Chargebacks in 2023: 4 Key Takeaways

Mitigating chargebacks is a complex task. Consumers file a dispute for a myriad of reasons, and that array of possible behaviors makes the prevention and refutation of chargebacks a challenge. To that end, efforts to define current trends and defense strategies can benefit the entire industry as it tackles an evolving and growing problem.

With that in mind, Justt recently published a survey-based report, 2023 Chargeback Pulse: Merchant Perspectives in a Changing Industry. A better understanding of merchant attitudes and experience gleaned from the survey data can help identify common obstacles the industry faces regarding chargeback mitigation. For a summary of the major takeaways, watch this video:

https://www.youtube.com/watch?v=IM2b41aE5qc

 For a more detailed explanation of key takeaways from the survey, read the following four highlights:

Takeaway #1: Chargebacks are a significant money drain

First, the report noted just how costly chargebacks are. Of the more than 500 surveyed U.S. and Canadian businesses, 40 percent of respondents said their businesses lost more than 1 percent of their revenue to chargebacks.

While that may not sound egregious, many businesses have profit margins under 10 percent of gross revenue. With margins that tight, chargebacks – many of which are illegitimate claims that should not be an accepted cost of doing business – can eliminate anywhere from 10-20 percent of total profit.

And that loss of revenue may only grow as consumers appear more open to using chargebacks. In a separate survey conducted in May, 78 percent of American consumers admitted filing at least one chargeback over the last year. That response share reflects a 12 percentage point increase over 2022. In addition, in the Chargeback Pulse survey, 53 percent of merchant respondents noted that chargebacks increased over the past year compared with 15 percent who registered a decrease. Greater consumer use means chargebacks will become an increasingly significant threat to your bottom line.

Takeaway #2: Chargebacks are a direct threat to your credit card processing rights

Second, chargebacks directly harm relationships between you, your acquirers or payment service providers and the credit card networks. Some 35 percent of companies surveyed reported that their chargeback ratio is more than 0.9 percent—above the threshold to enter the Visa Dispute Monitoring Program.

Going above the allowed chargeback limit leads to penalties and fines, but more worryingly, if it persists it may also result in the termination of any credit card processing agreements.

In other words, about a third of businesses are at-risk of losing their credit card rights.

Luckily, prevention systems pose a viable solution. Justt notes that 68 percent of companies that use post-transaction chargeback prevention systems report a chargeback ratio of less than 0.9 percent. And 72 percent of companies who use such systems report chargeback losses under 1 percent of revenue. Continued development of effective post-transaction chargeback tools will be crucial as the problem of chargebacks grows.

Takeaway #3: Chargebacks drastically weigh on your business operations

Thirdly, the chargeback rules and regulations are ever-changing, and that constant evolution makes it difficult for anyone to develop adequate defense strategies. Many merchants note that it is impossible to “get ahead of the curve.”

Moreover, keeping up with chargeback rules and regulations is draining and difficult. It distracts employees from other tasks they may have and there is no guarantee that they stay up-to-date with industry changes.

For example, Justt found that 17 percent of respondents had not heard of Visa Compelling Evidence 3.0 rules. And only 33 percent stated that they fully understood the new submission requirements. Which is surprising, as the changes made by Visa significantly impact the nature of evidence submission for fraud (Reason Code 10.4) chargebacks. And yet, a significant cohort had little exposure to the update.

No wonder 35 percent of merchants found it “extremely challenging” to keep up to date with credit card chargeback rules. Such internal confusion, lack of awareness, and limited education regarding chargeback rules show how fighting chargebacks directly drags down business efficiency.

Takeaway #4: Chargebacks demand attention from executive leaders

Lastly, chargebacks are not a throw-away issue that a single mitigation team can handle. Instead, it is a wide-reaching problem that demands proactive responses from several departments guided by strong leadership. Tellingly, Justt notes that 16 percent of respondents did not feel valued by their leadership. And those who noted a lack of value by executive teams were among respondents who also listed a lack of leadership buy-in as a key resource shortfall regarding their chargeback defenses. There is a connection between how much leadership understands the challenges facing chargeback teams and the overall support provided to those departments.

Fraud and chargeback department sentiment also suggests that mitigation teams need more support. Nearly 40 percent of dispute and fraud departments note that staffing requirements in the face of fluctuating chargeback volumes are “extremely challenging.” Different business departments are struggling and want support from management.

Luckily, collaboration presents a viable solution. Seventy-four percent of survey respondents noted that the greatest value of collaboration is the reduction of chargebacks and the primary reason for having good relationships with other departments. And yet, the greatest obstacle to collaboration reported by 66 percent of respondents was the fact that the departments they worked with reported to different company areas. Chargeback mitigation teams need buy-in from an engaged and responsive leadership team in the business to produce enviable results.

Conclusion: How to address chargebacks going into 2024

Gaining insight into merchant’s perspectives is instrumental in identifying the pressing industry concerns that warrant attention. Just’s report provides a valuable look into how the chargeback industry functions, and we can glean several takeaways for the future:

● The importance of fostering collaborative efforts with the help of executive leadership buy-in.

● The need for education investments within the ever-evolving chargeback space.

● The need for effective chargeback solutions that keep disputes below chargeback ratio thresholds.

● The importance of a streamlined dispute resolution process that can alleviate the cost and resource strain of chargebacks.

Industry-wide efforts in these areas can help improve the overall chargeback response as we enter 2024. For more information and data, you can read the 2023

Chargeback Pulse: Merchant Perspectives in a Changing Industry.