5 August 2020
Chargebacks, or stopped cards and unpaid payments, are commonplace on marketplaces and crowdfunding platforms. A fraudulent transaction, goods not received, unrecognised transaction… There are numerous reasons why a buyer may dispute a payment with his/her bank, with a view to cancelling a payment. While it is impossible to achieve a 0% chargeback rate, best practices can be implemented to minimize chargebacks and their associated costs.
Chargebacks for commercial reasons are the consequence of two types of problems:
There are a number of possible ways to prevent this from happening.
To avoid claims for non-receipt of goods, it is advisable to work with service providers who require a signature on receipt of the goods. An acknowledgement of receipt will prove that the goods have been delivered.
To reduce the number of disputes related to defective goods, you should check the standing of merchants when they join and remain vigilant.Another good practice is to provide a responsive after-sales service, which will offer a full refund or replacement of the defective goods if there is the slightest problem. Although you will lose the price of the product sold, you will avoid the buyer contesting the payment with his/her bank, which would result in additional costs on top of the loss of the price of the product.
You can set up your API to automatically notify you of any chargebacks so that you can have a clear view of the chargeback rate for each merchant. This will enable you to identify problematic merchants and make the necessary decisions. You could, for example, freeze the funds of a merchant who has an abnormal rate of unpaid payments, in order to cover the costs, or even suspend their account if fraud is suspected. In general, it is advisable to be cautious at the beginning of the relationship.
There are several different reasons in this second category of chargebacks:
There are various processes that can be used to limit this type of chargeback.
When a platform uses a payment service provider, the name of the payment service provider will appear on the customer’s account statement by default, e.g. “Lemonway”. As a result, it is not uncommon for buyers to dispute a payment simply because they don’t recognize that name and don’t believe they have ever purchased anything from Lemonway.It is therefore good practice to use a dedicated descriptor, so that it the name of your platform appears on the customer’s bank statement (and not the legal name of your company, which could also confuse your customers).
The purpose of this secure payment protocol is to ensure that every online payment is carried out by the actual cardholder, in order to limit online fraud. If the cardholder’s bank is a 3D Secure member, the cardholder will have to perform an additional step during payment: receiving a one-time passcode on his/her phone or entering a password. Banks now also offer in-app validation solutions, i.e. directly from their mobile app. Adding an extra step does have an impact on buying channels, but this potential loss is largely offset by the reduction in card fraud and therefore in the chargebacks suffered by the operator. 3DS provides additional security for transactions, which means that banks will no longer accept certain grounds for contesting payments.
Some platforms tend to “hide” information about how to cancel a recurring payment in order to retain their customers, but this is a bad idea. If your customers have decided to stop using your services and cannot easily find out how to cancel their subscription, they will dispute these payments with their banks, which will result in costly chargebacks. It’s better to communicate clearly about the recurring payment, using concise and easily understandable FAQs that are easy to find.
Many unpaid direct debits can simply be avoided by ensuring that the mandates have been completed correctly and forwarded to the relevant bank. You should also be aware that if you are dealing with companies, a SEPA B2B offers greater protection than the SEPA Core designed for private individuals. Whereas with an SDD Core a payment can be disputed for up to 8 weeks without any reason or justification, a B2B SDD can only be disputed if a reason is provided. In both cases, disputes can be filed up to 13 months after the transaction.
Despite all these best practices, it is impossible to completely avoid the risk of chargebacks. While card chargebacks and chargebacks relating to direct debits can occur up to 13 months following the transaction, it is a good idea to wait a few days before authorising the withdrawal of funds to your merchants’ bank accounts and in the meantime to keep the funds in your merchants’ payment accounts. As 50% of chargebacks occur within the first few days of payment, it is possible to safeguard part of the funds using a precautionary delay. To cover any unpaid payments that may occur later, the simplest thing to do is to build up a cash reserve.
Finally, do not hesitate to contest chargebacks within 12 days of receipt. In the event of a commercial dispute for goods not received, for example, if you have proof that the delivery has been made, send this to your PSP who will dispute the chargeback with the customer’s bank.
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