Shopify Chargeback Protection: How to Reduce & Manage Chargebacks in 2024

Solomon Asch, a 1950s Swarthmore College psychologist, once conducted an experiment where volunteers estimated the length of a vertical black line on a white card. Another card with three varying lines served as a guide for this assessment. But it was consistently clear which of the three lines matched the one under scrutiny.

Asch found that about one-third of the participants conformed to the majority opinion on the critical trials. Many reported feeling considerable discomfort and self-doubt when they went against the group.

His findings correlate with insights from our State of Chargebacks Report that revealed people’s actions are significantly influenced by those around them.

Chargeback abusers influence others to misuse the system for freebies or to resolve poor customer experiences.

Seriously, over 60% of buyers prefer contacting their bank to reverse transactions instead of engaging with you, the merchant. More so, up to 80% of all chargebacks are ‘friendly fraud’. 

Keep reading for Shopify chargeback prevention best practices and how they can save you from payment holds and business shut down.

What is a Shopify Chargeback?

In simple terms, a chargeback occurs when a customer disputes a transaction on your store with their bank or credit card issuer. 

The funds from the sale are then returned to the customer, and the merchant is debited the amount of the transaction along with a chargeback fee.

This can happen for various reasons, including fraudulent activity, customer dissatisfaction, or unauthorized transactions.

Understanding Shopify Chargeback Protection in the AI Era

Chargebacks are forced payment reversals by the cardholder’s bank. They’re a consumer protection instrument backed by federal law. The major reasons for chargebacks include fraud, merchant error, and first-party misuse.

When a buyer files a chargeback – and the case is upheld – the seller is legally obligated to refund the transaction amount. They also incur dispute fees and associated charges from their payment processor.

Before 2010, when the eCommerce industry was first introduced to first-party fraud, payment disputes were less of a burden to businesses. It was easy to understand the root causes. You can challenge meritless chargebacks by presenting simple transaction-related documents like receipts, customer communication, delivery notes, etc.

But then, as technological innovation spiked and the industry expanded, shoppers found loopholes in the chargeback system to commit fraud. According to Visa, such abuse of the chargeback principle, where buyers dispute legitimate transactions by claiming they didn’t authorize them or didn’t receive the order, costs merchants approximately $40 billion annually. 

Small businesses usually suffer the most blows – and the attack vector has evolved since the pandemic. Today, we see liar-buyers and scammers leveraging generative AI to perpetuate their nefarious acts. 

Platform owners, like Shopify, are especially tough on merchants with high chargeback rates. Even the slightest 0.001% chargeback rate triggers payment holds. If your chargeback rate incidentally reaches 0.3%, the fraud team will immediately send you a warning email to address the problem or risk losing your account.

an image depicting th history of shopify chargebacks over time

Best Practices for Shopify Chargeback Protection & Prevention

There’s no over-emphasizing the detrimental effects of chargeback fraud. Merchants are liable to revenue loss, sales cannibalization, fees, and account termination (when they breach the card network’s acceptable chargeback rate). Shopify says chargebacks cost the average merchant at least 0.47% of their total revenue annually.

Here are standard best practices for preventing Shopify chargebacks:

1. Apply Robust Pre-Purchase Fraud Detection and Prevention Measures 

Many eCommerce businesses already do a great job on this front, which explains why fraud-related chargebacks are low. Yet, our records show that chargebacks resulting from identity theft STILL pose a challenge to the industry. 

Therefore, plugging fraud loopholes with Address Verification Service (AVS), Card Verification Value (CVV), and Fraud Detection Tools are non-negotiable. They help you analyze transactions to limit identity theft and flag potentially fraudulent transactions for manual review. 

You can also implement transaction velocity checks to monitor transaction volume and frequency from each customer or IP address, and Geolocation Verification to ensure customers' IP addresses match their billing and shipping addresses. Additionally, consider setting maximum order limits for new or unverified shoppers will help reduce the number of high-risk orders you receive.

2. Prevent Post-Purchase Uncertainties Leading to Shopify Chargebacks 

We know, and data from several sources confirm, that buyer’s remorse is one of the leading causes of post-purchase chargebacks. According to a recent survey by Gartner, 60% of buyers regret nearly every purchase they make, an all-time high from 2020’s 54%.

There’s more. An average shopper spends up to $54,000 annually on impulse buys. Unfortunately, the euphoria of getting something new often gives way to uncertainty and regret, resulting in substantial losses for merchants. 

