Maximizing e-commerce profitability: Role of automated chargeback management

Amaka Team June 12, 2024

Article E-Commerce

In this article, we’ve teamed up with Chargeflow to share how automated chargeback management can increase profitability by reducing chargeback-associated costs.

I see no better introduction to this piece than quoting the incredible Rob Fraser of Outway: “Chargebacks are the bane of my existence.”

Chargebacks wreak havoc on a merchant’s profitability. They’re a silent profit killer. And their impact goes beyond the immediate financial loss. Every transaction charged back attracts additional fees, administrative costs, and sales cannibalization. Moreover, chargebacks tarnish a business’ reputation, erode customer trust, and consume valuable time you could use profitably elsewhere.

As you strive to maximize profitability and product leadership, attenuating the effects of chargebacks on your balance sheet becomes paramount. This article unveils battle-tested insights on the role of automated chargeback management for robust risk management protocols.

Understanding e-commerce chargebacks

E-commerce chargebacks are forced transaction reversals initiated by cardholders’ banks. The principle of chargebacks is almost as old as payment cards. They’re a consumer protection instrument backed by Federal law to ensure transparency and accountability in card-based transactions.

In that context, if a cardholder faces an issue they couldn’t resolve directly with the seller, they can request their bank or card issuer to intervene. The financial institution will then investigate the case and initiate a chargeback if they see merit in the customer’s claim. They’ll award a conditional refund to the buyer.

The burden of proof is on you, the seller, to counter the customer’s claims by presenting compelling evidence, such as proof of purchase or identity. If you succeed, the bank will return the payment to your account. Otherwise, the customer retains the funds. Case closed.

Reasons for chargebacks

Chargebacks happen for several reasons. The following are the most common ones:

1. First-party fraud (also known as friendly fraud): An intentional or unintentional abuse of the chargeback system that leads to stealing from the merchant.
2. Criminal fraud: Fraudsters using stolen cards or identities to make transactions and the actual owner attempting to recoup losses by filing a chargeback for unauthorized transactions. 
3. Merchant error: Missteps such as clerical or systems errors leading to chargebacks.

Our internal research shows that friendly fraud is the leading cause of chargebacks today. As much as 80% of all chargeback losses are attributed to friendly fraud.

Chargeback’s impact on profitability 

Chargebacks are a major sustainability risk for e-commerce businesses today. Shopify says chargebacks cost merchants on their platform at least 0.47% of their total revenue yearly. Unpacking that further, Mastercard estimates that by 2026, global chargeback transaction volumes will reach 337 million, a 42% increase from 2023 levels.

The detrimental impact on profitability cannot be overstated. Chargebacks create excessive financial losses, result in high overhead costs, and diminished profit margins, and lead to loss of future revenue due to a bad reputation.

They also result in your business entering fraud monitoring programs if you exceed the accepted dispute thresholds established by Visa and Mastercard. In extreme cases, you’re looking at loss of payment processing privileges.

Accounting for chargebacks

Many small businesses treat chargebacks as a cost of sales. But considering these losses as standard business expenses is illogical. Here’s why:

1. Chargebacks aren’t intrinsic to sales as they’re a result of customer disputes, fraud, or dissatisfaction, rather than the actual sale itself. Accounting for chargebacks as a cost of sales inaccurately attributes the losses to revenue-generating activities.
2. Adding chargeback losses to the cost of sales leads to gross profit misrepresentation. It obscures the actual transaction sales profit, making assessing the business health challenging.
3. Considering chargebacks as a cost of sales masks operational inadequacies. You lose sight of dispute root causes and process improvement opportunities if you don’t track and separate chargeback losses effectively.
4. You distort key performance metrics like gross margin and sales revenue per unit, misleading stakeholders and management about company health and operations.

Yet, chargeback accounting requires a thorough knowledge of every moving part of the complex, redundant chargeback process. For businesses using Amaka to track profitability, this aspect is particularly advantageous: Amaka’s robust cloud-based accounting integration helps users make their books make sense. Amaka provides cost-effective, enterprise-level automation solutions to SMBs worldwide, with guaranteed accurate and daily updated financial records.

