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Author: Mallory Halley

  • Chargeback Prevention Strategies: How to Stop Fraud and Protect Your Business

    Chargeback Prevention Strategies: How to Stop Fraud and Protect Your Business

    Reading Time: 6 minutes

    If you’ve ever had to deal with a chargeback, you know how frustrating, and costly it can be. You’re not just losing a sale. You’re facing fees, lost inventory, and the very real risk of getting labeled as high-risk by your payment processor. It feels unfair, especially when you’ve done everything right.

    Chargebacks were meant to protect customers from fraud, but more and more, they’re being used in ways that hurt businesses like yours. That’s why chargeback prevention is so important. It’s not just about fixing problems after they happen. It’s about setting up smart systems that help you avoid disputes in the first place—so you can focus on growing your business without worrying about lost revenue.

    For businesses, managing and preventing chargebacks is an ongoing challenge, and one that’s only predicted to get worse. A 2025 Davos Insights and Microsoft report projects chargebacks to increase by 24% by 2028, costing North American merchants and online companies $41.6 billion.

    The good news? Many chargebacks are avoidable. Understanding the different types of chargebacks, implementing measures to prevent them, and formalizing a plan to dispute them will help lessen their negative impact on businesses.

    What are Chargebacks?

    A chargeback occurs when a customer successfully disputes a transaction with their bank or credit card company instead of seeking a refund directly from the merchant or online business that provided the product or service. 

    Chargebacks typically fall into one of three categories: criminal fraud, merchant error, and friendly fraud. 

    Criminal Fraud

    The numbers on online fraud are hard to comprehend. In 2024, online scammers stole a record $16.6 billion – up 33% from 2023 – according to the FBI’s 2024 Internet Crime Report. The sharp rise of card-not-present (CNP) transactions is one trend worth noting, with research indicating these transactions made up 73% of all credit card payment fraud in the U.S. last year.

    What does credit card fraud look like? Today’s malicious actors are using sophisticated methods to commit fraud. Here are just a few examples.

    • Account takeover fraud: accounts are compromised and used to make purchases
    • Identity theft: criminals pose as genuine customers
    • Card testing fraud: purchases are made to verify stolen card details 
    • Synthetic identity fraud: purchases are made under new identities created with both fake and real information
    • Clean fraud: stolen cards are used and the transactions are undetected by fraud prevention tools
    • Triangulation fraud: real customers make a purchase from a third-party marketplace, like eBay or Amazon, but the seller purchases the product from another merchant

    These criminal activities lead to legitimate chargebacks when cardholders discover unauthorized charges on their accounts, or, in the case of triangulation fraud, when a fraudulent product arrives.

    Merchant Error

    Chargebacks can result from a myriad of issues within the merchant’s own operations. These can be actual mistakes made by the merchant or business, or practices that lead to customers receiving damaged products or the wrong ones altogether. Here are some of the more common examples of merchant error.

    • Processing duplicate transactions for one order
    • Sending orders to incorrect addresses
    • Processing transactions without proper credit card authorization
    • Charging the wrong amount during payment
    • Shipping delays or tracking mixups
    • Shipping wrong or defective items
    • Publishing inaccurate product descriptions

    These errors are often the most preventable causes of chargebacks.

    Friendly Fraud

    The most challenging chargebacks to prevent occur as a result of friendly fraud, where customers accidentally or intentionally dispute transactions they made. Unfortunately, it’s also the most common – Visa reports that friendly fraud now accounts for up to 75% of all chargebacks.

    Here are some common reasons that lead consumers to dispute charges with their bank or credit card companies vs. directly with merchants.

    • Billing descriptors on statements are unclear
    • Purchases are made by family members without the cardholder’s knowledge
    • Customers forget about a recurring subscription or are unclear about its terms
    • Customers falsely claim dissatisfaction after fully using a product
    • Customers sign up for free trials with no intention of paying for the service
    • Customers use buyer’s remorse as an excuse for a refund

    H4: It’s worth elaborating on return fraud. According to the NRF and Happy Returns 2024 Consumer Returns in the Retail Industry, 13.5% of all returns – worth $101 billion – were cases of return fraud last year.

    Chargeback Prevention Strategies

    The good news is that many chargebacks are preventable with the right approach. Here are some strategies for merchants and businesses to consider.

