There are a number of costs to account for when operating a video game business. These can range from expenses like employee salaries and software licensing fees to chargebacks and refunds. Chargebacks and refunds are often overlooked since they occur after your customer has already purchased one of your products or services. In other words, unlike the majority of your resources that go into making a stellar game or getting the word out about it, these costs of business happen post-sale and can occur without any warning.   In this post, we’ll illuminate this overlooked group of costs by defining what they are, how they can impact your business, and how you can handle them effectively. Plus, we’ll describe how Xsolla helps partners improve their win rate with credit card and PayPal chargebacks, as well as helps them to manage refunds for their respective user bases. Note: Reference the glossary at the end of this blog article for definitions of terms used throughout this post.

CHARGEBACKS AND REFUNDS OVERVIEW

What is a chargeback? A chargeback is a forced transaction reversal initiated by an issuing bank. Put less technically, it’s the result of a process that involves a cardholder contacting their bank to request a reversal of funds for a payment they made to buy one of your products or services. It sounds like a form of consumer protection, right? That’s correct! In 1974, the United States federal government enacted the Fair Credit Billing Act (FCBA) as a way of protecting consumers from unfair credit billing practices. Prior to this legislation, customers who paid with credit cards were vulnerable to unauthorized or fraudulent charges, charges made in the wrong amount charges for goods and services not received, and many other unfair credit billing practices.¹ With the introduction of the FCBA, however, customers gained a system to protect themselves from those unlawful practices. That system, which still exists today, is the chargeback process.   Credit Card Chargebacks Chargebacks provide cardholders with protection, allowing them to contact their banks directly and request a reversal of funds when a business commits an unfair credit billing practice. Once a request is made, the issuing bank begins an investigation with the acquiring bank to determine if there is sufficient evidence to support the customer’s chargeback claim. If the issuing and acquiring banks find sufficient evidence during a dispute that the business violated the FCBA, then the issuing and acquiring banks would uphold the customer’s claim. In doing so, the issuing bank reverses the amount owed to the customer directly from the business’ bank account. On top of that, the business pays additional operational costs to the acquiring bank for representation in the dispute. PayPal Chargebacks and Disputes Unlike the credit card schemes, PayPal gives customers and businesses an opportunity to communicate directly with one another via the PayPal Resolution Center, a digital space on their website, in a separate process, called a PayPal Dispute. This process lets businesses help resolve their customers’ concerns before they need to initiate the credit card chargeback process. During a PayPal Dispute, the funds in question are held temporarily by PayPal. If the customer and the business are unable to come to an agreement, the customer still has the right to file a dispute and initiate the chargeback process. The PayPal chargeback process is identical to the credit card chargeback process depicted above except that PayPal takes the place of the acquiring bank. Below, you can find an illustration of a PayPal Dispute. What is a refund? Refunds are less complicated than chargebacks and are something you’ve probably dealt with regularly, perhaps having made a number of refunds yourself as a customer. A refund is a request made by a cardholder to a business to cancel the payment and return the amount paid to the cardholder. In order words, it’s a transaction cancellation which a business may initiate in accordance with its refund policy and any applicable regulations.

HOW CHARGEBACKS AND REFUNDS CAN IMPACT BUSINESS

Chargebacks Chargebacks can greatly hinder your business in the following ways.

• You may receive fees between $20 to $100 per chargeback² as a result of having your bank defend you in a chargeback dispute.  
• You may lose products or merchandise.
• Customers are not obligated to return any products they purchase after filing a chargeback.
• You may receive larger fines, up to approximately $10,000, for exceeding monthly chargeback rates as established by credit card scheme programs.
• You may lose your ability to defend yourself in disputes depending on your fraud rate.
• Businesses that accept Visa cards but surpass a fraud ratio of 1% are put in the Visa Fraud Monitoring Program, which prohibits them from fighting disputes in the first place.
• You may experience reputational loss.
• This could lead to monitoring programs that apply stricter filters on your payments, thereby blocking more legitimate payments than usual which harms your business. Moreover, a reputational loss can lead to your business being labeled as “high-risk” by the credit card schemes, which also leads to higher fees.
• You may have your merchant account terminated or prohibited by Visa and Mastercard.
• Your business may be blacklisted by Visa or Mastercard. This prevents you from accepting credit card payments with these schemes for up to three years. It also puts your business in jeopardy of becoming blacklisted by other credit card schemes worldwide.  

