What Do Chargeback Management Tools Actually Do?

Read Time: 5 min

If your small business accepts credit cards from customers and vendors, chargebacks can drastically impact your profitability. When a cardholder asks their processing bank to reverse a charge, it leaves your business financially liable for the transaction. Even if you’ve rendered services or delivered products, money can be withdrawn from your merchant account. This can lead to significant profit loss if it occurs frequently. To combat the rising tide of credit card fraud, many merchants use chargeback management and protection techniques to protect their bottom lines.

By using advanced chargeback protection methods, small businesses can protect themselves from the nefarious activity of fraudsters. Because a byproduct of consistent chargebacks is having all of your hard work be labeled as a high risk business.

So, what does chargeback protection for merchants actually do? Let’s explore everything you need to know about this topic and why your business may benefit from it.

To understand what chargeback management does for small business owners, it’s first important to understand the techniques currently employed by companies around the world. Let’s take a closer look at seven chargeback management options for modern businesses.

1. Using card security codes

Card security codes may seem like a basic chargeback protection technique for merchants, but they can stop serious fraud in its tracks. If you’re receiving a card-not-present order, asking for the security code provides an extra layer of protection for your business. If a fraudster has access to a credit card number, but not the security code, they won’t be able to complete the transaction.

2. Payment velocity tracking

One useful chargeback management technique is payment velocity tracking. Incorporating a system that identifies payment frequency can help you block suspicious behavior. For example, if a customer charges multiple credit cards from the same IP address in a short period of time, this might be a red flag for fraudulent activity.

Businesswoman smiling in front of her laptop3. 3D secure

3D Secure technology is an excellent way to prevent fraudulent use of credit cards online. When a customer uses a credit card, they’ll be redirected to a portal that requests a pre-determined password (or a passcode sent to the cardholder’s cellphone number). This is an extra layer of verification for merchants.

4. Address verification

Address verification is a basic chargeback management tool that can help you prevent the use of stolen credit cards on your website. An Address Verification Service will automatically check if the billing address provided by the customer matches the address listed with the credit card provider.

5. Chargeback alerts

Chargeback alerts can help you avoid the ramifications of a chargeback on your merchant account. With this prevention method, the alert system will notify you of the dispute, and you can process a refund before the processing bank finds out about the dispute. While this won’t stop you from losing money, it will prevent a chargeback from being recorded on your merchant account.

6. Blacklists and whitelists

Building blacklists and whitelists can help you target consumers that you can trust. On the one hand, a blacklist is formed when you identify customers that may be committing fraud. In many cases, this is as simple as blocking credit card users that have previously requested chargebacks.

On the other hand, a whitelist is much broader. If you want to restrict access to a small region, you can whitelist a specific state or country and blacklist the rest of the world. This can be a good idea if you know that overseas purchases for your types of goods or services are suspicious.

7. Using a DBA for accepting card payments

Not all chargebacks are the result of credit card fraud. In many cases, a customer may not recognize the charge on their credit card statement – this can lead to the client filing a chargeback request. This is particularly common when a business has a different legal name from its ‘Doing-Business-As’ name. Always use a recognizable name to process card transactions, and when possible include your customer service phone number.

Top Chargeback Protection Benefits for Merchants

So, how can chargeback management help your business? There’s no doubt that the above techniques will require time and investment from your small business, but the benefits are innumerable. Let’s explore the three primary benefits of chargeback protection for merchants.

1. Protect your revenue

chargeback protection for merchants

The primary benefit of chargeback prevention techniques is revenue protection. When a card user requests a chargeback, you will most likely lose the money from the transaction. This can be devastating for small business owners that operate on small margins. Beyond just the loss of revenue, with certain chargebacks, you might lose your product as well. Depending on your type of business, this loss could mean a real loss of revenue for your business.

If you’re selling large-ticket items, or you can’t afford the cost of a fraudulent sale, it’s essential to employ a comprehensive chargeback management strategy. This way, you can rest assured that your profits as well as products are being protected. Because when you’re just starting out or run a small business, you can’t afford to take a loss.

2. Protect your merchant account

While protecting your revenue stream from chargebacks is vital, there’s much more damage that can be done if a charge is reversed. Not only will you lose money, but you may also be at risk of losing your merchant account. If your chargeback ratio exceeds 1-2% of transactions, your account will be considered for closure and you will be forced to set up a high risk merchant account.

If your ratio is too high, merchant account providers will lose money. This will impact your future ability to process credit card transactions at your business.

3. Protect your reputation

If you’re a business that often processes fraudulent credit cards, it might reflect poorly on your brand. Employing proper chargeback protection methods can help you avoid reputational damage or undue association with fraud.

High Risk Industries Carry Specific Risks

If you operate in a high risk industry, you may be at particular risk of experiencing chargebacks on your merchant account. For example, bail bonds companies, adult industry companies, and gambling companies are all considered ‘high risk’ in the eyes of credit card processing firms.

While some credit card processing firms accept high-risk industries, chargeback management is critical for maintaining a merchant account. Not to mention, your credit card processing fees may vary depending on your level of risk. While chargebacks may seem like a small problem, they can have detrimental effects on other areas of your business.