Dispute management is critical for any business, especially those tightly integrated with payment processors like Stripe. Mishandling disputes can lead to dire consequences, including the potential shutdown of your business. This is not a hypothetical scenario; businesses have been wiped off the map due to poor dispute management. The AI systems used by payment platforms are incredibly advanced and can outsmart attempts to bypass their rules.
The fine print that you sign when you create a Stripe account is clear – you cannot let your dispute rate climb beyond a certain threshold (more Stripe Dispute Activity Ratio info here).
Why is this such a big deal?
The primary benefit offered by major credit card companies like VISA and Mastercard—both in their written policies and social contracts—is the protection they provide customers against fraudulent transactions. When customers use credit cards, they often pay a premium compared to using debit cards, expecting this added layer of security. If a credit card is misused, the issuing bank will typically refund the customer, and the credit card company will absorb the cost. As a result, credit card companies closely monitor dispute rates, as high rates can significantly erode their profits. When these companies enter large processing agreements with intermediaries like Stripe, they expect them to manage the overall dispute rate within acceptable limits. If Stripe fails to maintain these standards, it risks its entire business model, which is heavily dependent on the credit card industry. For this reason, Stripe prioritizes maintaining low dispute rates over the revenue of individual vendors, regardless of their refund policies or practices.
Strategies to Manage Dispute Rates
Think of managing dispute rates and refund policies like a seesaw. On one side, you have your dispute rate; on the other, your refund policy strictness. If your dispute rate is zero, you can afford to be stricter with refunds. However, if your dispute rate begins to climb, even with a clear no refund policy on your website, you must reconsider your stance and lower how strict you are with your refund policy. It’s a balancing act that you have to be constantly aware of as a busines owner because the consequences are black and white - you willl lose your business without recourse.
If disputes start increasing due to a stringent no refund policy, it's prudent to become more flexible. Even if you clearly state no refunds, be prepared to offer refunds selectively to prevent dissatisfied customers from disputing the charges. The aim is to keep the dispute rate well below 1%, and not ever trending sharply upwards.
Even if you successfully challenge and win disputes, your dispute activity ratio will remain unaffected, and the consequences for a high activity ratio still remain. Thus, it's vital to prevent disputes from occurring in the first place rather than relying on winning them.
If you think you can outsmart the platforms by creating a new account, think again. Their AI is smarter than you are. This has been evident for several years. About six or seven years ago, we witnessed the first instance of algorithms being more intelligent than a creator who tried to outwit Stripe. The AI systems have only become exponentially smarter since then.
We have seen instances where creators, facing high dispute rates, had their accounts shut down. One creator thought they could outsmart the system by creating a new account. Within five days, it got shut down. After several back-and-forth attempts, they tried opening another account under their partner’s name but using the same bank account. It was shut down within 24 hours. Even after changing the bank account with yet another new name, the forth attempt was shut down almost immediately. These attempts only strengthened the case against the business for engaging in high risk practices.
It's important to monitor both your trailing four weeks and trailing three months dispute rates. If your trailing four weeks rate is increasing, you need to act swiftly to bring it down. Conversely, if it’s decreasing, you’re on the right track.
If you notice your dispute rate creeping up at the beginning of the month, consider launching weekly sales. This strategy increases the number of transactions quickly, thereby lowering the dispute rate numerator over a larger denominator. Each transaction in a sale counts multiple times if spread over weeks, significantly impacting your dispute rate.
Managing dispute rates is vital for the sustainability of your business. By being proactive, flexible, and strategic, you can keep your dispute rates low and avoid the catastrophic consequences of a high dispute rate. Always prioritize customer satisfaction and clear communication to minimize disputes and maintain a healthy business operation. Remember, trying to outsmart the system is a losing game. Take disputes seriously and manage them effectively to safeguard your business.