A Merchant’s Guide to Managing Chargebacks During COVID-19

The COVID-19 pandemic has completely disrupted usual business practices and consumer behaviors, leading to a tremendous increase in chargebacks—and if you’re a business owner, it’s likely you’ve experienced this firsthand. While the travel and hospitality industry has been hit particularly hard due to increased travel cancellations, it’s certainly not the only industry that’s experiencing an increase in chargebacks: other factors such as inventory issues, shipping delays, and a spike of ‘friendly-fraud’ chargebacks filed by cash-strapped customers have affected merchants everywhere.

In this article, we’ll dive into several key factors that are contributing to the chargeback explosion during COVID-19, and share some practical steps that merchants can take to reduce negative outcomes. Plus, we’ll discuss some unique and timely circumstances in which cardholders actually do not have the grounds to dispute transactions.

It’s important to keep in mind that the world of chargebacks is quite complex, and this article is just a basic overview. If you are a Fidelity merchant and you have specific questions about chargebacks you’ve received, we encourage you to reach out to our Customer Service team for assistance.

Environmental Factors That Are Leading to an Increase in Chargebacks

As more time passes, it’s becoming clear that the economic effects of the coronavirus pandemic are quite pervasive. And because of this, cardholders are finding more and more reasons—some legitimate, some not—to dispute transactions on their credit cards. See below for some common reasons for the recent increase in chargebacks, and scroll to the end of this article for tips on protecting your business from these types of chargebacks.

1. The Merchant is Unable to Provide Goods or Services

For a variety of reasons, many businesses are now unable to provide a product or service that was already paid for. Some examples include:

  • Flight cancellations
  • Closed stores, hotels, amusement parks, etc.
  • Out of stock issues due to increased demand (e.g. food items from grocery stores)
  • Store bankruptcies

If you (the merchant) cancels a product or service, you must provide a refund to the cardholder; if not, the cardholder has grounds to file a chargeback. This is true even if your business has gone bankrupt. 

The exception to the above is if you have had to cancel the goods or services due to a government prohibition. For example, if you canceled a flight due to a border closure, or if you closed your gym due to a government mandate to close non-essential businesses, the cardholder does not have the right to file a dispute for a refund that was not provided.

2. Event Rescheduling

Many planned events (such as concerts, trade shows, or sports matches) have been postponed out of safety concerns. However, customers may not always be satisfied with the new date. It’s important to keep in mind that if the cardholder does not want to attend the event on the new date, they have grounds to file a chargeback if the merchant does not provide a refund. The reason for this is that the cardholder had agreed upon a different date when making the purchase.

As is the case for unprovided goods and services, cardholders do not have grounds to dispute charges for postponed events if the merchant was forced to postpone the event due to a government-imposed prohibition.

3. Product Delays and Cancellations

Another common cause of chargebacks lately is delayed shipments. Because of increased supply-chain issues; greater demand for certain items; reduced company workforces; and USPS labor shortages, it has become more difficult for companies to ship out items on time. Customers may file chargebacks once the expected delivery date has passed and they haven’t received their item, or, they may even file a chargeback once it was received late out of frustration. 

4. Friendly Fraud

Friendly fraud is when the cardholder disputes the transaction simply because they want their money back. They may claim that the product or service was not received, that it was damaged, or that they did not authorize the transaction at all (among other things).

Unfortunately, at a time when more and more customers are taking a financial hit, friendly fraud is on the rise.

5. Traditional Fraud

Phishing attacks, in which a fraudster attempts to obtain private information, are growing in number—and this is leading to an increase in fraudulent online transactions. 

Once a cardholder finds out that their card has been used to fraudulently purchase goods or services, there’s a good chance they’ll file a chargeback to get their money back from the merchant. The costs of such chargebacks can add up quickly for business owners, so it’s essential to have fraud protection policies and technologies in place.

What You Can Do To Avoid Chargebacks—During COVID-19 And Always

As the threat of chargebacks looms larger, know that there are several things you can do to protect your business’ bottom-line and merchant processing account.

1. Promptly Refund the Customer When Cancelling a Product Or Service

If you cancel any goods or services, you must provide a refund to the cardholder (unless the product or service was not provided due to government prohibitions, as discussed above). A credit or voucher can only be given to the cardholder in lieu of a refund if the cardholder agrees to it. If the cardholder requests a refund, you must provide a refund. 

It is important that you issue the refund to the same card that was used to make the original purchase; this will serve as evidence in the event that the cardholder claims that the refund was not provided.

