How to Use SMS to Prevent Chargebacks

Accepting credit cards = Chargebacks. 

Right? 

Brands, especially those that sell online or offer subscriptions, are familiar with chargebacks (aka customer disputes). Some accept chargebacks as a necessary part of doing business, but that doesn’t need to be the case. 

Brands that take a proactive approach to chargebacks go beyond retaining hard-earned revenue. The steps brands take to prevent customer disputes can also improve customer experience, prevent churn, and improve overall operations. 

Solving chargebacks at any company needs an all-hands-on-deck approach. It’s a problem that requires finance, technology/cybersecurity, operations, and marketing to work together to solve. Because of this, we'll examine how marketing communications (specifically SMS) can help protect your bottom line from chargebacks. 

So, let's dive in. 

What is a Chargeback? 

Chargebacks are a form of consumer protection. This protection allows cardholders to dispute a charge and have the transaction amount returned to them. On the merchant side, this means the revenue is taken from you unless you can prove the cardholder is wrong. Basically, it’s a “guilty until proven innocent” situation. 

To gain back revenue, merchants need to provide evidence against the cardholder's claim in the form of a dispute response document. 

A reason code is attached to every chargeback to tell merchants what evidence they need to provide in the dispute response document. Collecting evidence for the document can be labor-intensive and time-consuming. 

The chargeback process exists to protect the cardholder from fraudsters stealing their credit card information or malicious merchants scamming them. Unfortunately, this process is abused, which is why putting systems in place to protect your company is vital. 

Why Do Chargebacks Happen?  

There is a range of reasons why chargebacks happen, but you can break them down into these four categories: 

Chargeback Fraud 

Chargeback fraud is when a cardholder maliciously disputes a charge. They know they don’t have a valid reason to dispute, but they are going to try and get their money back anyway. 

For example, a customer was meaning to cancel a recurring shipment and forgot. Instead of contacting customer service or shipping back the product, they dispute the charge claiming they already canceled their subscription before the charge occurred. 

Chargeback fraud disputes are not valid claims, which means merchants can submit a dispute response document and regain their revenue. 

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Friendly Fraud 

Friendly fraud is when a cardholder accidentally disputes a charge. This can happen because of simple forgetfulness, a family member making a purchase, or even the occasional drunken online shopping spree. No, really:

An email newsletter, The Hustle, conducted a survey of over 2,000 of its alcohol-consuming American subscribers to find that 79% of them have made at least one drunk purchase and the average annual spend per drunk shopper is $444. 

Overall, friendly fraud is when a customer thinks a charge on their card is fraudulent, even though they actually made the purchase. The key is that there is no malicious intent behind the dispute. 

Just like chargeback fraud, merchants can win friendly fraud chargebacks and regain their revenue.

True Fraud 

True fraud is when a fraudster successfully steals and uses a cardholder's information. The liability for fraudulent purchases is put on the merchant, meaning the merchant is responsible for stopping fraudulent transactions from happening at their site or store. 

True fraud can be prevented by using fraud filters to weed out fraudsters before the transaction happens, but true fraud revenue losses can not be recovered. 

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Merchant Error 

The final type of chargeback is merchant error. This is when an operational error happens, such as a customer returning an item, but never receiving a refund. Or, a customer is charged twice for the same purchase. 

These types of chargebacks are not winnable for merchants. 

How are Chargebacks Damaging to Your Business? 

The True Cost of Fraud™ Study by LexisNexis found that every $1 of fraud now costs U.S. retail and eCommerce merchants $3.60. This is a 7.1% increase from the previous year and a 15% increase from the pre-Covid study conducted in 2019. The rising fraud costs are attributed to a combination of: 

• Chargeback fees
• Chargeback investigation labor
• Chargeback management labor and costs
• Lost merchandise shipped to fraudsters 
  

Alongside direct chargeback costs, there is also the loss of customers and potential sales. 

LexisNexis also reported that brands that invest in best-practice (multi-layered solutions include cybersecurity and digital experience operations) have a 71% lower volume of successful fraud attacks and a 12% lower cost of fraud. 

So, now that we have charted all the necessary chargeback information, let’s get into how you can implement SMS marketing to prevent chargeback and protect your brand. 

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How SMS Marketing Can Prevent Chargebacks

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Recurring Transaction Reminders

Recurring transactions are highly susceptible to chargebacks. The subscription model makes it frictionless for customers to receive their product, but the lack of customer interaction can also expose you to chargebacks. 

Many subscription merchants have started sending “charge upcoming” emails to give their customers notice that their card will be charged soon. These notifications can be even more effective with SMS. Text messages get opened at a whopping rate of 98% compared to around 20% open rates for email.

By giving your customers a heads up on their upcoming transaction, you give them:

• Time to pause or cancel their subscription, which prevents chargeback fraud and creates a better customer experience
• A reminder that a charge will be on their card statement shortly, which prevents friendly fraud chargebacks
• A chance to add more items to their order

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Customer Support 

It can be as easy as a couple of clicks on a bank’s app to dispute a charge. To combat this, you need to make it incredibly easy to reach out to your company. You want to encourage customers to reach out to you instead of their bank if they have a problem. 

For customer service inquiries, SMS can be used to connect your agents or chatbots with customers. SMS provides real-time connection and high open rates allowing you to resolve problems and answer questions quickly while being more flexible than live chats. 

Adding Extra Context with Live Agents and Automation

Shopping online, although incredibly convenient, can leave customers with unanswered questions because they are unable to speak directly to a representative. In order to address this need, brands have incorporated SMS or chat services into their eCommerce stores. 

CTAs such as “Have any questions? Text us at XXX-XXX-XXXX” on product pages let customers know your team is available and ready to help. 

When you combine live agents or automation with answering questions with easy-to-find information about shipping time and returns, it will not only convert shoppers but prevent chargebacks. 

Some of the reasons eCommerce purchases are charged back include: 

• The item does not match the description or photos online 
• Shipping times take longer than expected, so customers assume they never received the product
• The return process is different than expected, so the customer turns to their bank instead of the merchant to try and get their money back

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Better Communication with Your Customer 

Use SMS's incredible open rates to easily communicate with your customer. You can send shipping notifications, follow up to see if they were happy with the product (and resolve any problems, if needed), update them on the return process, and so on. 

Showing that the line of communication is open can also encourage customers to reach out to you if they have any questions or problems, and overall, builds a better customer relationship. 

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Chargebacks Can Guide Operational Changes 

As we have covered, receiving a chargeback is never a good experience for merchants, but chargeback information can be a valuable tool for finding gaps in operations. 

For example, if you are receiving a lot of chargebacks with customers claiming they never received their refund. You may need to improve the speed of your return and refund processes. 

Now more than ever before, brands need to be customer-obsessed. It’s anywhere from five to 25 times more expensive to gain a new customer than to retain an existing one. With recent changes in the digital marketing ecosystem, such as the iOS 14 update, costs of acquiring new customers can be driven up even more. 

Using chargeback information to improve operations will increase customer satisfaction, improve the lifetime value of the customer, and protect your bottom line.

SMS for Chargeback Prevention and Beyond

While SMS marketing and chargeback prevention may not seem relevant to each other initially, creating a better connection with your customer through support and active communication will prevent chargebacks. But SMS can have a much wider impact than just preventing chargebacks.  

To learn more about how SMS is helping brands engage their customers, click here.