What is a chargeback and how to avoid it?

Chargebacks occur when a buyer disputes a purchase on their credit card and asks for a refund. 

This is a process created by credit card companies with the purpose of providing greater security for their customers, preventing consumers from being wronged in case they don’t recognize a purchase on their credit card bill or in cases of irregularities identified in the transaction. 

How a chargeback works in practice

The chargeback process usually begins when a buyer doesn’t recognize a transaction listed on their credit card bill and contacts the credit card company to report the problem. After an analysis of what happened, the credit card company follows up with a chargeback that results in the blocking of the amount paid by the customer and notifying the seller about the order. 

It’s important to remember that only the cardholder can request a chargeback, and the credit card company is who handles the process of analysis and the refunding of the amount to the buyer.

What’s the difference between chargebacks and refunds?

A chargeback occurs when the customer, without contacting Hotmart or the creator, requests the cancellation of the transaction directly from the credit card company, which is responsible for returning the money to the buyer.

In the case of a refund, the buyer can request it within the product’s warranty period and Hotmart will provide a refund. Usually, the creator contacts the customer to try to reverse the situation amicably or to solve the objections that have led to the refund request. If the refund request is upheld, the refund is made and the timeframe may vary depending on the payment method that was used at the time of purchase. 

Chargeback requests can occur for many reasons, such as:

Not recognizing the purchase on the credit card bill: this may include situations in which the buyer forgets a purchase they have made, or even cases in which the cardholder has lent the card to someone close to them, and when checking the bill, they could not identify where the purchase came from. 

Theft or robbery of the card: Many times, the charge being disputed is due to fraud resulting from a theft that causes purchases made with the credit card without the cardholder's consent. 

Dissatisfaction with the purchase: the cardholder makes a purchase, and upon receiving access to the product feels aggrieved and requests the cancellation.

Bad faith: we cannot rule out the possibility of a buyer purposely asking for the purchase to be canceled, claiming not to recognize the purchase, only to receive a refund. 

The impacts of chargebacks on your digital business 

For those who sell digital products, in addition to financial and image losses, a large number of such requests can have major consequences.

The major credit card companies penalize companies that receive too many chargeback requests. Especially Visa and MasterCard perform this continuous monitoring and those institutions that remain above the acceptable limits can be penalized through fines or sanctions, even making it impossible for the platform to offer our customers the option of payment via credit card.

The two main credit card companies have the following limits:

MasterCard: less than 1.5%

Visa: less than 0.9%

The credit card companies monitor the rate for a certain period by using the following calculation:

% chargeback = (number of chargebacks received in the period)/ (number of sales made in the period).

It is important to understand that the number of chargebacks received in the period can be relative to sales in the same period or sales relative to previous periods.

Check out a few tips to avoid and, especially, reduce your chargeback rate:

Track your rates: It is essential that you monitor both chargeback and refund requests when selling a digital product since it is the combination of the two that will indicate whether the product is being well received by buyers. 

Reduce the chances of unrecognized purchases: Use the feature that defines the product name that will be displayed on the credit card statement. This makes it easier for the buyer to remember which product the transaction refers to, thus avoiding even “accidental” chargebacks.

Understand the context of each region: If your strategy is to sell to different countries and regions, you should consult local assistance to validate your sales pitches. Fine-tuning your strategy for each market is a good practice.

Active onboarding: make sure that your users are able to access your product and that they have all the information they need to have a good experience. Engage your users at the very beginning. Contact them via a messaging app or email and ask them if they watched the first lesson, for example. A user who doesn’t feel welcome is more likely to ask for a chargeback!  

Focus on the quality of your content: Explain, in detail, how your product will solve your customer's problem and align expectations. Make sure people aren’t buying a product expecting one thing and receiving something entirely different. And of course, promise only what you can actually deliver. 

Offer good customer support: Keep your service channels visible and easily accessible to your buyer (on the thank you page, sales page, etc.). The more agile you are in dealing with technical support issues and complaints, the less likely the buyer is to resort to a chargeback as an immediate solution. 

If you’re a creator, maintain a close relationship with your affiliates: 

Keep your marketing materials up to date and communicate with your Affiliates to avoid selling your product with a discourse diverging from what you believe in. 

If you’re an affiliate, select with care the products you’ll sell:

Make sure that the product you have decided to sell truly delivers what it promises, that it has quality content, and provides good buyer support. 

These are some of the actions you can take to minimize the impacts of chargebacks on your digital business. But remember that whenever a chargeback occurs, the payment is blocked at the credit card company and, consequently, at the other payment mechanisms that transacted the purchase, such as HotPay. For this reason, when a chargeback occurs, the commissions generated for all parties referring to the purchase are blocked, and their balance is updated.

As stated in the Hotmart Terms of Use, no guarantee is provided against chargebacks or purchase/payment blocks of any nature by the buyer, and it is possible to deduct from the User's balance the amounts referring to refunded or blocked transactions or disputed transactions (chargeback) at any time.