A chargeback is the result of an action taken by a cardholder who disputes a credit card transaction through their credit card issuer. The card issuer initiates a chargeback against the merchant’s account and the funds are withdrawn unless the chargeback is reversed.
Typical Chargeback Reasons
Both Visa and Mastercard have different chargeback reason codes…
Visa Chargeback Reason Codes
41: Cancelled Recurring Transaction
53: Not as Described or Defective Merchandise
57: Fraudulent Multiple Transactions
60: Illegible Fulfillment
62: Counterfeit Transaction
71: Declined Authorization
72: No Authorization
73: Expired Card
74: Late Presentment
75: Transaction Not Recognized
76: Incorrect Currency or Transaction Code or Domestic
Transaction Processing Violation
77: Non-Matching Account Number
80: Incorrect Transaction Amount or Account Number
81: Fraud—Card-Present Environment
82: Duplicate Processing
83: Fraud—Card-Absent Environment
85: Credit Not Processed
86: Paid by Other Means
96: Transaction Exceeds Limited Amount
MasterCard Chargeback Reason Codes
4807: Warning Bulletin File
4808: Requested/Required Authorization Not Obtained
4812: Account Number Not On File
4831: Transaction Amount Differs
4834: Duplicate Processing
4837: No Cardholder Authorization
4840: Fraudulent Processing of Transactions
4841: Cancelled Recurring Transaction
4842: Late Presentment
4846: Correct Transaction Currency Code Not Provided
4847: Requested/Required Authorization Not Obtained and Fraudulent Transaction
4849: Questionable Merchant Activity
4850: Installment Billing Dispute
4853: Cardholder Dispute—Defective Merchandise/Not as Described
4854: Cardholder Dispute—Not Elsewhere Classified (U.S. region only)
4855: Goods or services not provided
4857: Card-Activated Telephone Transaction (fraud only)
4859: Change to Addendum, No-show, or ATM Dispute
4860: Credit Not Processed
4862: Counterfeit Transaction Magnetic Stripe POS Fraud
4863: Cardholder Does Not Recognize—Potential Fraud
4870: Chip Liability Shift
4871: Chip/PIN Liability Shift
Chargeback Ratios & Thresholds
The two most popular card networks, Visa and MasterCard, have chargeback monitoring programs to enforce chargeback thresholds for both count and percentages. They carefully scrutinize each business’s chargeback activity and take action when they consider chargeback levels to be too risky & excessive. The networks use a chargeback ratio, called the chargeback-to-transaction ratio, to evaluate risk. However, each network calculates the chargeback-to-transaction ratio differently. The count threshold is 100 on a monthly basis for Visa and MasterCard, and the percentage is 1%. For MasterCard, the number of first chargebacks filed in the current month divided by the number of transactions made in the previous month, so 100 first chargebacks in June divided by 10,000 transactions in May equals a 1% chargeback-to-transaction ratio (or 100 basis points). For Visa, the number of chargebacks filed in the current month divided by the number of transactions made in the current month, so 100 chargebacks in June divided by 10,000 transactions in June equals a 1% chargeback-to-transaction ratio (or 100 basis points). When exceeding these thresholds, businesses typically face termination of their merchant account from their merchant account provider.
By reviewing a business’s chargeback reasons, they are able to see the usual culprit for having chargebacks. When a merchant starts to get close to or exceed chargeback thresholds, they should immediately consult with a company such as Maverick to have a complimentary review done and see what can be done to better customer experiences to lower chargebacks. Usually, businesses are able to enhance simple practices and customer engagement, which in turn would help lower chargebacks.
Although it’s impossible to stop customers from issuing a chargeback, below are a few easy ways you can help limit your chances.
1) Use a name that your customers will recognize
Your credit card descriptor is the name that shows up on your customers’ credit card bills or online statements, which is typically generated by your DBA name, customer service number and abbreviated DBA state from the application. One of the biggest reasons merchants experience chargebacks is because their customers simply don’t recognize the charge. If you’ve branded your website something other than your legal name, use the name that appears on your website as your credit card descriptor. Even if you list your legal name in the footer of your website, chances are, your customers won’t read it or remember the name by the time the charge pops up on their statement a few days later. If you really want to use your legal name, we recommend using a URL as your credit card descriptor so the customer can review it and familiarize themselves with it and recall their purchase.
2) Be available
While some customers might instantly issue a chargeback when they don’t recognize a charge, others will actually take the time to do a little research about it. Make sure you have at least one easy way for those customers to get ahold of you. That means putting up an email address or phone number on your website. It can be hard, especially for startups, to man a phone 24/7, but most people are just as happy with an email address. Even if the customer wasn’t going to issue a chargeback, being available to your customers is just a good business practice. Giving unhappy customers a way to voice their concerns could help you save the sale or at least your company’s reputation with them.
3) The more detail the better
Ever ordered something online, and then when it arrived thought to yourself “wow, this is not at all what I thought I was ordering?” What about signing up for a service that you thought would solve your problem, but didn’t? The best way to avoid chargebacks from these scenarios is to provide detailed descriptions of what you’re selling. Include pictures or screenshots whenever possible. Dimensions are helpful if you’re selling products. For SaaS providers, give a detailed list of the features and functionality you offer. You can add to this list later as you enhance your service but always let people know what they are paying for. It is great to have a frequently asked question (FAQ) page that lists your refund policy, return policy, best ways to contact, etc.
4) If you’re going to offer a free trial, make sure it’s really free.
Don’t make customers enter their credit card information when signing up for your free trial just so you can roll them right into a plan with recurring payments. Go ahead and collect their information, but make sure your customers have to opt-in to your paying plan at the end of the free trial. You may lose out on those customers who would have otherwise forgotten to cancel their account, but it will guarantee that all of the customers you do get really want to use your service. Chances are the ones who forgot to cancel will either issue a chargeback or contact you for a refund anyway, creating more work for you in the end. It is important to always be as transparent as possible!
5) Don’t make a promise you can’t keep
When you’re first starting out, offering a lifetime membership sounds like a great idea to get customers, especially if the cost to signup is low, but you’re setting yourself up for failure. You’ve just promised to provide your service their entire lifetime. This opens you up to a lot of chargebacks if you decide to switch the company’s direction, or worse if you decide to shut your doors. Promising miracle results leaves you with the same exposure. If your product doesn’t cut through steel or deliver those 6 pack abs in a week, you’re going to run into trouble. Also, keep in mind a cardholder has up to six months to dispute a charge so by extending services, you’re essentially extending their chargeback window.
6) Don’t hold onto your customers’ money
The longer that money is in your possession before your customers get what they paid for, the more time your customers have to issue a chargeback. Annual subscriptions are one example of this. Your customer may have access to your service on day one, but they’ve been promised a full year of service. That’s 365 days where you run the risk of a potential chargeback. Once the chargeback has been issued, your customer gets the full amount back, not a prorated amount – even if they’ve already been using your service for 10 months. Another example is credit based billing models that allow customers to deposit funds up front and then work off of those funds over time. These models tend to see a higher chargeback rate than those that bill customers peruse or by invoice at the end of the month. Billing after you’ve already provided your service almost entirely eliminates your chance for a chargeback.
7) Offer refunds!
It can’t be stressed enough. It is the number one way to reduce your chargebacks. Let’s face it – chargebacks were created to protect consumers against scammers, so they are heavily skewed in favor of your customers. If someone’s not happy with your product or service, they are going to get their money back one way or another. Make it easier and refund customers when they deserve it!