    Authenticate Customers

    Strong customer authentication methods ensure that the person making the purchase is the legitimate cardholder. Some considerations include 3D Secure 2.0, two-factor authentication, Address Verification Service (AVS) verification, Card Verification Value (CVV) verification, device fingerprinting, and behavioral biometrics. While these methods add layers of security, it’s important to ensure they don’t significantly impact the customer experience. 

    Adopt Technology Tools

    Depending on needs, transaction complexity, and budget, businesses can implement specific tools or a full suite of solutions to provide a layer of protection. Aurora Security’s comprehensive security solutions are an example. These tools can be adopted individually or as needed to provide real-time chargeback alerts, instant refunds to resolve issues before chargebacks are filed, and even digital receipts and financial support in the event of disputes.

    Confirm Orders

    A formal order confirmation process can prevent many chargebacks. This can be as simple as a detailed email that clearly specifies what the customer has purchased and when it’s expected to be delivered and follow up emails with shipping notifications and confirmation of delivery. This communication trail reduces customer confusion – and serves as valuable evidence should a dispute arise.

    Ensure Digital Payment Security

    Adopting the latest card security practices helps prevent unauthorized transactions. One example of this is network tokenization, which replaces sensitive card data with a unique identification token. It’s just one of the security features built into the ARISE Payment platform.  Other measures worth implementing include maintaining strict PCI DSS compliance, utilizing end-to-end encryption, implementing fraud screening rules, and enabling velocity checks to detect unusual patterns, such as multiple purchases in rapid succession from a single account.

    Manage Shipping Expectations

    The more information businesses can provide to customers during the fulfillment process, the better. Best practices include providing realistic delivery timeframes, using tracking numbers to monitor progress, communicating delays, requiring signature confirmation for high-value items, and maintaining accurate inventory management to ensure you’re not selling products that are out of stock. When customers know when to expect their purchase, they’re less likely to file chargebacks out of frustration or confusion about order status.

    Obtain Proof of Receipt

    Documentation is your best defense against friendly fraud as it provides essential evidence in the event of a dispute. Beyond requiring signatures for valuable items, consider photographing packaged items before shipping to document condition and contents, especially for fragile or valuable products. Merchants can also consider using delivery services with proof-of-delivery options.

    Optimize Billing Descriptors

    Confusing or unrecognizable billing descriptors were the leading cause of chargebacks, according to the 2024 Cardholder Dispute Index. Ensure it identifies your business in a recognizable way, matching your store name or website rather than a corporate entity name. Some other best practices include providing contact information to allow customers to inquire about charges, keeping your descriptors consistent across all channels, and including a brief purchase description to help customers recognize the charge.

    Make Your Return, Refund and Cancellation Policies Clear

    Transparent policies help set appropriate customer expectations. Make them easy to understand to eliminate any potential for misunderstanding, and include them prominently on the website and within all order communications. Some merchants also require customers to acknowledge the policies by checking a box during the online checkout process as well. When customers understand your policies before purchasing, it makes it more likely that they initiate a refund directly through approved channels rather than filing chargebacks.

    Be Accessible to Customers

    Don’t underestimate the value of great customer service. Oftentimes customers request refunds from their bank or credit card company only after being unable to get their issue resolved with a merchant or business. Offer multiple contact channels including phone, email, and online chat to accommodate different customer preferences, provide 24/7 online support, and respond to customer inquiries promptly. 

    Cancel Recurring Transactions Promptly

    We’ve all been frustrated at one time or another while trying to cancel a subscription. Making it difficult to do so can force customers’ hands to file chargebacks – and ensure they never buy your product or service again. Subscription-based businesses should process cancellations – and document doing so – immediately upon request, rather than waiting until the end of a billing cycle. This can help preserve your brand reputation and leave the door open to future business.

    Post-Chargeback Action Plan

    Despite all of these prevention efforts, some chargebacks are inevitable. When they occur, merchants and online businesses typically have 7-10 days to respond. To dispute a chargeback effectively, follow this four-step process.

    1. Review the chargeback reason code
    2. Gather relevant evidence specific to that reason code, which might include transaction receipts and invoices, delivery confirmation or proof of service, customer communication records, agreed-upon terms and conditions, and the IP address and device information
    3. Write a rebuttal letter that clearly addresses the specific dispute reason
    4. Submit all documents through your payment processor’s portal before the deadline, as late submissions are often automatically rejected

    Chargebacks represent a significant threat to businesses. Merchants must navigate the complex dispute resolution procedures, potentially face financial penalties, and manage the administrative burden of responding to chargeback claims. However, with a comprehensive prevention strategy and a clear action plan for when disputes arise, merchants can be ready to face the challenge head on. 

