How to Avoid Chargebacks: 6 Actionable Tips for Dropshippers

In this article, I will provide you with ways how to avoid chargebacks. These tips can help you maintain your credibility as an online seller, or a dropshipper, and not lose your privilege to charge money via credit card transactions. 

I have never experienced chargebacks before, but I have read too many horror stories about chargebacks that destroyed dropshippers. However, as a customer, I filed chargebacks myself for fraudulent transactions done through my credit card.

In addition, I will also discuss:

• What a chargeback is
• The negative impacts of a chargeback
• Common reasons customers file a chargeback 

In the end, I am hoping that you have a baseline from which you can build your processes to prevent chargebacks. 

Key takeaways: 

• Not all customers who file chargebacks are legit
• A chargeback can ruin your business reputation and prevent you from charging money online
• Each successful reversal in favor of the customer makes you lose money 

Let us begin!

What is a chargeback? 

A chargeback is not a request for a refund. Rather, it is a process where a credit cardholder disputes the transaction made with his credit card. Essentially, the customer is saying that he did not authorize the transaction and does not want to pay for it. 

A chargeback can end in two ways: in favor of the merchant (you, the dropshipper), or in favor of the credit card holder, which is also called a reversal.

A reversal means that the credit card company will take the money back that they gave you, the merchant, and put it back to the credit line of the customer. 

The bad news is that a reversal like this can negatively impact your credibility. In extreme cases, you may even lose your capacity to accept payments as a dropshipper. 

If you keep experiencing reversals or keep getting disputes through chargebacks, credit card companies, and payment processors will think that you are a scammer, swindler, or some nefarious entity.   

The goal, therefore, is to reduce chargebacks as much as you can to preserve your credibility in the eyes of payment processors.

Why do customers file a chargeback?

Here are the most common reasons customers file a chargeback:

• The merchant refused a refund request
• The transaction is fraudulent; the customer did not make the purchase
• The customer feels that you scammed him
• The customer did not receive the order
• Incorrect charges to the credit card

Let us take a look at each one. 

1. The merchant refused a refund request

Customers file a chargeback because the merchant they dealt with does not want to give them “justice.” There are many reasons a customer would ask for a refund, and here are a few: 

• The item is not as described
• The item is damaged or broken
• The customer changed his mind

Most of the time, customers will first attempt to settle the matter with the merchant, or with you, the dropshipper. Should you refuse to issue a refund, then the customer has no other recourse but to file a chargeback. 

If you think the customer has legitimate reasons to be upset and ask for a refund, then issue a refund. It does not matter if it is the fault of your supplier—you must have accountability as the seller. In the customer’s eyes, you are the seller, not your supplier. 

Passing the buck to your supplier is irresponsible. Accept your losses, learn a lesson, and move on. 

2. The transaction is fraudulent; the customer did not make the purchase

It is not uncommon for credit card details to get compromised. The person at fault here is not the issue. What matters is that the customer is a victim. 

Now, you need to think of this situation from the customer’s perspective. There is no way the customer will give up his claim. 

But what if you already shipped the item? 

You will lose the chargeback. Again, it does not matter to the customer if you did your duty. What matters is that they did not order this item and they must not pay for it. 

One thing you can do to avoid this situation is to use a payment processor like PayPal. It verifies the identity of the user, and it also has sophisticated algorithms to know if the credit card purchase being made is suspicious. 

If so, PayPal’s system will not continue with the transaction, thereby reducing the chances of customers filing chargebacks due to fraud. 

3. The customer feels that you scammed him

Some customers file chargebacks because they misunderstand what a product can do or you misrepresent them (your products). This often happens because of bad marketing practices. 

Here is an example: 

It seems like this pool is big enough to accommodate four people—two children and their parents. The reality is that this is too far from the truth. Just look at the people in the pool—it is so clear that these images were edited to fit that pool.

An unsuspecting buyer would not be keen enough to make this observation. Once he gets this pool and inflates it, guess what happens? He will be so frustrated that he will file a chargeback for fraud or misrepresentation. 

How can you avoid this? Do not use this picture in your dropshipping store. Sell the item and make sure you post the item specifications, especially the width and dimensions.    

4. The customer did not receive the order

Another common reason why customers file a chargeback is they did not receive the item. On many occasions, especially if you are dropshipping from China, the customer is merely unaware that the shipping can take 30 days or more. 

It is not unusual for Chinese shipments to arrive in 40 to 60 days. You can reason that this information is on your website. However, if the investigator finds it difficult to see this information because you took the time to “hide” it, the investigator will rule in your customer’s favor. 

Always make it a point to be transparent in your listings. If it takes 60 days to ship, say so. Justify why the shipment takes time. For one, you can even offer free shipping and use it as a reason for the long shipping time.  

5. Incorrect charges to the credit card

The last common reason is incorrect credit card charges. Let us say you posted an item on sale and now it is only worth $50, but you charged $100. In this case, the customer has every right to file a chargeback.  

This rarely happens, especially now that e-commerce systems like Shopify do not make these mistakes.

They automatically charge what is on the price you indicated on the product pages. It could happen if you used an image that shows a price that is different from the listing. 

