Chargebacks for High-Risk Merchants: How to Prevent Payment Disputes in 2025

Did you know that too many chargebacks could lead to higher processing fees or even losing your ability to accept payments? In this episode, join Frank as he dives into a challenge that just about every merchant faces at one point or another—chargebacks. You'll learn about the seriousness of chargebacks, especially for high-risk businesses, and how to implement the right strategies and tools to minimize their impact on your bottom line.

In this episode, these questions and topics will be covered:
• 1:15 - What exactly is a chargeback, and why does it happen? 
• 3:32 - The three main types of chargebacks: fraudulent, consumer disputes, and technical chargebacks. 
• 6:11 - Strategies to prevent chargebacks from happening: the importance of solid policies and customer service. 
• 11:11 - How detailed analytics and reporting can provide insights into chargeback patterns. 
• 13:33 - Key takeaways for implementing targeted solutions to manage chargebacks effectively.

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Website: http://www.paydiverse.com
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Transcript

UNKNOWN: 0:00

Thank you.

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Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Senna, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions and grow your business. Let's get started. Did you know that too many chargebacks could lead to higher processing fees or even losing your ability to accept payments? Chargebacks can feel like a business-ending headache, but today I'll walk you through ways to minimize them and to keep your payment processes running smoothly. Welcome back to The Payment Sky, where we break down the world of payment processing to help e-commerce merchants optimize their payment solutions. I'm Frank Sena, and today we're diving into a challenge that just about every merchant faces at one point or another, chargebacks. Chargebacks are more than just a nuisance. They're a serious concern for banks and card networks, and they're especially relevant for high-risk businesses. If you operate in this space, high chargeback rates can lead to higher fees, stricter guidelines, and even account termination Most high-risk merchants see more than just a chargeback or two a month. But with the right strategies and tools, it's possible to minimize those chargebacks, protect your bottom line, and keep your business thriving. In this episode, you'll walk away knowing how to identify what's causing your chargebacks, key strategies to prevent them from occurring, and tools that can help you manage and minimize to mitigate chargebacks when they happen. All right, let's get into it and start by breaking down the basics. What exactly is a chargeback and why does it happen? To understand why chargebacks are such a big deal, it helps to look at them from the merchant bank's perspective. Think of it from the bank's point of view. They've already paid you for the transaction, but if a chargeback comes through, they're caught in the middle. They have to refund the customer on your behalf that's a big cost for them. Chargebacks can come through up to six months after that transaction has been processed. High chargeback rates can indicate that your business could be a long-term risk, potentially resulting in even more disputes. If too many chargebacks happen, it's not just a financial issue for the bank. It also strains the bank's relationship with the card networks like Visa and MasterCard, who monitor chargeback rates very closely. So they watch charge backs carefully, and if you start racking up too many, it can create big problems. High charge back rates can lead to increased fees, monitoring programs, and in some cases, they'll just terminate your account because there's too many charge backs. So now that we understand the bank's concerns, let's talk about the types of charge backs and why they happen so you can get a better sense of what might be driving charge backs in your business. Not all charge backs are created equal. They usually fall into three main buckets. There's fraudulent chargebacks, consumer disputes, and technical chargebacks. Each type has a different root cause and requires its own strategies to prevent. So talking about fraudulent chargebacks, they typically occur when a customer disputes a charge because their card was used without authorization. Sometimes it's actual fraud, like someone stole their credit card, But other times it's what we call a friendly fraud where the customer made the purchase but disputes it because maybe they have buyer's remorse or they just want a free product. And these credit card companies will often just take the customer's side. So a lot of times this friendly fraud will be effective and the merchant gets screwed. Fraudulent chargebacks are especially common in the e-commerce space where physical card presence is not required. So then we have the second bucket, which is the consumer disputes. They're often related to dissatisfaction with the product or service. So maybe the product didn't match its description, it didn't arrive on time, or the customer service fell short. Confusion over the return policies, hard to find customer support, or even an unclear billing descriptor can easily push customers to file a chargeback instead of contacting the business directly to resolve it. Finally, there are technical chargebacks, which happen due to processing errors. These are not that common, but worth going over. Some examples include double billing a client, charging the incorrect amount, or not processing a refund quickly enough. While these are less common than other types of chargebacks or disputes, technical chargebacks are often preventable with accurate billing systems and payment gateway practices, and just making sure that all of your technology stacks that are integrated with your payment systems are integrated correctly, because that's usually where I see any sort of double billing mistake happen. It's usually just a technical error that can be easily fixed by reviewing your integrations. So understanding the types and causes of chargebacks is the first step towards minimizing them. Each chargeback type has unique causes and addressing these issues proactively will help you keep chargebacks to a minimum and your account in good standing. So now that we know why chargebacks happen, let's get into strategies to prevent them. Prevention is always the best strategy here. In fact, some of the most effective methods do not require advanced technology, just solid policies and processes. So let's talk about customer service policies. Many consumer disputes can be avoided by making it easy for customers to reach you. Keep your customer service phone number visible in the header or the footer of your website. Have a dedicated contact us page prominently displayed on your website and consider adding a refund link to