  • What Is Cash Discounting? A Complete Guide for Business Owners

    What Is Cash Discounting? A Complete Guide for Business Owners

    Reading Time: 4 minutes

    If you’re accepting credit or digital payments, you’re likely paying processing fees that can eat into your profits. These fees can reach up to 4 percent per transaction. While card payments are convenient for customers, they come at a cost to your business.

    While going cash-only isn’t realistic for everyone, alternative pricing strategies like cash discounting offer a middle ground – allowing you to offset processing costs while still accommodating customer payment preferences.

    A deeper look at cash discounting

    What is cash discounting?

    Cash discounting is a pricing strategy where businesses offer customers a discount on the posted price of an item if they pay with cash instead of a credit or debit card. The mechanics are straightforward. Businesses pre-adjust their pricing to include credit card processing fees (typically 2-4% of the transaction value). 

    The psychology behind cash discounting is particularly compelling for consumers. The discount is perceived by customers as a benefit – essentially, a reward for paying with cash. And, studies show that getting a discount raises a person’s oxytocin levels, literally making them happier. 

    Real-world savings examples with cash discounting

    Here’s what different businesses can save by implementing cash discounting programs. 

    Business TypeMonthly ProcessingProcessing RateMonthly FeesCash Conversion RateMonthly SavingsAnnual Savings
    Restaurant$50,0002.8%$1,40040%~$560$6,720
    Retail Store$100,0002.5%$2,50030%~$750$9,000
    Plumbing Company$25,0003.2%$80050%~$400$4,800
    Gas Station$200,0002.2%$4,40060%~$2,640$31,680

    Cash Discounting vs. Other Pricing Strategies

    What is the difference between cash discounting and surcharging?

    A surcharge is when you post cash prices and charge an additional fee on top of that price for customers who pay with a card. Essentially, customers pay less than the listed price with cash discounting, and more than the listed price with surcharging. 

    What is the difference between cash discounting and convenience fees?

    A convenience fee is a form of surcharging where you charge a fee when your customers choose to pay in a non-standard payment channel or method, like online or over the phone. Convenience fees can be a flat fee or a percentage of the total amount, while cash discounts are usually percentage-based. 

    What is the difference between cash discounting and dual pricing?

    Dual pricing and cash discounting are often used interchangeably, but they differ in a key way. With dual pricing, both cash and credit prices are posted simultaneously, while cash discounting involves posting only the credit price with a discount applied at checkout for cash payments.

    Payment Strategy Comparison Chart

    FactorCash DiscountingSurchargingConvenience FeesDual Pricing
    Legal statusLegal in all 50 statesProhibited in CT, MA; restricted in othersLegal in all 50 statesLegal in all 50 states
    Price displayCredit price posted, discount at checkoutCash price posted, fee added for cardsBase price posted/fee for alternative channelsBoth prices displayed simultaneously
    Customer perceptionPositive Negative Neutral Transparent
    Business fitLocal businessesEstablished brandsAllThose with robust systems
    Transaction volume$10,000-$100,000/mo$50,000+/moAny$50,000+/mo
    Average ticket$15-$100$50+Any$25+
    Industry fitRestaurants, retail, services, healthcareProfessional services, B2B, luxury goodsUtilities, government, online servicesGas stations, automotive, large retail

    Regulatory considerations for cash discounting

    State-level regulations

    With few exceptions, states have largely remained uninvolved in regulating the practice of cash discounting. In California and Texas, merchants who offer a cash discount must apply for and hold a special license in order to remain compliant. In Wyoming, there is a 5% discount limit imposed on businesses. For all remaining states, it’s fair game.

    Industry-level regulations

    There are few industry-specific regulatory considerations for cash discounting. One example is within retail and e-commerce. Online implementation requires website disclosures and checkout flow modifications to clearly communicate pricing differences.

    In highly regulated industries such as healthcare, additional compliance considerations may apply, particularly regarding billing practices and insurance processing.

    Weighing the decision to implement cash discounting 

    There are a few factors to consider when it comes to whether or not a business should implement cash discounting.

