How Do You Prevent Chargebacks?
Chargebacks are payment reversals initiated by cardholders through their issuing bank that threaten merchant accounts when ratios exceed network thresholds. Prevention requires a layered approach combining 3D Secure authentication, Rapid Dispute Resolution, Ethoca and Verifi alerts, clear billing descriptors, and velocity-based fraud detection rules.
Chargeback Prevention Checklist
- Enable 3D Secure 2.0 on all card-not-present transactions for liability shift
- Enroll in Ethoca alerts and Verifi CDRN for real-time dispute notifications
- Deploy Rapid Dispute Resolution (RDR) for automatic pre-chargeback refunds
- Verify AVS (Address Verification) and CVV on every transaction
- Use billing descriptors that clearly show your brand name and URL
- Implement velocity rules: limit cards per IP, orders per hour, and amount thresholds
- Send order confirmations and shipping notifications with tracking numbers
- Offer easy self-service refunds to reduce friendly fraud disputes
Chargeback Rates by Industry
Chargeback rates vary significantly by industry vertical. High-risk industries inherently face more disputes due to product type, delivery model, or customer expectations. Understanding your industry benchmark helps you set realistic targets and determine how aggressively you need to invest in prevention tools.
| Industry | Typical Range | Risk Level |
|---|---|---|
| Low-Risk Ecommerce | 0.3% - 0.6% | Low |
| Subscription Services | 0.5% - 1.0% | Medium |
| Digital Goods | 0.6% - 1.2% | Medium |
| Travel & Hospitality | 0.8% - 1.5% | Medium-High |
| Nutraceuticals / Supplements | 1.0% - 2.5% | High |
| CBD & Hemp | 1.5% - 3.0% | Very High |
| Adult Content | 1.2% - 2.8% | Very High |
| Online Gaming | 1.0% - 2.0% | High |
Types of Chargebacks
Chargebacks fall into three primary categories, each requiring different prevention strategies. True fraud chargebacks occur when a stolen card is used without the cardholder's knowledge. Friendly fraud, the largest category, happens when legitimate customers dispute valid purchases. Merchant error chargebacks result from processing mistakes like duplicate charges, incorrect amounts, or failure to process cancellations. Identifying which category dominates your dispute profile is the first step toward effective prevention.
True Fraud
15-20% of disputes
Stolen cards, account takeover, identity theft. Prevented by 3DS, AVS, device fingerprinting.
Friendly Fraud
60-80% of disputes
Legitimate buyers disputing valid charges. Prevented by clear descriptors, easy refunds, compelling evidence.
Merchant Error
10-20% of disputes
Duplicate charges, wrong amounts, missed cancellations. Prevented by process automation and reconciliation.
Building Your Prevention Stack
No single tool eliminates chargebacks. The most effective approach layers multiple prevention tools that address different stages of the dispute lifecycle. Authentication tools like 3DS prevent fraud before it happens. Alert tools like Ethoca catch disputes before they become chargebacks. Representment tools help you win disputes that do occur. The goal is reducing your net chargeback ratio below 0.5%.
Pre-Transaction
Tools: 3D Secure 2.0, AVS/CVV verification, device fingerprinting, velocity rules
Blocks 60-80% of true fraud
Pre-Dispute
Tools: Ethoca alerts, Verifi CDRN, Order Insight, clear billing descriptors
Deflects 20-40% of disputes before filing
Pre-Chargeback
Tools: Rapid Dispute Resolution (RDR), automated refund rules
Resolves 15-30% of filed disputes automatically
Post-Chargeback
Tools: Compelling evidence packages, representment automation
Wins back 30-50% of represented chargebacks
Billing Descriptor Best Practices
Unclear billing descriptors are the single most preventable cause of friendly fraud chargebacks. When customers do not recognize a charge on their statement, they call their bank instead of the merchant. Your descriptor should include your recognizable brand name and either your website URL or customer service phone number. Avoid using parent company names, DBA names that differ from your brand, or payment processor names. Test your descriptor by checking how it appears on all major card networks. Many merchants find that fixing their descriptor alone reduces chargebacks by 10-15%.
How MerchantGuard Helps Prevent Chargebacks
MerchantGuard monitors your chargeback ratio in real-time, sends automated alerts before you breach network thresholds, and provides AI-powered analysis of your dispute patterns to recommend the most effective prevention tools for your specific business model.
Frequently Asked Questions
What is the difference between a chargeback and a refund?
A refund is initiated by the merchant voluntarily, returning funds directly to the customer. A chargeback is initiated by the cardholder through their issuing bank, bypassing the merchant entirely. Chargebacks carry additional fees ($20-$100 per dispute), count against your chargeback ratio, and can trigger network monitoring programs. Refunds do not affect your chargeback ratio.
What is a good chargeback rate?
A healthy chargeback rate is below 0.5% of total transactions. Visa's VAMP program issues early warnings at 0.9% and imposes fines at 1.5%. Mastercard's Excessive Chargeback Program triggers at 1.0%. Most well-managed ecommerce merchants maintain rates between 0.3% and 0.6%. High-risk verticals should target below 0.8% to maintain a safety margin.
What is friendly fraud?
Friendly fraud occurs when a legitimate cardholder makes a purchase and then disputes the charge with their bank instead of requesting a refund from the merchant. Common causes include buyer's remorse, family members making unauthorized purchases, forgotten subscriptions, and unrecognized billing descriptors. Friendly fraud accounts for an estimated 60-80% of all chargebacks across ecommerce.
How does 3D Secure prevent chargebacks?
3D Secure (3DS) adds an authentication step during online checkout where the cardholder verifies their identity through their issuing bank. When a 3DS-authenticated transaction is disputed, liability shifts from the merchant to the issuing bank. This means the chargeback does not count against the merchant's ratio and the merchant retains the funds. 3DS 2.0 uses risk-based authentication to minimize checkout friction.
What tools work best for chargeback prevention?
The most effective prevention stack combines 3D Secure for liability shift, Ethoca alerts and Verifi CDRN for pre-dispute notification, Rapid Dispute Resolution (RDR) for automatic refunds on qualifying disputes, AVS and CVV verification for fraud screening, and velocity rules to detect suspicious patterns. MerchantGuard monitors all these layers and provides real-time alerts before thresholds are breached.
