Chargeback Prevention Guide

Understanding Chargebacks

What Counts as a Chargeback?

A chargeback occurs when a cardholder disputes a transaction with their bank. Common reasons:

• Fraud — "I didn't make this purchase" (stolen card, account takeover)
• Non-receipt — "I never received the product/service"
• Not as described — "Product doesn't match listing/photos"
• Subscription — "I cancelled but got charged" or "I didn't authorize recurring billing"
• Refund not processed — "Merchant won't give my money back"
• Credit not processed — "Returned item but no refund"

The Real Cost of Chargebacks

It's not just the transaction amount. Each chargeback costs you:

Chargeback Rate Formula

Your chargeback rate is calculated monthly:

Example: 50 chargebacks on 10,000 transactions = 0.5% CB rate (safe)

Example: 150 chargebacks on 10,000 transactions = 1.5% CB rate (danger zone)

Important: Chargebacks are counted in the month they're filed, not the month the transaction occurred. A December sale can cause a March chargeback.

Prevention Strategy: 4 Layers of Defense

Layer 1: Pre-Transaction Fraud Screening

Stop fraudulent transactions before they process:

For Physical Products:

• Fraud tool: Sift, Signifyd, or Riskified ($0.10-0.30 per transaction)
• Rules: Decline if shipping ≠ billing address (for first purchase)
• Velocity limits: Max 2 purchases per card per day
• Geolocation: Decline if card-issuing country ≠ IP country (unless allowlisted)

For Digital Products/Services:

• Email verification: Require confirmed email before purchase
• IP blacklists: Block known VPN/proxy services
• Device fingerprinting: Limit purchases per device ID
• 3DS authentication: Require 3D Secure for >$100 orders (shifts liability to issuer)

Layer 2: Clear Customer Communication

Many chargebacks happen because customers don't recognize the charge or can't reach you:

Billing Descriptor

• Use recognizable company name (not "PAYFLOW*XYZ123")
• Include phone number in descriptor: "ACME INC 555-0100"
• Test it: buy from yourself and check your bank statement

Post-Purchase Emails

• Order confirmation: Sent within 5 minutes, includes: order #, items, total, expected delivery
• Shipping notification: Sent within 24h of shipment, includes tracking link
• Delivery confirmation: Sent when tracking shows "delivered"
• Follow-up: 7 days post-delivery: "How's your [product]? Any issues? Reply to this email."

Subscription-Specific

• Pre-billing reminder: 3 days before rebill: "Your [subscription] renews on [date] for $X. Cancel anytime: [link]"
• Failed payment notice: "Your card was declined. Update payment: [link]. Cancel: [link]."
• Clear cancellation flow: No "call to cancel" BS. One-click cancel in customer portal.

Layer 3: Rapid Dispute Resolution (RDR)

This is the most important layer. RDR prevents disputes from becoming chargebacks.

How RDR Works

1. Cardholder calls their bank to dispute a charge
2. Bank queries Verifi/Ethoca network: "Is this merchant enrolled in RDR?"
3. If yes: Dispute is sent to YOU before it becomes a chargeback
4. You have 24-72 hours to issue a refund (avoids chargeback fee + CB count)

RDR Enrollment

You need TWO services (they cover different card networks):

• Verifi CDRN/RDR — Covers Visa/Discover ($199-499/month + $0.10-0.20 per alert)
• Ethoca Alerts — Covers Mastercard ($199-499/month + $0.10-0.20 per alert)

ROI Example: $400/month cost, prevents 50 chargebacks @ $25 fee each = $1,250/month savings + keeps your CB rate clean.

RDR Rule Configuration

Set up auto-refund rules to handle alerts without manual review:

• Auto-refund if: Amount < $50 + order is >30 days old
• Auto-refund if: Reason code = "fraud" + you have no delivery confirmation
• Manual review if: Amount > $500 or customer has prior disputes

Layer 4: Chargeback Representment

When you DO get a chargeback, fight the ones you can win:

Winnable Cases

• You have delivery confirmation — Signature, tracking showing "delivered"
• Customer used the product/service — Login records, usage data, completion confirmations
• Refund already issued — Customer filed CB after you refunded (provide refund proof)
• Terms were clear — Timestamped screenshots of ToS, refund policy, subscription terms customer agreed to

Unwinnable Cases (Don't Waste Time)

• True fraud — Card was actually stolen
• Product genuinely defective — Photos/videos from customer
• You missed delivery deadline by >14 days
• Your ToS violates card network rules

High-Risk Scenarios & Solutions

Subscription Businesses

Problem: "I didn't authorize recurring charges" is the #1 CB reason.

Solutions:

• Explicit opt-in checkbox: "Yes, charge me $X every month starting [date]"
• Confirmation email with subject: "Your $X/month subscription is confirmed"
• Billing reminder 3 days before each charge
• Dunning management (retry failed payments smartly to avoid "I cancelled but got charged")

Free Trial → Paid Conversions

Problem: Users forget about trials, get charged, dispute.

Solutions:

• Email on day 1: "Your 7-day trial ends on [date]. You'll be charged $X."
• Email on day 5: "Your trial ends in 2 days. Cancel anytime: [link]"
• Soft descriptor on authorization: "ACME 7-DAY TRIAL"
• First charge uses descriptor: "ACME SUBSCRIPTION START" (not generic "RECURRING PMT")

Drop Shipping

Problem: Long delivery times (14-30 days from China) = "Where's my order?" disputes.

Solutions:

• Website shows delivery estimate: "Ships in 7-10 days, arrives in 15-25 days"
• Order confirmation repeats timing: "Expected delivery: [date range]"
• Tracking updates every 3-5 days: "Your order is in transit. Current location: [X]"
• Offer "expedited shipping" option to capture impatient customers

Digital Products

Problem: Customer downloads, uses, then disputes to get free product.

Solutions:

• Log all downloads (IP, timestamp, file name)
• Watermark content with customer email/transaction ID
• Require account creation before purchase (proves "beneficial use")
• For courses: track video completion % (proves they used it)

Monitoring & Alerts

Set up weekly alerts for these metrics:

• CB rate >0.5%: Review transactions, tighten fraud rules
• CB rate >0.75%: Emergency: refund anything questionable proactively
• Refund rate >10%: Product/service quality issue (fix root cause)
• Fraud rate >2%: Fraud filters too loose (tighten rules)

Run a free GuardScore audit to see:

• Your current chargeback risk level
• Whether you need RDR/VAMP enrollment
• Which processors are best for your CB profile