- Chargebacks can be summed up in just two words: disputed transactions
- Chargebacks are a hard reality when doing business with consumers, but there are proactive steps you can take to prevent them
- Refunds and chargebacks are not the same thing
Depending upon which side of the fence you are standing, chargebacks can be seen as positive or negative.
Chargebacks can be useful for customers, because they allow them to get their money back for something that may have been purchased or charged to them in error.
For merchants? Not so much.
Chargebacks can obviously be very disappointing. It could feel like somebody opening up the cash register and removing money from a sale right before your eyes. And, if you get enough chargebacks, it could affect your bottom line and keep you from achieving your revenue goals.
With this in mind, let’s do a deep dive into what chargebacks are, and, for merchants, how to avoid them.
What Are Chargebacks?
For those unfamiliar, chargebacks can be summed up in just two words: disputed transactions. When a dispute is made by a customer, the funds will be frozen while the bank investigates. If they find in favor of the person filing the dispute, the funds will be refunded to them. (This is where it’s key for merchants to be able to make their own case in the event this happens—more on that in just a bit.)
The idea of chargebacks is to protect consumers from fraud. It’s no secret that unauthorized transactions are increasing worldwide and causing problems left and right. In order to save time and money, requesting a chargeback transfer can often settle the dispute quickly and quietly for the customer.
The difference between a chargeback and a refund:
- With a refund, you (as a merchant) give the money back to the customer.
- With a chargeback, the bank—(not you, the merchant)—performs the transaction.
If the chargeback wasn’t already a headache in its own right, you may be charged a fee for the processing of the chargeback. It could even range up to $100 for each dispute. Your account gets debited for a sale that had seemed just fine a short time ago.
Is the customer required to return the merchandise involved in the disputed purchase? No. The bank/credit card will initiate an investigation, and if all arrows point to a valid dispute, the funds are removed from your account and returned to the consumer.
In short, the customer is going over your head and talking directly to the bank or credit card issuer.
Specific Reasons for Chargebacks
Understand the reasons for chargebacks and this could start you on your way to reducing their occurrence in your business. Here are some of the more common causes of chargebacks:
- Defective goods
- Purchases unauthorized by the cardholder
- Invalid or voided credit card
- System error: being charged twice for the same item
- Human error: possibly in the accounting department
- Shipping issues: the item never arrived
Chargebacks are meant to accomplish several things:
Making the customer feel safe and protected.
The idea that there is a safety mechanism in place can add peace of mind to purchases of products and services.
Preventing the brokering of substandard products or services.
If a customer feels the product or service did not live up to its promise, a chargeback situation can be set in motion.
Keeping transparency alive and meaningful.
If a customer is charged for something they didn’t buy in the first place, or if the product was never delivered or the service never rendered, then it’s chargebacks to the rescue.
Expose and stop criminal fraud.
Do you remember the Equifax data breach of a few years ago? One of the biggest financial services companies in the world experienced a break in its security, compromising nearly 150 million people. A fresh memory of a tragic incident like this makes chargebacks feel like a welcome warrior for consumers in the fight against criminal fraud.
The History of Chargebacks
Chargebacks are nothing new. They were first designed and used in the 1970s, when common use of credit cards was relatively new. Many people were a bit reluctant to use credit because the cards were easy to lose or steal. Chargebacks helped ease the worry. They officially became a thing as part of The Fair Credit Billing Act of 1974.
Even to this day, there are many customers who may not even be aware that they have a right to initiate a chargeback.
What You Can Do To Avoid Chargebacks
Make sure the name you’re doing business with is recognizable to the customer on their statements.
Sometimes, companies will use a third-party company to process their payments, or are part of a larger company with a different name. This can lead to customer confusion if the name that appears on a credit card statement is different from the name your customers are used to seeing.
If these aspects apply to your company, make sure to note how the charge will look like on their statement. You can do this by adding a note at checkout along the lines of: “Charges will appear on your statement as “Company XXXX.”
And when you send the order confirmation email, do the same. It may be a good idea to also include your phone number and website domain on the statement. This way, there are no questions or concerns in the customer’s mind that this charge is from you and not some cybercriminal.
Educate your staff.
Make sure your employees know how to look for suspicious transactions, and that names and other information matches—in terms of billing and shipping info.
Keep detailed records.
Signed documentation, receipts, contracts, transaction dates, and authorization information could be helpful evidence as you make your case.
Stay on top of your shipping.
Keep track of tracking information, dates, and delivery details. A shipping software solution can be a huge asset in facilitating all this. If shipping valuables, you can also require a signature at delivery.
Install a credit card fraud detection solution.
Chargeback management software tools can help in reducing or stopping credit card fraud. You can also outsource your chargeback management, leaving you to focus on other issues in your business. Or, you can also employ a hybrid approach that utilizes both.
Communicate with your bank and credit card companies.
Merchant services companies such as Square offer fraud protection, as well as ongoing support in monitoring chargebacks as part of their overall services to businesses.
Make sure your customer knows exactly what they are paying.
This includes shipping costs, tax, and any other potential fee that might apply. An unexpected total could lead a customer to claim that the price was not as quoted. Be certain that your product page includes every charge detail to the penny.
Be aware of “friendly fraud.”
Nothing friendly about it, though—a customer will purchase an item, and then call their bank/credit card company and claim that they had never made the purchase in the first place. A chargeback is issued, and you’re out the money for the sale, and the customer gets to keep the product. It’s maddening. Unfortunately, friendly fraud is becoming more common, and can be difficult to dispute. However, if you are feeling like you have been a victim of friendly fraud, you have every right to dispute it. Trust your gut.
Know your credit card chargeback merchant rights.
When it comes to chargebacks, it may seem like you don’t have much of a chance or a reason to fight back. However, there are some rights given to merchants in a chargeback situation:
- Chargebacks concern only the purchase price: The chargeback cannot exceed the original amount of the purchase. However, be aware that there may be surcharges and shipping charges tacked on.
- If a customer requests cash back on a debit card, that cash cannot be included in the chargeback: It’s about the charge only.
- If the delivery was late, the customer must attempt to return the item first: A chargeback cannot happen just because a purchase was delivered late.
- For return items, there is a 15-day waiting period before a chargeback can be completed: This gives the merchant time to issue a proper refund.
Minimizing Chargebacks Through Customer Service
Try to avoid giving the customer a reason to even think about initiating a chargeback without a valid cause. Be attentive to customers, provide high-quality service, and pay close attention to credit card transactions. Work with a customer quickly if there is an issue or the threat of a claim. Don’t let it wait, or you could be hit with a chargeback.
There is no way to completely avoid the reality of chargebacks. However, your knowledge of how to prevent chargebacks can work toward reducing the occurrences. It’s not often easy for a merchant to win a dispute, but if you take proactive steps to stop chargebacks, you may save your business some time and money.
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