Revenue Optimization

Preventing Payment Reversals as a Merchant

Addressing chargebacks: impacts, prevention strategies, and merchant success with payments orchestration

Written by
Andy McHale
Publication Date
December 15, 2023
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Chargebacks can dramatically impact your end-of-month sales reports. 

When too many payment reversals occur due to chargebacks, you may quickly find your business facing a slew of operational and financial challenges. 

As a result, most merchants try to avoid chargebacks like the plague. 

According to the 2023 Global Ecommerce Payments and Fraud Report, first-party misuse ranks as the second most prevalent fraud attack, with 34% of merchants experiencing it.  

While some payment disputes are inevitable, the growing availability of payment methods demands merchants practice exceptional due diligence regarding chargebacks. 

What is a Chargeback? 

A chargeback is a term used to describe the reversal of a payment due to a customer dispute. 

Several participants in the payment process can initiate a chargeback, including the cardholder, the cardholder’s bank, or even the card network. Chargebacks can occur for varied reasons depending on the circumstance, such as:

  • The merchant did not fulfill the order for goods or services a customer purchased and is unwilling to issue a refund 
  • The goods or services provided by the merchant do not match the original order or agreement at the time of purchase, and the merchant is unwilling to issue a refund 
  • The payment amount for the goods and services purchased was incorrect 
  • The payment was not authorized by the cardholder, commonly referred to as “fraud” 
  • There were technical processing errors during payment processing

The cardholder’s bank most commonly initiates a chargeback. Following the chargeback initiation, most card networks debit funds from the merchant’s account back to the cardholder’s account. 

The Challenge of Chargebacks & Chargeback Fraud for Merchants

Customer disputes that lead to chargebacks present significant financial, operational, and administrative implications, making chargeback prevention immensely important. 

Although you can dispute chargebacks, the dispute process can be equally daunting, requiring you to collect and provide adequate evidence that a payment was correctly authorized and processed. 

The dispute process can take weeks to months of effort, increasing your business’s administrative and operational burdens. In the event of an unsuccessful dispute, you must not only refund the money to the customer but also pay an additional penalty fee to the bank in question. 

Even when you successfully dispute a chargeback, accruing too many chargebacks can lead to your business being classified as high-risk by card networks and banks. As a result, you may struggle to find future partnerships with banks and financial institutions. 

Aside from the operational toll of chargebacks, additional consequences can include: 

  • Lost revenue 
  • Lost products
  • High transaction fees
  • Penalty fees

Moreover, chargeback fraud can be a pervasive issue for your business, making it pertinent to inhibit the occurrence of chargebacks. Chargeback fraud occurs when customers intentionally dispute a payment despite receiving the correct products or services they purchased. 

Preventing chargeback fraud — and chargebacks in general — often requires the following improvements to your payment processing system:

  • Real-Time Fraud Detection: Real-time fraud detection systems analyze transactions as they occur, flagging suspicious activities instantly and allowing you to take immediate action before a payment is completed. For example, real-time fraud detection can identify irregular spending patterns or if a card is being used in multiple locations simultaneously. 
  • Strong Customer Authentication (SCA): SCA requires customers to provide multiple forms of verification before a transaction is approved, adding an extra layer of security beyond a simple password or PIN. By mandating additional authentication steps, SCA helps reduce the chances of unauthorized transactions and subsequent chargebacks due to fraud claims.
  • Up-to-Date Compliance Strategies: Regulatory standards like PCI DSS and PSD2 aim to reduce the risk of digital threats for merchants and their payment systems. Keeping your systems updated on the latest regulatory changes and leveraging tools that maintain compliance with the relevant standards is crucial for preventing chargebacks. 

Avoiding Chargebacks with Authorization Reversals & Refund Reversals

To avoid the consequences of chargebacks, it is vital to consider two additional types of payment reversals that can impact your business as a merchant: 

  • Authorization Reversals: An authorization reversal is widely considered the “quick fix” payment reversal. When an authorization reversal occurs, the payment is reversed before it officially completes its processing, saving both the merchant and the customer the headache of returning or retrieving the payment funds. In most cases, an authorization reversal occurs after discovering a problem with the payment during the payment processing stage. On a technical level, authorization reversals communicate with the relevant bank or financial institution to reverse a recently authorized transaction.
  • Refund Reversals: A refund reversal is a payment reversal that occurs after a transaction is completed but before a customer files an official dispute. In a refund reversal, the company or merchant willingly provides the customer with a refund and initiates the payment reversal process. Unlike an authorization reversal, refund reversals occur after payment processing. Refund reversals can have many underlying causes, from customer dissatisfaction over faulty products to incorrect payment amounts. Regardless of the reason behind a refund, refund reversals work by creating a new transaction to return the funds to the customer’s account.

As more time passes between a payment initiation and a reversal, the more complicated it becomes to return funds to a cardholder’s account. Utilizing authorization reversals and refund reversals whenever possible helps you avoid costly fees and operational inefficiencies. 

While both authorization and refund reversals can save merchants time, refund reversals can still result in extra interchange fees and lost funds. However, both types of payment reversals are preferable over chargebacks. 

Spreedly Helps Merchants Avoid Costly Chargebacks

Dealing with chargebacks can be a true hassle for merchants, hindering your ability to spend time on business innovation and growth. 

At Spreedly, our payment orchestration platform helps prevent and avoid chargebacks by optimizing each transaction for authorization success. 

Solutions like Smart Routing and Spreedly’s Advanced Vault help you ensure success during payment processing and keep stored payment information refreshed and secure. Plus, Spreedly provides Level 1 PCI compliance, keeping your system up-to-date on the latest regulatory developments. 

Discover how Spreedly works today to experience the advantages of payment orchestration.

Download the Payments Orchestration eBook Below

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