Maximizing e-commerce Profitability with automated chargeback management

Industry records show that merchants lose at least $3 for every $1 chargeback. Keeping a hunky-dory accounting system with tools like Amaka helps you make informed business decisions, not guesswork. It helps you track the underlying causes of business losses. You know where your money is going and how to close loopholes to maximize earning potential. 

That’s where automated chargeback management comes in.

Automated chargeback solutions like Chargeflow are a hands-off dispute mitigation tool that helps merchants recover chargebacks on autopilot. Chargeback automation streamlines dispute management processes by automating tasks such as chargeback alerts, tracking, evidence collection, and dispute response. 

Benefits of automated chargeback management systems

Managing chargebacks by autopilot has tremendous positive benefits, such as:

• Profitable dispute resolution: By automating routine tasks like evidence collection and submission, you save valuable time and resources and improve your chances of winning cases. You also expedite the dispute resolution process by swiftly identifying and flagging chargeback issuance. 
• Real-time monitoring and alerts: Chargeflow alerts help you prevent chargebacks before they happen. You effectively track chargeback activity in real-time for proactive action, such as issuing refunds or providing additional evidence, to prevent chargebacks from escalating and minimize financial losses.
• Data-driven insights: You have mountains of data to excavate valuable insights into the root causes of chargebacks. Such tools help you identify areas for improvement, refine processes, and implement proactive measures to prevent future chargebacks.
• Integration with major payment gateways: You can retrieve transaction data and evidence for accurate and up-to-date dispute resolution data.
• Enhanced customer experience: Efficient chargeback management is not only about dispute net win rate. It contributes to a positive customer experience, preserving trust and loyalty.
• Cost savings and positive ROI: You reclaim at least 17 hours every month. By minimizing the time and resources spent on manual chargeback management processes, you can better allocate resources toward growth initiatives.

Using technology to boost efficiency, maximize profits, and provide superior customer service is a competitive advantage.

Implementing chargeback automation: Case study from Wordtune

Automated dispute management systems offer superior benefits compared to manual processes. But, selecting the right solution makes all the difference. Let’s examine how Wordtune recovered 5.4x more chargebacks with chargeback automation. 

Wordtune is an AI-driven writing and reading tool that speeds up content creation with cutting-edge AI features for over two million active monthly users. Facing a surge in chargebacks as it expanded, the company sought a reliable partner to tackle fraud risks without compromising conversion. After analyzing available options in the market, they turned to the Chargeflow Stripe app.

Chargeflow offered Wordtune a simple, Stripe-powered solution they could easily activate without any heavy lifting. It seamlessly integrates payment data from Stripe and Chargeflow to automate chargeback evidence creation and detect, mitigate, and prevent fraud. This relieved Wordtune’s in-house team and freed up developer time for other business endeavors.

The result? 29.7% reduction in overall dispute rate, 33.5% reduction in fraudulent disputes, and 5.4x increase in chargeback recovery rate—all while their revenues shot through the roof!

Says Matt Lewis, head of User Operations for Wordtune: “Chargeflow set up an extremely easy, low touch, integrated solution. In two clicks, it was connected to our Stripe account and started automatically challenging disputes.”

Wordtune now serves its users better without constantly looking over the shoulder for when the next email from the card network will drop. Read the full case study on Stripe.

Key takeaways

Chargebacks are a necessary, but costly, aspect of online business. They pose a significant threat to a merchant’s profitability, with far-reaching consequences beyond the immediate financial loss. Effective chargeback accounting with tools like Amaka helps you track these losses so you can better close loopholes without shooting yourself in the foot.

And, automated chargeback management solutions, such as Chargeflow, provides a hands-off approach to dispute mitigation for better ROI. It streamlines processes with fraud detection, evidence collection, filing, and comprehensive case management. 

Implementing chargeback automation elevates your win rate above market averages, as exemplified by Wordtune’s success story. Choose a scalable solution that aligns with your business model and existing technology. Take your operations to their fullest potential!

Author bio

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.