Chargeback Alerts: How They Work, and Whether They’re Right For Your Business

Chargeback Alerts are a relatively new tool in the constant arms race of managing chargebacks. In this article we’ll cover what chargeback alerts are, who should use them, how, and what businesses shouldn’t bother.

What Are Chargebacks? A Quick Review

Chargebacks are, put simply, situations in which a cardholder calls their credit card issuer and disputes a credit card charge. The cardholder can dispute a charge for one of dozens of reasons, (e.g. they were double billed, the service / product wasn’t as advertised, the customer doesn’t recognize the charge, etc.). When a customer disputes a charge, the small business owner’s credit card processor is notified. The business’ credit card processor then immediately withdraws the disputed funds from the business’ bank account, and the funds are held in escrow until the dispute is resolved. Then the business must prove the charge was legit, otherwise the funds in question get sent to the customer.

Suffice it to say the chargeback system is pretty biased against business owners. It’s incredibly technical, it’s expensive (both in labor costs to respond to charges, and in fines and fees from your credit card processor), and it’s frustrating because the onus is on the business to disprove the often illegitimate accusations of the customer.

What Are Chargeback Alerts:

Chargeback Alerts, offer a way for businesses to avoid the chargeback system altogether. The way Chargeback Alerts work, is that you sign up and enroll your company’s merchant account descriptor with a Chargeback Alerts Provider. Once signed up, when one of your customers initiates a chargeback dispute, you’ll hear about it almost immediately and be provided with a three-day window to issue a refund to the customer. If you do issue a refund, the chargeback process will be stopped, and the credit card issuer will never notify your credit card processor and instead just drop the dispute. That means no fees from your credit card processor, no funds withdrawn from your bank account and held in escrow by the processor, no spending time fighting chargebacks, etc.

Chargeback Alerts Only Catch 40%-ish of Chargebacks:

Chargeback Alerts work by obtaining the alerts from the customer’s issuing bank directly. That means that for you to receive a Chargeback Alert for one of your customers, the customer’s credit card issuing bank must also be enrolled in the Chargeback Alerts system. Unfortunately, only about 40% of issuing banks are currently enrolled in a Chargeback Alerts system. That means there’s about a 40% chance that if one of your customers initiates a chargeback, and you’ve enrolled your business in Chargeback Alerts, that you’ll receive a Chargeback Alert notification. The other 60% of the time, it’ll proceed as a normal chargeback.

Chargeback Alerts Systems are increasing coverage by the month, as new issuing banks sign on to provide Chargeback Alerts, as a means of ensuring that the credit card issuers customers receive more timely refunds, and so that the banks themselves don’t have to engage in the chargeback system. As more issuing banks sign on, the percentage of potential chargebacks that can be caught and avoided via chargeback alerts will grow.

What Do You Do With A Chargeback Alert:

Once you’ve received a Chargeback Alert you essentially have only one option, to provide a full refund to the customer. Some merchants mistakenly believe a chargeback alert provides them with an early warning opportunity for them to go and communicate with a disgruntled customer and try to resolve the issue without a refund. Unfortunately, for that to work, you have to rely on the customer to call their issuing bank and remove the dispute once you’ve worked things out, which despite the customer telling you they’ll do it, they’ll rarely follow through. Thus, if you’re signed up and paying to receive chargeback alerts, you need to make sure you’re prepared to issue a full refund.

If I’m giving a Full Refund Anyway, Why Bother with Chargeback Alerts:

If you provide a full refund to the customer, the chargeback process will be stopped, you won’t incur any fees or charges from your credit card processor, you won’t have funds suddenly withdrawn from your bank account, you won’t spend staff time responding to the chargeback dispute, and your chargeback ratio with your credit card processor won’t be negatively impacted. That said, chargeback alerts are obviously not a perfect solution, insofar as you’ve had to give the customer a full refund, so it’s not ideal for every business type.

Who Do Chargeback Alerts NOT Make Sense For:

Chargeback Alerts do not make sense for a lot of eCommerce or retail businesses that operate on very tight margins and who have already typically delivered the product when the credit card charge is incurred. That’s because, for example, a company selling microwaves via eCommerce has already shipped out the microwave before the chargeback has been incurred. Thus, if that business were to enroll in Chargeback Alerts it wouldn’t do them any good because they cannot recover the cost of goods sold or the labor involved in shipping the product. Thus, for that business, it’s better to spend their time and energy trying to fight and win the chargeback dispute, as opposed to receiving a Chargeback Alert and refunding the customer.

Who Do Chargeback Alerts Work Great For:

Service based businesses, products with low incremental cost of goods sold (e.g. software or website memberships), businesses with high margins, businesses with recurring billing models, companies that issue gift cards, businesses that do not ship or deliver goods until some time after the product has been ordered (e.g. custom products). For all of these types of businesses, it generally makes more financial sense to sign up for Chargeback Alerts, and issue the disgruntled customer a full refund. Then immediately try to mitigate losses by terminating services to the customer, deactivating purchased gift cards, shopping the shipment of goods, etc.. Again, this isn’t a perfect solution even for these businesses, because there are always some costs which cannot be recovered (e.g. marketing and sales costs). However, when weighed against the costs of fighting chargebacks and often losing chargeback disputes anyway, it’s an overall smart business decision.

How Do I Enroll in Chargeback Alerts:

The two largest providers of chargeback alerts are Verifi and Ethoca. However, there are a number of credit card issuers that either offer chargeback alerts directly (e.g. Discover & American Express), as well as a number of smaller banks that issue their alerts independently or through other alert providers as opposed to via Verifi and Ethoca.

As the business owner, you don’t really care where your chargeback alerts come from. You just want to get as many alerts as possible, for as cheap as possible, and ideally have refunds automatically issued according to business rules that you’ve established. Therefore, the best way to achieve that goal is to sign up to receive chargeback alerts through a Chargeback Alert Aggregation provider.

There are a number of these alert aggregation companies, with various degrees of professionalism and effectiveness. At Soar Payments, we automatically enroll new merchants (unless they opt out) in Chargeback Alerts via one of the largest aggregators, simply because the pricing per alert is slightly better, and the coverage is broader and easier to maintain than having the business owner go out and sign contracts with the approximately 10 different individual sources of chargeback alerts.

About Soar Payments

Soar Payments is a high risk merchant services provider, whose credit card processing and payment gateway solutions come pre-integrated with chargeback management tools, like chargeback alerts. To obtain a merchant account with Soar Payments, apply online.