Before exploring management tools, let’s see what happens during the process:

1. Pre-dispute: Cardholder disputes a charge with their bank.
2. Review: Bank reviews the claim for validity.
3. Provisional credit: Bank grants temporary credit to the cardholder if valid.
4. Notify merchant: Bank informs the merchant and debits their account.
5. Merchant response: Seller can accept or dispute the chargeback.
6. Representment: Merchant submits evidence.
7. Final decision: Bank or issuer decides.
   1. Merchant wins: Chargeback reversed.
   2. Customer wins: Chargeback stands.

Knowing this process helps identify what to address.

Read more about the process in another piece.

This process may differ by card provider and circumstance. For instance, if you’re signed up for RDR and CDRN, you’ll have a chance to refund the customer during the pre-dispute phase.

If you do so, then the process won’t proceed.

I recommend reviewing these guides for more details on different networks:

• Visa
• Mastercard
• American Express
• Discover

They differ in time limits, chargeback reason codes, and the way they handle the process.

There’s also pre-arbitration, which happens after representment. It gives both sides another chance to agree.

If neither party concedes, the case moves to arbitration. This is a dead stop to the process and involves the card network. They’ll review the presented evidence and make a decision.

Only 2% of chargebacks reach this stage.

Now we can discuss the software.

How Does Chargeback Management Software Work?

Chargeback management software identifies suspicious transactions and alerts businesses in real time. It integrates with payment systems to monitor patterns and reduces disputes. The software also generates responses for chargeback claims and provides tools for prevention and analysis.

Here are the tools most chargeback management software offers:

• Chargeback alerts: Notifies businesses of new chargebacks in real time.
• Recordkeeping and reporting: Tracks chargeback data for decisions and analysis.
• Prevention and analysis: Detects fraud patterns to reduce future disputes.
• Representment generation: Automates responses to fight chargebacks.
• Chargeback guarantees: Protects against losses from chargebacks.

Each of the following sections will dive a bit deeper into each of these solutions.

1. Chargeback Alerts

Chargeback alerts notify merchants of customer transaction disputes before a chargeback occurs. These warnings allow merchants to address issues promptly. Potentially preventing chargebacks.

There are 3 alert providers, CDRN, Ethoca, and RDR. They usually require you to go to Verifi or Ethoca to sign up for them, which wastes a lot of time.

That’s why it’s better for you to consider a reseller (like us). You won’t need to pay an arm and a leg for fully managed chargeback management services. Meanwhile, you can prevent up to 91% of chargebacks.

That rate has many variables. For instance, whether you use all 3 alerts and whether the issuing bank is signed up for Visa Resolve Online.

I discuss the details on alerts in a separate piece. It’ll also help you determine whether you should use them.

2. Recordkeeping & Reporting

Recordkeeping tracks and stores transaction data, chargeback details, and customer interactions. This allows easy access to historical data for analysis and compliance.

Reporting generates insights and summaries from the recorded data.

This helps businesses:

• Measure performance against KPIs
• Understand chargeback trends
• Identify root causes

Effective recordkeeping and reporting allow businesses to respond quickly to disputes, improve decision-making, and enhance financial health.

3. Prevention & Analysis

Prevention strategies in chargeback management software reduce the likelihood of chargebacks.

This includes:

• Fraud detection: Algorithms identify unusual transaction patterns.
• Transaction optimization: Streamlines checkouts to reduce user errors.
• Customer service improvement: Feedback loops enhance service quality.

Analysis involves examining chargeback data to find trends and root causes. It helps businesses understand why chargebacks happen, guiding preventive measures.

By analyzing patterns, businesses can refine their processes, lowering chargeback rates and reducing costs.

4. Representment Generation

Representment in chargeback management software is the process of contesting a chargeback. When a merchant receives a chargeback, they can provide evidence to dispute it.

The software collects data, such as transaction details, customer communication, and shipping info. It compiles this evidence into a structured format for submission to the payment processor.

This process aims to reverse the chargeback and recover lost revenue. Effective representment boosts success by addressing the chargeback reason and proving the transaction was valid.

Some software claims to win up to 80% of chargebacks.

This rate depends on factors like the type of dispute, with friendly fraud cases having higher win rates. In general, sellers will win around 30% of chargebacks.

5. Chargeback Guarantees

Chargeback insurance (AKA guarentees) covers the costs of disputed transactions, including the original amount and fees.

This type of coverage reduces the financial impact of chargebacks, letting merchants focus on growth without fearing unexpected losses.

Chargeback insurance involves an agreement with a provider, which assesses factors like transaction volume and history.

I have more information and whether it’s worth getting in a separate guide.

What Are the Types of Chargeback Management Software?

When shopping for chargeback management software, you’ll encounter three options:

• SaaS: Subscription-based services offering full control over chargeback management.
• Fully managed: Outsourced chargeback management.
• Hybrid: A mix of SaaS and fully managed options.

