Ecommerce and Chargebacks: How to Manage and Prepare to Scale


This is a guest post by Scott Stone, CMO at Chargeback.

Ecommerce merchants, from brand-new to industry veterans, experience chargebacks. In 2016, ecommerce will lose $6.7 billion to fraud, according to data from LexisNexis and eMarketer. Chargeback fraud and friendly fraud represent 71 percent of those losses.

Unfortunately, many of these same merchants are unaware or undereducated in regards to what chargebacks are, what they mean for business operations, and the opportunities they create for revenue recovery.

Chargeback Basics

Every major credit card network guarantees zero-fraud liability to its cardholders. Chargebacks are simply a manifestation of these guarantees. A chargeback is a transaction reversal meant to serve as a form of consumer protection from fraudulent activity by both merchants and identity thieves.

To initiate a chargeback, cardholders file a dispute with their issuing bank. The merchant’s bank account is debited the amount of the transaction right away and the cardholder is credited the amount. If the merchant wants that money back, it’s up to them to provide compelling evidence to disprove any fraudulent activity associated with the transaction. Ultimately, it’s up to the card network to rule either in favor of the merchant or the cardholder.

Chargeback Ratio

The entities keeping a close eye on merchant chargeback ratios are the card networks. Visa, MasterCard, American Express, and Discover are looking for proportionate rates that sit at or below 1 percent for a set duration. A 1 percent chargeback rate is the industry-wide maximum acceptable ratio.

If your chargeback ratio exceeds that 1 percent, the card networks pass along heavy penalties and can shut down your account. In order to determine a chargeback ratio, divide the total number of chargebacks by the total number of transactions during a monthly period.

Chargeback Reason Codes

Each chargeback processed by the cardholder’s issuing bank is assigned a reason code. Chargeback reason codes accurately represent the grounds for the cardholder’s dispute. There are 151 reason codes across the four major card networks. Millions of disputes processed by Chargeback show the average breakdown of all reason codes used in the table below.


Each business will see a unique breakdown of reason codes, based on industry. However, if the breakdowns you see begins to deviate from the normal distribution, it’s an excellent indicator that some action needs to be taken.

Product or Service Reason Codes

Shipping and product misrepresentation comprise the two main subsets of product and service reason codes. With shipping-related codes, an increase in volume could point to distribution partner issues and shortcomings in consumer communication or tracking capabilities. Regarding product misrepresentation, a large volume of reason codes here should lead to audits of product descriptions and specifications provided on the website.

Cancel Recurring Billing Reason Codes

A disproportionately high volume of cancel recurring billing reason codes is a clear indicator that customer communication regarding payments and billing requires attention. It’s critical to honor all consumer requests for termination of billing as well as communication regarding upcoming billing cycles.

Fraud or No Authorization Reason Codes

If you field a disproportionately large amount of fraud or no authorization reason codes, there could be an issue with inadequate front-end fraud solutions. On the other hand, if fraud or no authorization reason codes suddenly disappear completely from the chargeback landscape, it could indicate overly-strict front-end fraud filtering. The danger this presents is the possibility of blocking legitimate transaction and alienating real customers.

Merchant Options

You can choose whether or not to respond to a chargeback. Unless  you participate in early alert notifications or are enrolled in a similar program with the card network, you aren’t notified of a chargeback until your monthly statement. After you’re notified, you can decide whether or not to respond to (i.e. ‘fight’) the chargeback.

Some merchants will only respond to chargebacks over a specified transaction dollar amount. While others will only respond to chargebacks coded under all reason codes other than fraud or no authorization.

  • Fraud Reason Codes > Response > Loss > True Fraud
  • Fraud Reason Codes > Response > Won > Chargeback or Friendly Fraud
  • Non-Fraud Reason Codes > Response > Won > Chargeback or Friendly Fraud
  • Non-Fraud Reason Codes > Response > Loss > Product or Service Issues

Responding is the only way you will ascertain the true source of the chargeback itself. While chargeback responses result in one of two outcomes (win or loss), one of three potential points of origin is revealed (other than product or service issues): true fraud, friendly fraud, or chargeback fraud.

  • True Fraud: True fraud occurs when an unauthorized individual completes a transaction with stolen payment card information.
  • Friendly Fraud: Friendly fraud occurs when a cardholder misuses chargeback rights, but without malicious intent.
  • Chargeback Fraud: Chargeback fraud is the fraudulent request for a return or refund in the form of a chargeback.

Responding to Chargebacks

If you field a low volume of chargebacks each month, you can manage responses in-house. Responding to chargebacks requires looking up the associated reason code, sifting through card network rules and regulations to determine the required response materials, collecting said appropriate compelling evidence, and submitting the evidence to the acquiring bank.

In order to locate information pertaining to the transaction and record information relevant to the reason code provided, you need to access the following data sources:

  • Payment Service Provider(s)
  • Shopping Cart Data
  • Customer Service Portal
  • Fraud Scoring

Responding to a single chargeback can be extremely time-consuming for small and medium-sized merchants. For those who experience a low volume of monthly chargebacks, the time invested in responses might not be an issue. On the other hand, if you receive dozens of chargebacks every month and plan on rapid growth, you should focus on the ability to scale the chargeback response process.

Scaling Responses

In order to scale the chargeback response process, you must create a central data warehouse. Here, all data sources containing information relevant to transactions are aggregated into one place. An in-house employee can use the central data warehouse to quickly generate responses from templates crafted specifically for the processor, reason code, and product.

Instead of accessing multiple data sources to gather the data required, the employee simply needs to access the central data warehouse, locate information relevant to the transaction, and generate the response. Pure automation of the process is critical for rapid scaling, but deep developmental knowledge and resources are needed to create and maintain this automation.

By improving time spent responding to chargebacks, you are able to improve the rate of chargeback responses as well. You’re able to respond to all chargebacks with this approach and not just those coded under fraud or no authorization reason codes. This is critical, because as much as 80 percent of all chargebacks represent chargeback fraud or friendly fraud. Despite more than half being initially categorized as fraud or no authorization.

Understanding what chargebacks are, the lagging indicators they present, and how to scale the response process ensures you are able to recover the greatest amount of revenue possible.

Chargeback develops software designed to help retailers prevent and manage chargeback fraud.


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