Keep in mind that if you receive a chargeback for not providing a refund, you should not issue the refund manually at that point. The chargeback will automatically prompt the funds to be returned to the cardholder’s account. 

2. Be Transparent About Shipment Delays—in Anticipation and as They Happen

If you deliver items, it’s important to fully disclose any expected or actual shipment delays. This will prevent the customer from filing a chargeback because they believe their product was not shipped, or because they are frustrated with the delay.

To learn more about what you can do to mitigate damage from “Product Not Received” chargebacks, check out Part 1 of our Chargeback Management Series.

3. Utilize E-Commerce Fraud Prevention Tools

To prevent fraudulent transactions at your e-commerce store, it’s essential to make use of fraud mitigation tools, such as:

  1. Address Verification System (AVS): AVS is a security feature for card-not-present transactions that checks to make sure that the billing address provided by the customer matches the billing address on file with their bank.
  2. Card Verification Value (CVV): CVV is the 3 or 4 digit number on the back of the credit card. Requiring the customer to enter this in adds a layer of security to the transaction, since it helps to verify that they are indeed the proper cardholder.
  3. 3D Secure: 3D Secure is an online identity verification technology that prompts the cardholder to complete an additional verification step during the checkout process.

4. Be Upfront About Your Refund and Return Policies

Cardholders should be made aware in advance of the circumstances in which they are eligible for refunds and those in which they are not. It is strongly recommended that you obtain a confirmation from the cardholder that attests to the fact that they have understood and agreed to your terms and conditions. You can do so either by asking for the cardholder’s signature in-person, or by adding a checkbox to your online checkout flow so that the cardholder can confirm they’ve read and agreed to your terms and conditions. This will serve as supporting documentation in the event that the cardholder claims that they weren’t aware, or didn’t agree to, your terms and conditions (for more on this topic, please read Part 3 of our Chargeback Management Series).

5. Make it Easy for Customers to Cancel an Order

If your customer can’t figure out how to cancel an order, or if it’s too much of a hassle, they may be inclined to dispute the transaction. That’s why, in addition to providing your refund and return policies upfront, it’s important that you make it easy for customers to cancel their order or request a refund if they so choose.

6. Sign Up for a Chargeback Notification System

The card brands give merchants a limited amount of time to respond to chargebacks, so it’s vital to be aware when a chargeback has occurred so that you have as much time as possible to respond. Chargeback notification systems will promptly notify you as soon as a customer dispute has been filed.

When the Cardholder Does Not Have the Right to File a Chargeback

It’s important to keep in mind that there are many instances in which cardholders do not have the grounds to dispute transactions. Here are some examples that are particularly relevant to the COVID-19 pandemic:

1. Refund Not Provided for a Product/Service That Was Cancelled/Postponed Due to a Government Prohibition

As discussed above, cardholders do not have the right to file a chargeback if they weren’t given a refund for a product/service that was canceled or postponed due to a government prohibition. This is because the card brand’s chargeback policies are superseded by government regulations.

2. Refund Not Provided to a Cardholder Who Chose Not to Use Purchased Service out of Personal Concerns

During COVID-19, many people are choosing not to fly or stay in hotels, even if they had already paid. If the merchant does not give a refund for the cardholder’s tickets or reservations in this instance, then the cardholder does not have the grounds to dispute it. This is because the merchant already fulfilled their obligation.

3. Refund Not Provided to a Cardholder Who Already Agreed to Terms and Conditions

If the cardholder is unable to use or access services due to unexpected circumstances—e.g. government-imposed travel restrictions or feelings of sickness—and the merchant does not provide a refund since the customer cancellation goes against their disclosed terms and conditions, the cardholder does not have rights to dispute this.

Besides for flight or hotel reservations, another relevant example is restaurant reservations. If a cardholder makes a restaurant reservation but chooses not to go to out of health concerns, and the merchant charges a no-show penalty that was disclosed in the cancellation policy, then the cardholder cannot dispute the no-show penalty.

The world of chargebacks is constantly evolving and changing, as has become clearer than ever during the COVID-19 pandemic. By staying in the know and regularly reviewing your existing chargeback mitigation practices, you’ll be better equipped to respond to chargebacks as effectively as possible—and as a result, protect your bottom-line and your merchant processing account.

If you have any questions about managing chargebacks during COVID-19, or if you’d like to find out more about FIdelity’s Chargeback Alerts System, please feel free to reach out to us at 855-794-7348.

For more chargeback management tips, be sure to check out Fidelity’s Chargeback Management Series!