Refunds Refunds can also slow business down but to a much lesser degree.

• A fee of up to $0.50 may be issued upon fulfilling a refund made via credit card.
• Shipping and restocking fees may be applicable when fulfilling a refund.
• You may incur additional costs upon having to handle refunded physical products.

CHARGEBACK AND REFUND BEST PRACTICES

How to minimize your number of chargebacks Follow the steps below to reduce your number of chargebacks and associated chargeback fees.

1. Monitor and analyze user behavior on third-party platforms that allow the resale of video game goods, as well as gaming-focused community groups on social networks.
2. Observe user behavior on websites like G2A or TaoBao, two popular sites for fraudsters to resell video game goods, or any social media network and take note of certain patterns of user behavior (e.g., the same email account, certain phrases used in messages). Then, apply that logic to similar users for your game and block them in advance.
3. Let gamers make purchases with other payment methods besides credit cards and PayPal.
4. Alternative payment methods exist in every market worldwide but are not part of the chargeback system. This means it’s impossible for customers to make chargebacks if they make purchases with these payment methods.
5. Use in-game parameters, such as user data and transaction stats, to help verify payments.
6. This allows you to segment users by the level of trust, so you can apply different verification filters to each segment and reduce the risk of receiving chargebacks.
7. Apply 3D Secure 1.0 or 2.0 to payments when applicable based on several parameters, such as geographic region and payment amount.
8. Verifying payments through any of the 3DS messaging protocols enhances payment security and shifts the liability of any transaction from your business to the issuing bank.
9. Proactively refund cardholders for transactions that are known to be fraudulent.
10. This provides a cardholder with their funds and preempts them from filing a dispute to initiate the chargeback process in the first place, thereby reducing chargeback costs.

How to handle refunds for customers Follow the steps below to turn refunds into a positive touchpoint with your customers.

1. Respond to your customers’ refund requests in a timely manner.
2. Don’t ignore or overlook any request. Remember, refunds are cheaper than chargebacks, and taking care of them in a timely manner will create goodwill between you and your customers. Try to respond to customers’ refund requests within one to two business days. Plus, promptly taking care of refunds protects your business’ reputation online, where customers are often quick to voice their negative opinions on digital public forums or social media sites.
3. Use a fair and transparent refund policy.
4. Gamers, like all consumers, respond well to refund policies that are fair and transparent. But keep in mind, regardless of the refund policy used, customers can still file a chargeback if they purchased something from you with a credit card or via PayPal.

HOW XSOLLA HELPS WITH CHARGEBACKS AND REFUNDS

Chargebacks Xsolla helps our partners improve their win rate with a credit card and PayPal chargebacks via a three-stage process. Pre-transaction

1. Additional verification: Xsolla either debits a small amount of money on a customer’s bank account and asks them to provide the corresponding debited amount or sends them a payment code via SMS to authenticate their payment. When the customer enters the correct debited amount or payment code, it means that the customer has access to their bank account or a piece of hardware (smartphone, tablet) that verifies them as the cardholder.
2. Manual review: Payment traffic that isn’t analyzed automatically goes into manual review and our Customer Support team reviews each payment on a case-by-case basis.
3. 3D Secure: Xsolla applies 3D Secure 1.0 and 2.0 (3DS 1.0 and 2.0) to provide an additional layer of security for online credit/debit card transactions, which also shifts liability for fraudulent transactions from our partners to the issuing bank.
4. In-game parameters: Xsolla leverages user data and transaction stats to help verify payments. This allows us to separate users by the level of trust, so we can apply different verification filters to each segment and greatly reduce our partners’ risk of receiving chargebacks.

Post-transaction

1. Manual review: The Xsolla Anti-fraud team not only monitors and analyzes user behavior, blocking individuals who have a history of requesting chargebacks but also investigates similar behavior across gaming populations to apply any necessary filters to prevent additional fraud.
2. Chargeback prevention tools: Xsolla currently leverages a number of tools to mitigate the number of chargebacks our partners receive. One tool lets Xsolla take more control of partners’ chargebacks through identifying actionable transactions which can assist in precluding costly fees, fines, and losses. And another lets us communicate directly with issuers to exchange detailed transaction information in real-time, thereby preventing chargebacks from moving deeper into the dispute process.
3. Proactive refunds: The Xsolla Anti-fraud and Customer Support teams work together to proactively refund individuals who might otherwise submit chargebacks. This means that if Xsolla knows that a transaction is fraudulent, our teams work together to refund the true cardholder before that individual needs to open a chargeback in the first place.  

