Empty grocery store shelves, skyrocketing prices for everything from everyday essentials to games consoles, and now it’s increasingly difficult to even get a car in the color you want. If you’ve led anything like a normal life in the past two years, then you will have noticed that the world has a serious supply chain problem. ‘Chain’ is an important word to remember here because what happens at one part of the chain has knock-on effects further down, and one of these effects is likely to be an increase in chargebacks. If customers aren’t getting the goods they order on time, then many will initiate a chargeback, which will end up costing significantly more than a refund and could contribute to your company being charged more for every transaction.
So, where has the supply chain crisis come from, how is it affecting chargebacks and what can be done to stop it from affecting your business?
The supply chain crisis
When the COVID-19 pandemic began, some of the first places to be hit hard were major manufacturing centers – China, Vietnam, South Korea, and Taiwan. Factories at these locations had to shut down or slow down production, and the shipping companies who take their finished goods across the world similarly slowed down their operations in anticipation of less demand.
There was clearly decreased demand in some sectors – restaurants, bars, and vacations were all almost non-existent for several months early in the pandemic. The shipping companies overlooked something obvious: if consumers in the developed world aren’t spending money on social activities, they will often spend that money somewhere else. That caused a huge spike in demand for other types of consumer goods – workers buying office equipment for their homes, furloughed workers deciding to renovate their homes or start new hobbies, families purchasing new televisions or game consoles to stave off boredom. This should have resulted in factories and shipping companies increasing production to meet the new demand, but a short period of decreased demand ‘clogged up’ the international shipping system, with even the containers used to ship goods across the world being in short supply. The cost of shipping skyrocketed, and the sudden influx of ships overwhelmed the capacity of ports like Los Angeles and Oakland at a time when dockworkers and truck drivers were also in short supply due to the pandemic. A huge container ship damming the Suez Canal just when the world needed that not to happen, was a darkly comic coda to the whole mess.
Because of decades of lean just-in-time logistics practices, there was little in the way of warehoused goods to fulfil demand, meaning that the crisis is still ongoing. It is not affecting all industries equally (a severe shortage of microchips has made companies that supply computers and electronics particularly vulnerable), but it is causing major problems worldwide.
What does this mean for chargebacks?
Any company that relies on shipping physical products to customers will be affected by the supply chain crisis, not just those who ship products overseas – domestic shipping has been affected by increased demand and a decreased number of delivery drivers. Inevitably, this means that customers will be getting their products later (or, if their packages are stolen from trains before they arrive, not at all.) Although many will contact merchants directly to resolve issues, some will simply initiate a chargeback. Technically speaking, these ‘goods not received’ chargebacks are only supposed to be used if merchants refuse to refund customers for goods that are not delivered, but too many consumers consider it a first-line solution to their problems, mainly because in most cases, chargebacks are highly likely to get their money refunded.
Having a surge of chargebacks at a time when there are serious supply chain issues could be devastating for many companies. Chargebacks cost companies significantly more than refunds – they also include fees levied by the acquiring bank and take time to process, particularly if you intend to dispute them. Should your company receive enough chargebacks, your acquirer may decide that your company is risky and will therefore increase their processing fees, meaning that every transaction will cost more.
You may also see an uptick in friendly fraud – illegitimate chargebacks in which customers try to get a refund for a product that did in fact arrive. Now that it’s widely known that deliveries are taking longer or going missing, more people will use this reason for their chargebacks, further adding to the problems the supply chain crisis is causing.
What can you do to stop chargebacks?
Your company is already doing everything to ensure that your products reach your customers, but with a worldwide crisis in supply chains, it will be difficult for many companies to avoid disruption.
The first fix for the problem would be to offer robust, easy to use package tracking for all your deliveries. Even if you have to pay more for this service, you are likely to find that it will save money overall – even if a delivery is running late, a customer will still be able to see it, and that should prevent a request for a refund or chargeback.
The next step is to make sure that requesting a refund for an item that really doesn’t arrive is easy – and that you are able to track packages to make sure that they aren’t simply late. If customers can request refunds easily, they will choose that option over the relatively more complicated process of initiating a chargeback, and although refunds aren’t ideal from a business standpoint, they are preferable to chargebacks. If your company is experiencing delivery delays, perhaps send an email to customers outlining what they should do if their package is delayed.
Lastly, you will still be getting chargebacks from delayed deliveries and dozens of other sources, and although many will be legitimate, a surprising number will be cases of ‘friendly fraud’ – one third of consumers committed friendly fraud in 2020. With 40% of consumers filing additional chargebacks within 60 days after successfully exploiting this loophole, additional effort must be placed to deter this dangerous trend. Experts agree that the sole remedy for friendly fraud requires challenging the underlying claim – a process called “Representment.” The benefits of a good representment service are far and wide. Not only are merchants able to recover funds that were unjustly debited from their account, but they can also thwart this practice from being repeated without the necessity to blacklist an otherwise good customer. Finally, investigating chargebacks to identify those that were legitimately filed also provides vital feedback that can provide insights for improvements and help reduce repeat