I’ll compare the options below.

For more information on these tools, check out a separate guide. It also compares some of the best chargeback management tools out there.

Let’s begin with software as a service (SaaS).

1. SaaS

Pros:

• Saves money.
• Not overkill.
• Ideal for smaller businesses.

Cons:

• Must delegate staff to deal with these tools.
• Requires training.

SaaS chargeback management tools help businesses automate and manage the chargeback process. Delivered via a cloud-based or on-site platform, these tools allow businesses to handle disputes, track transactions, and maintain detailed records.

SaaS provides flexibility and cost savings compared to fully managed services.

However. The business must oversee the system, requiring time and expertise.

Cloud-based solutions offer easy access but may pose security risks. On-site tools provide more control but come with higher upfront costs.

2. Fully Managed

Pros:

• Access to chargeback expertise and resources.
• Saves your team time and effort.
• Handles disputes efficiently and reduces operational strain.

Cons:

• Higher costs than SaaS alternatives.
• Less control over dispute resolution processes.

Fully managed chargeback management tools outsource the chargeback process to professionals. They handle all communication with banks and card networks, automate responses, and offer fraud detection features.

Fully managed solutions free businesses from chargeback management, allowing focus on core operations. Reporting and insights track performance, but the business has limited control over the system.

These options cost more than SaaS, but businesses benefit from expertise and efficiency. Though, some companies may prefer more oversight or customization, which is often limited with fully managed services.

3. Hybrid Solutions

Pros:

• Balances control and outsourcing flexibility.
• Tailors tools and services to your business needs.
• Combines internal expertise with external support.

Cons:

• Managing both systems can get complicated.
• Requires continuous oversight to maintain efficiency.

Hybrid chargeback management tools offer a blend of in-house control and external support. Businesses can manage certain chargeback tasks themselves while outsourcing more complex or time-consuming responsibilities to experts.

Hybrid solutions allow businesses to customize their chargeback management process. They can use internal resources for simpler tasks and external professionals for more complex cases.

This approach offers flexibility but requires careful planning to ensure smooth operation.

Managing multiple systems and providers adds complexity. Regular evaluation is needed to decide which tasks should be outsourced or handled internally.

What Are Different Types of Chargebacks?

There are 3 different types of chargebacks:

• True fraud: An unauthorized transaction made with stolen information.
• Friendly fraud: A customer disputes a legitimate order.
• Merchant error: The seller makes a mistake.

We have a separate guide that compares these in detail. Check it out.

When you get a chargeback, issuers and banks won’t use these labels. They assign reason codes that explain why the customer disputes the order.

Reason codes vary by card network. I provide a full list of them in this guide.

You can boil all of those codes down to the above chargeback types.

Each of these types will require different combinations of tools and prevention methods to combat.

Let’s see what these sources are.

1. True Fraud

True fraud chargebacks occur when unauthorized purchases are made with a stolen card. The cardholder is the victim, and the issuer investigates the fraud. They reverse charges and prevent future fraudulent transactions.

It accounts for 1% of chargebacks but has the lowest win rate (9%).

To prevent true fraud (also known as third-party fraud), focus on these tools:

• Address Verification System (AVS): Matches the billing address with card issuer records.
• Card Verification Value (CVV): Verifies the security code on the back of the card.
• 3D Secure: Adds an authentication step for online transactions to verify the cardholder’s identity.
• Device fingerprinting: Tracks device details to spot fraudulent patterns.
• Fraud detection: Uses machine learning to flag suspicious behavior.

See this guide to learn more about third-party fraud and ways to prevent it.

You’ll need to prove that the customer is committing friendly fraud. If the fraud is real, there’s no point in trying representment.

What if they’re committing friendly fraud?

2. Friendly Fraud

Friendly fraud chargebacks occur when customers request reversals for legitimate purchases. They claim non-delivery or unauthorized transactions despite receiving the goods or services. This type of chargeback fraud misleads banks and hurts businesses financially.

Friendly fraud is a type of chargeback fraud where the customer often "doesn’t know" they’re committing fraud. Find the differences between these types of fraud here.

Friendly fraud can account for up to 75% of chargebacks, with an average win rate of 43%.

Using tools from the true fraud section can help prevent customers from falsely claiming fraud.

You should also consider adding these tools to cover other areas:

• Chargeback representment software: Automates evidence collection.
• Order tracking systems: Provides proof of delivery to counter "item not received" claims.
• Chargeback alerts: Enables early detection and dispute resolution.
• Cardholder verification tools: Confirms identity through customer details.

The aim is to prove that the actual customer made the purchase.

Learn more about friendly fraud in this piece.

This last chargeback type if up to you to prevent.