Summary: Customers file chargeback complaints for many reasons. However, you can certainly find ways to avoid these things from happening. In addition, what matters is that you think from your customer’s perspective and try to understand them. 

Ways to Avoid Chargebacks

There are several ways by which you can avoid chargeback disputes. These things are never foolproof, but they can certainly help. More importantly, doing these things can improve your likelihood of winning the fight in a chargeback case against you. 

1. Secure your payment system

The first thing to do is to secure your payment system. What it means is that you must only use payment processors that have a robust or sophisticated anti-fraud detection system. 

One good example of this is PayPal. To my knowledge, PayPal will not easily approve a transaction if the credit card’s billing address is different from the shipping address. 

It is also possible to use a payment system where the credit card user must type both the credit card billing address and shipping address. If the typed billing address does not match what is on the credit card record, this payment will not go through. 

As you can imagine, a credit card hacker does not know the billing address of the real cardholder. As such, credit card fraud can be prevented.

2. Set proper expectations

Another good way to prevent chargebacks is to set proper expectations, especially when it comes to shipping. Many consumers today are too used to what Amazon offers—2-day shipping.  

As a dropshipper, you must tell your consumers how long it will take for the product to arrive. In addition, you must be clear about how you describe your timelines. 

This principle also applies well to print-on-demand dropshipping stores. If you look at some print-on-demand store examples, they tell their customers how long both production and shipping would take. 

Do this, and you will prevent potential buyers from thinking that they will get their items immediately. 

3. Be transparent in your offer

The third approach is to stay transparent. Do not attempt to hide information from your customers. It is not uncommon for some dropshippers to hide refund and shipping information. 

If you lie, or at least do anything that resembles fraud, the chargeback investigator will not pity you. They do not like “fraudsters” or businesspeople who have unscrupulous business practices. 

In dropshipping, I believe it is better not to be able to make the sale because a customer cannot agree on the production or shipping time than to make a sale and face a chargeback case later on. 

4. Keep documents and know where to find them

Know what details of the transaction are available to you. Your payment processor has this, and so does your e-commerce platform like Shopify or WooCommerce. 

Knowing where to find this information helps you save a lot of time. Furthermore, and more importantly, these things are important in your explanation to prove you are not a fraudster. 

5. Confirm customer orders

Customers type their email addresses when they place an order. Before you process the transaction, it would help if you sent them an email asking them to confirm their purchase. 

If the purchase is fraudulent, then you can issue a refund, and nobody gets into trouble. If the order is legit, you can proceed in processing or fulfilling it. 

The only caveat here is if the scammer used his email address instead of the customer’s email. Naturally, you will be sending an email confirmation to the scammer, not the real card owner. 

Nevertheless, you will have evidence that you did confirm the purchase before you processed the order. This, backed by the evidence of your shipment, can help you win the chargeback case.

One last thing: do not work with suppliers you do not know. I always say that you must at least buy the product you sell. This way, you will have first-hand experience with how a supplier behaves. If this supplier cannot be depended upon, you can stay away from them and not get burned later on.  

6. Get a Chargeback prevention software

Chargeback prevention software can really help you handle disputes better and keep your business running smoothly. Here’s how the process generally works:

1. Customer Disputes a Transaction

Whenever a customer disputes a transaction, perhaps due to dissatisfaction, mistaken purchases, or fraud, they will typically contact their bank. 

This marks the beginning of the chargeback process.

2. Notification Received

The prevention software is integrated with numerous banks and payment networks, enabling it to receive immediate notifications about disputed transactions. 

This early detection is crucial in chargeback prevention.

3. Alert Sent to You

Alerts are sent to your business upon receiving notification of a dispute. 

These alerts are sent at least 24 hours before the transaction evolves into a full chargeback, giving you a valuable window to act and resolve the issue.

4. Refunding the Payment

You can handle disputes according to your business rules. 

You can automatically refund the payment or contest the chargeback depending on whether you can win and the order value.

5. Avoiding the Chargeback: 

When you refund the payment before it becomes a chargeback, you avoid it. This significantly lowers your chargeback rate. 

Reduced chargebacks translate into fewer fees, greater payment acceptance, and less administrative burden related to disputes.

While various tools are available to help with this, Chargeback.io is one of the best options out there. 

That’s the one we have been using for most of our stores and even the Dropship.io itself. 

Summary: There are many ways to prevent chargebacks from happening. As the saying goes, prevention is better than cure.  If you think about it, all these boil down to one thing: protect yourself from the possibilities of fraud.   

What must you do if there is a chargeback filed against you?

There are two things you can do if a customer files a chargeback against you: accept the chargeback or fight it. 

If you accept it, you are acknowledging that the transaction was fraudulent. In this case, you are admitting that the credit card payment made to you was fraudulent or that you made a mistake.   

If you fight it, you are claiming that the transaction is not fraudulent and that you have the right to get paid. 

To fight a chargeback, you must respond to the inquiry of either the payment processor or the credit card issuer, such as VISA or Mastercard. Sometimes, it is the bank that will contact you. It all depends on who is processing credit card payments for your business. 