    Do the math on ROI

    It’s important to analyze your current processing fees and transaction patterns. Cash programs are most effective for businesses with average transaction sizes above $25, as smaller transactions (under $10) make it difficult to justify program costs while still offering meaningful customer incentives.

    Assess customers

    Cash discounting is only successful if your customers adopt it at scale. Older customers and those in cash-heavy industries may be more receptive to cash discounting programs. If your customers strongly prefer paying by card, it may be too hard to gain traction.

    Budget implementation costs

    It will be easier for some types of businesses to implement cash discounting programs vs. others. For example, it’s a pretty heavy lift for restaurants and food service companies to update menus, menu boards, and POS systems to reflect changes to the pricing structure. Factoring these implementation costs into your ROI will keep your expectations realistic.

    Consider additional upsides

    Consider the practical side of how cash incentives would shake up your normal operations. One positive example of this is in healthcare. Because the accounting administrative burden is so high, healthcare providers often offer cash discounts to avoid the expenses of billing, mailing statements for unpaid amounts, processing partial payments, not collecting amounts owed, etc.

    Implementation best practices

    In-store implementation

    There are three key things you need to get right when setting up cash discounts in your store.First, you’re required to have specific signage at the store entrance and point of sale, mandated by federal and card network regulations. These signs must clearly state the cash discount percentage, conditions for the discount, and that posted prices are card prices. 

    Second, your POS system must include automatic cash discount features that apply discounts for cash payments, display both prices to customers, and generate compliant receipts showing the discount as a separate line item. Consider using a payment platform like ARISE that can accommodate cash discounting. The ARISE payment terminals can automatically handle the discount calculation at the point of sale.

    Third, all customer-facing materials including menus, price tags, digital displays, and marketing materials need to reflect new card prices. You’ll also need to plan for 2-4 hours of staff training, ensuring they mention the discount option early in customer interactions and frame it as a savings opportunity rather than a card penalty.

    Online implementation

    For those of you who sell online, you will need to implement clear pricing disclosures on product pages and update your terms of service. Most e-commerce platforms require custom development – anywhere from $2,000–$10,000 – or specialized plugins to handle dual pricing effectively.

    Checkout flows will also need to be modified to show payment method options with real-time price calculations while maintaining conversion rates. Enabling your system to process the transactions is only the beginning – you’ll also need to update FAQs, train live chat staff, and standardize responses for the increased volume of pricing questions during the first 30-60 days after implementation.

    When implemented correctly, cash discounting can be a powerful strategy to reduce payment processing costs – potentially saving thousands of dollars each year.  

  • Level 2 and Level 3 Payment Processing: A Simple Guide to Lowering Interchange Fees

    Level 2 and Level 3 Payment Processing: A Simple Guide to Lowering Interchange Fees

    Reading Time: 4 minutes

    The digital payment environment is increasingly complex. Today, merchants and service providers must accommodate a growing number of payment methods and platforms, as well as navigate PCI DSS compliance amid the fraud risks that come with them.

    There’s also a complicated “cost of doing business” – made up of interchange fees, assessment fees, and processor markup. According to NerdWallet, they can add up to 1.5-3.5% of a transaction’s value. Overwhelmingly, 70-90% of that comes from interchange fees. Today we’re breaking them down to help merchants uncover any potential savings opportunities.

    What are interchange fees?

    Let’s start with a quick definition. An interchange fee is what a merchant’s bank pays to a customer’s card-issuing bank each time a credit or debit card transaction is processed. It essentially serves as compensation for the issuing bank for the risk and cost of providing credit to the cardholder. These costs are passed through to merchants by their banks as part of their overall processing costs.

    This fee is not a specific dollar amount, but rather a percentage of the total value of the transaction. That percentage varies by processing level. Each transaction is processed at one of three levels.

    Level 1 processing

    Level 1 processing applies to most business-to-consumer (B2C) transactions, using personal credit cards – think retail store and restaurant purchases. This level requires businesses to share only a few basic details when processing the card. It has the highest interchange fees. 

    Level 2 processing

    Level 2 processing applies to business-to-business (B2B) and business-to-government (B2G) transactions. This level requires more data to be collected, lowering the risk that the issuing bank is taking on, like costly chargebacks. Due to this, the interchange rate is reduced by up to .5% when compared to Level 1.