3. Merchant Error

Merchant error chargebacks occur when businesses make mistakes during transactions. These errors can be technical glitches or human oversights in processing, fulfillment, or billing. Customers initiate chargebacks to correct these merchant-caused issues and recover their funds.

These disputes account for 20 – 40% of chargebacks and don’t typically require management tools to fix.

Analytics and reporting tools could provide data that’ll help you what in your standard operating procedures are causing these issues, though.

Focus on having clear billing descriptors and policies. Otherwise, customers could have evidence that’ll increase their odds of winning chargebacks.

How do you know whether chargeback management tools are helping? Let’s see.

Key Metrics With Chargeback Management

Metrics are critical for assessing chargeback management effectiveness. You should understand the tools and techniques before diving into performance metrics.

Here’s what we’ll compare:

• Chargeback rate: Number of sales versus chargebacks filed.
• Net win rate: Number of cases won versus total disputes.

Now, let’s dive in.

1. Chargeback Rate

Chargeback rates (or ratios) contrast your sales against the total number of chargebacks in a period. You’ll ideally want to keep your rate under 0.65%. Otherwise, you run the risk of facing penalties.

Exceeding acceptable chargeback rates can lead to penalties, including being placed in chargeback monitoring programs. These programs impose heavy fines and can even result in being removed from a card network.

And if you’re "lucky", they’ll put you on a MATCH list. This prevents you from being able to access other payment processors for a while.

This risk underscores why reducing chargebacks is so important. You need to keep your rate within an acceptable range to avoid such programs.

Learn more about the different types of programs in this piece.

Let’s move onto win rate.

2. Net Win Rate

Net win rate, AKA net recovery rate, is the percent of chargebacks that you won divided by the total number of disputes issued. A higher net win rate shows how well you do with disputing resolutions. It also reveals the financial impact of disputes on your business.

The "total" chargebacks include those you chose to represent and those you didn’t. For instance, if you accept a chargeback and don’t fight it, it counts toward this rate.

Having a low net win rate won’t result in you being in a monitoring program. But it means your business is losing a lot of money.

One of those ways you’re losing money is through chargeback fees.

Dealing with Chargeback Fees

Chargeback fees are costs that the issuer charged the acquirer and passed on to you. Usually, you must pay $10 – $100 per chargeback and they aren’t refunded. Even if you win.

Businesses located in Mexico will receive refunds if they use Stripe. Or merchants using Shopify will get refunds.

That’s besides the point.

Some payment processors and chargeback management solutions will offer chargeback guarantees (or chargeback insurance). These will reimburse you the lost product cost and the chargeback fee on some dispute types.

We explore chargeback fees and the overall cost of disputes further in a dedicated guide.

These costs should convince you that chargeback management is worth the investment. Without it, you’re paying fees, losing products, and bearing staff costs to manage disputes.

Speaking of paying people. Do you really need to outsource chargeback management?

Do I Have to Outsource for Chargeback Management?

No, you don’t have to outsource chargeback management. If you’re a smaller business, I’d recommend dealing with chargebacks internally.

But…

Outsourcing means you’ll need someone up-to-date with chargeback regulations and banking rules. Otherwise, you risk increasing your chargebacks by violating rules.

I know folks who’ve compared prices of platforms and told me they charged more than $1,000 a month for basic features. Examples include Signifyd and Chargebacks911. Small businesses may not afford this alongside regular operational costs.

Consider hybrid options. Use representment generation for friendly fraud disputes or chargeback alerts for other types of chargebacks.

Also, explore fraud prevention tools available on your platform. For instance, Shopify offers affordable fraud prevention apps, which we compare in a separate guide.

Before you go, you should review the benefits of chargeback management software.

Benefits of Chargeback Management Software

Here are the various ways chargeback management software can help businesses:

1. Fraud detection: Machine learning flags suspicious transactions.
2. Real-time alerts: Lets merchants take quick action.
3. Data analysis: Aggregates transactional data to spot trends and root causes.
4. API integration: Connects with payment processors, shopping carts, and accounting systems.
5. Chargeback rate reduction: Helps prevent inclusion in chargeback monitoring programs.
6. Revenue recovery: Saves money by winning chargeback disputes, especially friendly fraud.
7. Efficiency: Automated systems streamline the dispute resolution process.

I mean, there’s not much else to discuss.

Chargeback management software keeps your chargeback rates low. Meanwhile, it helps you recover lost money through, for instance, friendly fraud with representment generation.

All of the data points, alerts, efficiency, etc., are the cherry on the cake. They make it easier to spot potential leaks in your business and seal them off before more customers can take advantage of it.

Aside from that, there’s nothing more to discuss.

Wrapping Up

Whether you use an all-in-one solution or manage chargebacks yourself, keeping your chargeback rate low is crucial. Otherwise, you risk losing access to payment processors.

One way you can get into chargeback management is by using chargeback alerts. See how we’ve helped folks reduce chargebacks by up to 91% with our alerts.