the header or footer. While I understand merchants don't want to lose a sale, you really need to think about this from a how do I minimize chargebacks and disputes? How do I make it as easy as possible for a customer to contact me if they have a problem rather than going to Visa or MasterCard or Amex to get it resolved that way? Because if you get too many of those disputes, then your merchant account is going to get terminated and you're going to be stuck without the ability to process payments. While no one wants to lose a sale, the cost of chargebacks will hurt your business much more in the long run. Another key element is your billing descriptor. Your billing descriptor is the name that appears on a cardholder's credit card statement when they see the transaction. Testing the descriptor is very easy. Once your account is approved, just go into your virtual terminal and run a$1 transaction on your own credit card using the virtual terminal in the payment gateway. Then You go into your bank's app on your phone and you look up the transaction and just see how it's displayed. It's very simple. And then you can go back into the payment gateway and refund yourself for that$1 transaction. The best descriptors, the best billing descriptors are clear and easily identifiable. And they sometimes will include a customer service number to make it so easy for customers to contact you. If they see this transaction on their credit card, credit card statement, they don't really know what it's for, or they have buyer's remorse, the phone number's right there in the billing descriptor to call and get it resolved rather than them going through their credit card company to get it resolved. And here's a quick but essential step. Make sure your customer service phone number is functional and actually works. I know it might sound obvious, but we've seen this a lot. If the customer service phone number isn't properly or connected, customers can get really frustrated quickly and turn to their bank for a chargeback instead of trying to deal with the merchant. So always double check that that customer service phone number is active and functional. So in addition to solid customer service policies, third-party tools can be a game changer for managing chargebacks. Some vendors provide chargeback alerts to notify you as soon as a chargeback is filed, which gives you the chance to resolve the chargeback before it actually turns into a chargeback that hits your account. Other tools out there focus on dispute representation, where they help you to gather evidence to fight chargebacks. This service can be crucial if you regularly deal with friendly fraud or unauthorized claims. A really powerful tool is called RDR or Rapid Dispute Resolution, which allows merchants to resolve disputes immediately, sometimes before they even become chargebacks. For example, the RDR system can automatically issue a refund as soon as a dispute is flagged, preventing it from becoming a formal chargeback. So RDR is super powerful, you can set it to say, all right, any transaction under a certain value, like 50 bucks, if somebody disputes it, just automatically refund them. We don't want that to even come back as a chargeback. We'd just rather it was automatically refunded and it's a done deal right there. So finally, some services offer detailed analytics and reporting. These tools give you insights into chargeback patterns and show you which transactions products, or customer types are more prone to disputes. This data is invaluable for identifying problem areas and making targeted improvements. And if you're interested in any of these types of solutions or you're curious about how they could work for your specific business, feel free to reach out to me. At PayDiverse, we work with various providers to help tailor chargeback management strategies to fit your needs and help your business keep running smoothly and be able to collect payments without disruption. So one of the most important metrics for managing chargebacks is your chargeback ratio. You may have heard about this. This number, the chargeback ratio, tells banks and card networks how often customers are disputing your transactions. Let's go over how chargeback ratios are calculated and what levels you should aim to maintain. Chargeback ratios measure the percentage of disputes compared to your total transactions. So literally on your statement, you look at the total number of chargebacks and you divide it by the total number of transactions. And there you get your chargeback ratio. There are two main ways to look at chargebacks. You're looking at chargebacks by count and chargebacks by volume. Chargebacks by count look at the number of chargebacks divided by the total number of transactions So for example, if you process a thousand transactions in a month and you have 20 chargebacks, your chargeback ratio by count is 2%. Chargebacks by volume looks at the dollar amount of the chargebacks relative to your total sales volume. So if you have$100,000 in monthly sales and$2,000 in chargebacks, your chargeback ratio by volume is also 2%. Staying below the 1 or 1.5% mark is usually acceptable, but consistently exceeding 2% can lead to penalties, monitoring, or even account termination. It's really important that you keep your chargeback ratio low to protect your merchant account and avoid the risks that come with high chargeback rates, like having your merchant account terminated and not being able to accept payments anymore. All right, let's wrap things up. up with some key takeaways from today's episode. Chargebacks matter to banks and card networks. High chargeback rates directly impact your bank and card networks, which is why they monitor this metric closely. By understanding the different types of chargebacks that you have, you can implement targeted solutions to prevent them. So be sure to identify and address chargeback causes. Next, you We want to remember to always use customer service policies to prevent disputes. Make it super easy for customers to contact you. Test your billing descriptor and make sure that it's recognizable and easily identifiable. And ensure customer service numbers are visible and that they work. Make sure it's listed on your website all over the place. Consider using third-party chargeback management tools, chargeback alerts, representment services, RDR, and analytics tools can all help you minimize chargebacks effectively. Monitor your chargeback ratio regularly. Staying below that 1%, 1.5% is key. High ratios will jeopardize your account, cost you more money, and could prevent you from collecting further payments. And remember, chargebacks don't always have to feel overwhelming. If you're looking for a strategy tailored to your business, Reach out to PayDiverse. We work with high-risk merchants to keep your payment processes smooth, your account healthy, and your business protected. Thanks for tuning in, and until next time, keep your payments running smoothly.