Chargeback resolution

1. Case management: Xsolla monitors all open credit card and PayPal chargebacks daily. By analyzing opened chargebacks, our team effectively filters out clear-cut instances of chargeback abuse. In other cases, we are able to provide acquiring banks with enough evidence to verify the legitimacy of a transaction. By approaching each case individually, we manage to win a significant number of chargeback disputes, helping our partners improve their operations by increasing their win rate with credit cards and PayPal.

Refunds Xsolla lets our partners conveniently use our dedicated Customer Support team to manage refunds for their gamers, or easily manage refunds for gamers of their own via an API that connects with Xsolla Publisher Account.

1. Refunds: Xsolla offers refunds for hundreds of payment methods across multiple payment types, including credit/debit cards, direct carrier billing, cash-based payment methods, and digital wallets. This also includes manual refunds for select alternative payment methods that traditionally are non-refundable.
2. Credit to balance: Xsolla can refund gamers by crediting their original transaction amount to their balance immediately. This provides them with an alternative to traditional refunding, which is quicker in certain countries around the world and leads to improved customer satisfaction.  
3. Partial refunds: Xsolla can perform partial refunds for any shopping-cart transaction that includes two or more digital or physical goods. For example, a gamer may receive a refund on two of three virtual items that they purchased in a single transaction. In this way, Xsolla partially refunds them for their original transaction amount, while still allowing them to maintain ownership of the virtual item they want to keep.
4. Viewable chat histories: Partners may view the chat history between the Xsolla Customer Support team or their own dedicated customer support team and gamers in Publisher Account. This provides partners with additional transparency and insight.
5. Real-time notifications: Xsolla sends real-time notifications on refunds to a game so it can perform any necessary follow-up actions. For instance, if Xsolla refunds a gamer who bought an in-game item from a game, we can alert the game so it can remove that in-game item from the player’s possession.

SET YOURSELF UP FOR SUCCESS

Chargebacks and refunds occur after a customer has bought your product or service. These two overlooked costs of business slowly but surely cut away at your revenue while adding to your operational expenses. Xsolla has been dealing with chargebacks and refunds for 14 years, so we can help you work through the details to reduce operational costs and improve customer satisfaction. – Not an Xsolla partner? Contact one of our gaming experts today or email business@xsolla.com to learn more about how you can minimize chargebacks and manage refunds easily. – Current Xsolla partner? Email your account manager today to set up a time to receive a personalized plan on how to lower chargebacks for your game(s). SOURCES

1. “Fair Credit Billing Act.” Federal Trade Commission.
2. “Chargebacks.” Chargeback 911.

GLOSSARY

Acquiring bank: A financial institution that maintains a business’ bank account. Also known as an acquirer or a merchant bank, it processes credit card transactions on behalf of a business.   Chargeback: A chargeback is a forced transaction reversal initiated by an issuing bank. Put less technically, it’s the result of a process that involves a customer contacting their bank to request a reversal of funds for a payment they made to buy one of a business’s products or services. Credit card scheme: These are the companies (Visa, Mastercard, American Express, Discover) that regulate credit card usage and serve as technology providers. Credit card schemes are the bridge between the businesses that accept a credit card and the banks that issue credit cards to consumers.   Dispute: A dispute is a filed claim submitted by the cardholder. Initially, it is received by the issuing bank, and this institution determines whether the dispute has merit to initiate a chargeback. Issuing Bank: A financial institution that issues credit cards to consumers on behalf of credit card schemes (Visa, Mastercard, American Express, etc.). Also known as an issuer or a customer bank.   Refund: A refund is a request made by a cardholder to a business to cancel the payment and return the amount paid to the cardholder. In order words, it’s a transaction cancellation that a consumer may or may not initiate by contacting the business in accordance with its refund policy. Win rate: The probability that a business will win against a dispute. ‍