    Level 3 processing

    Level 3 processing applies to the higher value and volume of transactions by large B2B and B2G companies. Level 3 processing has much more complicated data requirements (more on that later), but it offers the deepest interchange discounts – often 1% below Level 1 rates.

    What do these interchange fees look like on paper? Let’s take a B2B manufacturing company processing $2 million annually, as an example. Here are the annual cost estimates at each processing level: 

    • Level 1 (~2.75% interchange rate + $0.30 per transaction): $55,000 + transaction fees
    • Level 2 (~2.25% interchange rate + $0.25 per transaction): $45,000 + transaction fees
    • Level 3 (~1.85% interchange rate + $0.20 per transaction): $37,000 + transaction fees

    Qualifying for Level 2 and 3 payment processing

    On paper, it would appear that all merchants and services providers should try to benefit from the cost savings of Level 2 or 3 payment processing. However, businesses must meet certain criteria in order to qualify for a higher processing level. The biggest factors include customer base, transaction value, commercial card percentage of transactions, and system capabilities for data capture.

    Qualification Assessment Chart

    CriteriaLevel 1Level 2Level 3
    Customer BasePure B2CMixed B2B/B2CB2B/B2G
    Transaction Value~$25-$75~$75-$250~$250+
    Commercial Card %Less than 20%20-60%60% or more
    System CapabilityManualSemi-automatedFully automated

    A deeper dive on the critical element of data capture

    Even qualifying businesses can struggle to meet Level 3 data capture requirements. Doing so effectively depends on how advanced their ERP system is and whether they’re actually using all of its features and functionality. Companies without fully automated processes will need to invest additional time, money, and training to capture the detailed transaction data that Level 3 processing requires. 

    It’s important to consider these costs when determining if the ROI is high enough to outweigh the operational and technical costs. That’s why many businesses choose to start with Level 2 processing, given the significant lift required for Level 3.

    Data Requirements by Payment Processing Level

    Data FieldLevel 1Level 2 Level 3 ERP Source
    Card Number✅✅✅Payment processing
    Expiration Date✅✅✅Payment processing
    Transaction Amount✅✅✅Order total
    Merchant ID✅✅✅Payment gateway
    Tax Amount❌✅✅Tax calculation module
    Customer Postal Code❌✅✅Customer master file
    Purchase Order #❌✅✅Order management
    Line Item Details❌❌✅Product catalog/inventory
    Product Codes/SKUs❌❌✅Item master file
    Unit of Measure❌❌✅Inventory management
    Freight/Shipping❌❌✅Order processing
    Discount Amounts❌❌✅Pricing engine

    Considerations for advancing payment processing levels

    Advancing to Level 2 or 3 payment processing can bring significant cost savings from reduced interchange fees – if you have the back end systems and processes to support it. But there are additional benefits, too.

    • More secure transactions from the additional work in validating customer data
    • Streamlined processes through stronger integration with internal procurement and accounting systems
    • Ability to meet compliance requirements for government and corporate purchases
    • Enhanced dispute resolution from better documentation 
    • Improved customer service with more data available to troubleshoot client issues
    • More complete data allows for deeper customer and operational insights to make better business decisions

    Achieving (and maintaining, without penalty) a higher level of payment processing for your transactions takes work. Here are five next steps when evaluating if moving to level 2 or 3 processing is the right move.

    1. Assess card mix. Look at a minimum of three months of transaction data to identify commercial card volume and average ticket sizes.
    2. Audit systems. Inventory what Level 2 and 3 data your current systems capture and identify gaps. Consider the cost/benefits of switching to a platform like ARISE that can provide enhanced security features that support Level 2 and 3 processing.
    3. Start with Level 2. If you’re not capturing enhanced data yet, implement Level 2 requirements first. This will help you start realizing immediate savings while you further prepare your processes and operations for Level 3 processing.
    4. Plan out integration efforts. Work with your payment processor and gateway to map out field requirements and testing procedures.
    5. Continuously optimize. Track qualification rates monthly and address any data issues that prevent transactions from qualifying. In 2024 Visa introduced new penalty rates for incomplete data, stricter validation of product category codes, and enhanced fraud monitoring. These changes make data accuracy and security critical.

    Level 2 and Level 3 processing often require significant system changes and a whole new approach to ongoing data management. However, it can be worth it, as long as businesses are well informed, prepared, and have clear expectations for ROI.