Use these proven strategies to prevent post-purchase uncertainties that lead to chargebacks:

a) Upgrade Your Customer Service

In today’s eCommerce terrain, where buyers have excessively more information than sellers, investing in customer service ensures you’re not acquiring buyers only to lose them to the competition. Ideally, you should:

  1. Use customer surveys and post-purchase polls to pinpoint service gaps and post-purchase uncertainty triggers. This helps establish a benchmark for service delivery.
  2. Make your order confirmation page work for you. Integrating ReConvert into your upsell strategies helps ensure you’re not leaving money on the table. ReConvert adds a positive spin to the entire checkout experience with captivating reviews, testimonials, or a welcoming video, reinforcing product quality and user satisfaction. 
  3. Ensure your refund and return policies are not shooting you in the foot, as customers return at least 16% of all online purchases. It’s crucial to note that a loose return policy creates room for return fraud, and a stringent return can also trigger chargeback fraud. 
  4. Work with order delivery partners providing tracking numbers or proof of delivery. Some buyers file chargebacks due to delayed delivery. Also, without proof of delivery, you won’t win the case if the buyer claims non-receipt.
  5. Manage your online reputation to limit the chances of the buyer changing their mind after reading a negative review. Keep an eye out on social media for customer complaints and promptly address issues. You can also encourage past customers to write reviews and incorporate that user-generated content into your marketing assets.  
  6. Be thoughtful when crafting your automated email workflows. For recurring billings, notify the customer before payment due dates and ensure your billing descriptor has the essential information about the order and your business.
  7. Require authorization for high-ticket transactions and keep proper records of order-related documentation like receipts, delivery notes, and customer communications. 

While these tactics are vital in preventing and challenging Shopify chargebacks, the sad reality is they’re not comprehensive for the meteoric rise in disputes. Merchants face significant hurdles navigating consumer behavior shifts, ever-changing chargeback rules, and disconnections between the parties involved in a chargeback process. That makes it impossible to utterly avoid disputes.

b) Automate Your Shopify Chargeback Protection Efforts

Friendly fraud is a challenge for the eCommerce industry due to the extensive resources needed for real-time identification and analysis of relevant data.

For example, you cannot possibly predict a friendly fraud chargeback until after the fact. The only way to pinpoint irregularities and prevent lost sales is by using technology designed for such complex tasks – and trained with tailored data. 

That’s where Chargeflow comes in.

Chargeflow is a chargeback automation solution that helps merchants recover chargebacks on autopilot. Read from direct-to-consumer merchants using chargeback automation to prevent losses:

What People Are Saying About Automated Shopify Chargeback Prevention:

Sydney Webb, Founder and CEO of Toto:

“We are making more money than we ever have. Here’s the thing with our DTC strategy: we’re a small team. We have 4 full-time employees managing 2000+ retail doors, marketing, ops, sales, etc –so we try to keep things as simple as possible, and not just add a fancy new tool unless it's an absolute no-brainer.
[One] key piece of our short-stack has been Chargeflow. So far, they’ve won 100% of the chargebacks we’ve had from sneaky customers trying to claim they "never received a product," and it’s working on autopilot.
If your team is anything like me/Toto (aka small and mighty lol), and you’re looking for a no-brainer tool to make more money with 0 work required, this might just be a perfect solution.” (via LinkedIn)

Ronak Shah, CEO & Co-Founder of Obvi:

“We win 6 out of 10 chargebacks. A year ago, we were only winning 2 out of 10.
Here’s how we increased our chargeback win percentage by 200%: We don’t handle them anymore. We aren’t great at handling chargebacks by ourselves, so instead of wasting more time and money failing at them, we handed them over to Chargeflow.
Their entire team handles more than 4 million chargebacks per year. The less I have to worry about a specific part of my business, the more I can concentrate on what I do best.
This way, my team and I can focus on upcoming product launches, interacting with our community and accounting instead of looking backward to fathom what we need to win a chargeback. We just got a $5,238 check from Chargeflow from last quarter’s chargebacks. We didn’t do a thing. We’re so glad we don’t have to deal with them anymore.” (Via LinkedIn)

Shopify Chargebacks Prevention is Essential

Understanding the psychology of chargebacks – knowing why cardholders dispute charges – is an unfair advantage, especially since merchants spend up to $3 for every $1 chargeback. Preventing Shopify chargebacks should be a top priority for your team.

Retailers incur a ~$25 fee for every chargeback incident, often exceeding the profit from the disputed order. High-risk businesses, companies that breach the established chargeback rate, attract fines of over $10,000. Repeated fines lead to stringent penalties and eventual loss of your merchant account.

Use the strategies in this piece to protect yourself from consumer chargeback abuse – from installing anti-fraud tools to improving your customer service and using chargeback automation to pre-empt losses.

While chargebacks are an inevitable part of online business, the good news is that Shopify will refund chargeback fees for cases won. Also, the higher your chargeback recovery rate, the better your reputation and relationship with regulators. Merchants that write off chargeback as the cost of doing business face the double tragedy of excessive penalties from the card network and revenue loss.

By staying informed and proactive, you can enhance your store’s resilience against chargebacks, protect your profits, and ensure long-term success in the competitive eCommerce landscape.

About the Author

Tom-Chris Emewulu is Chargeflow's digital evangelist. He's an entrepreneur, author, and thought leader specializing in product management, payment security, and business development for eCommerce businesses. With over a decade of entrepreneurial experience, Tom-Chris is passionate about educating eCommerce technology leaders about growth strategies and the dynamically evolving payment fraud terrain. He's been featured on New York Times Square, Forbes, DW, Business Insider, and other platforms.

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