Usually, they will ask for several things. 

1. Transaction Information

This is the digital transaction record, that you will get from your Shopify store. If you are using a payment processor like PayPal, you can also get data from there. 

Here is a sample from PayPal:

Now, here is a sample from WooCommerce: 

I covered all the personally identifiable details, and that is why there are blue sections in the screenshot. Banks and payment processors will ask for information like this one to understand what the charge was. 

You also must explain to them what the purchase was about, when it was made, and what you did as the merchant. You must establish the fact that the purchase that the customer made was legitimate and voluntary and that you are a legitimate businessperson.

2. Shipping or Delivery Receipt

The next thing that you must present, provided that your product is physical, is the shipping document. It is also called the shipping label. 

As a dropshipper, this shipping label will come from your supplier. It does not have to be a tangible piece of paper. A digital copy should suffice.

The good news is that online suppliers and marketplaces have information like this handy. For example, if you use AliExpress, there is a section in your order that shows the status of the shipment. 

Here is an example of shipping status:

Where you find this data depends on your supplier. Many dropshipping supplier databases such as Spocket and Printify will provide you with this information from your purchase or order history. You can take a screenshot of this and send it as part of your response to the chargeback inquiry. 

3. Other Information

You can also send other information, such as: 

• Email communication or chat between you and the buyer
• Screenshots of your shipping policy, which contains details of the shipping expectations and prices
• Detail about the product; for example, if your product is digital, you can send a screenshot saying that it is non-refundable and that the item the buyer is purchasing is digital, not physical 

Keep in mind that the goal of your response is to prove that:

• The transaction is legitimate
• You did not commit any kind of fraud 
• Your product details page contains all the necessary information the user has to know before making the purchase
• You shipped the item to the consumer

Perhaps the one thing that is difficult to fight is a chargeback related to product quality. If the quality is really poor, then you have no other course of action but to issue a refund. It is why I never recommend dropshipping poor-quality products. 

The negative impact of chargeback on your dropshipping business

A chargeback is damaging to a business, so you want to reduce chargebacks in many ways you can. The negative impacts of chargebacks on your dropshipping business are: 

• Loss of sale
• Loss of money 
• Loss of credibility

Let us discuss each one.

1. Loss of sales

A customer who files a chargeback and wins means that you lost money from that transaction. If the customer paid you $50 with his credit card, the credit card company will take that $50 back. 

Not only did you lose the $50, but you are also not likely to get your product again. After all, a customer can claim that he did not receive the item even if he did. The problem is you do not have proof that you shipped the item. 

So, in addition to giving back the $50, you also lose the money you spent on the item. On top of that, you lose money that was spent on shipping. If your dropship supplier charges money for handling, you lose that money, too.    

2. Loss of money

Another negative impact of a chargeback is a direct loss of money. Once a customer does this, the credit card company will charge you with chargeback fees, regardless of who wins the dispute. 

There is no telling how much the credit card company will charge you for this. The usual cost is between $20 and $100. They do this because they need money to pay the investigators. In addition, credit card companies do this to discourage merchants from “fraudulently misrepresenting” their products.

It is not only you who pays chargeback fees. Even the consumers who filed the chargeback have to pay. The amount that the customer pays varies from one bank or credit card issuer to another. 

3. Loss of credibility

If a chargeback often happens, your payment processor will deem you as a high-risk merchant. If this problem does not improve or gets resolved, they can take away your privileges of processing credit card payments online. Now, you cannot charge payments online.  

Another thing that can happen is that the payment processor can put your money on hold. They will only release it once the dispute has been settled. 

PayPal is one of the strictest payment processors when it comes to this. It is not uncommon for dropshippers to experience a hold on payments from their customers. All it takes is just one customer who files a chargeback or dispute in PayPal. 

In this case, you can send PayPal your shipping labels as proof that you did your part. If the investigator rules in your favor, you will get our money. Nevertheless, it is still possible for PayPal to do the same thing again for your next transactions even if no customer filed a chargeback or dispute.    

There are also indirect costs associated with chargebacks. As a merchant, you need to spend time preparing documents, taking screenshots, and writing your explanation—all these things require time and time is money. 

FAQ: How to Avoid Chargebacks

How do I prevent chargebacks?

To prevent chargebacks, be clear on your business processes and set clear expectations for the customer. Do not make promises you cannot keep and do not make claims that are not true.  

How do you beat a chargeback?

The only way you can beat a chargeback is through evidence. This evidence depends on the situation or the reason a customer is filing a chargeback. 

Do customers usually win chargebacks?

Yes, most of the time, credit card companies rule in favor of consumers. 

Can chargebacks be denied?

Yes, chargebacks can be denied the ruling will be in your favor. This can happen only if you have evidence that you fulfilled your commitment as a dropshipper.  

Summary

The next step now is to take a closer look at each step to avoid a chargeback and then compare that with the process you have in your dropshipping store. For example, is it really clear to the customer that your shipping times will take this long?

I encourage you to review your processes and use our list of how to avoid chargebacks. If you do this, the result should be zero to minimal chargeback for your dropshipping store!