Accepting credit cards in your online store is a great way to generate more revenue for your business, but it also brings with it an element of buyer beware, or in this case, seller beware. The seller beware appears in the form of chargebacks.
Chargebacks can cause irreversible losses to businesses of all sizes. From the loss of products and services sold, the chargeback fee, to the actual payment itself, chargebacks affect your businesses bottom line and reputation with credit card companies.
As a merchant, you need to understand what chargebacks are, how they occur, and how you can fight back.
What are chargebacks?
A chargeback allows a customer/cardholder to dispute any fraudulent transactions on their statement. If for whatever reason, the bank considers the dispute to be legitimate, the bank will take the entire amount of the transaction from your merchant account, plus an additional chargeback fee.
Ideally, chargebacks are meant to save customers from fraudulent transactions; the process is simple and makes it easy for a customer to get their money back. But unfortunately, sometimes concepts with the best intentions can be used for evil.
Some customers may intentionally create fraudulent transactions to get both the product or service AND their money back.
This type of chargeback is called “friendly fraud,” yet there is nothing friendly about it. Customers purchase products or services from you, and then once they receive them, they file a chargeback, saying they never actually received the product or service.
Besides friendly fraud, there are several other main causes of chargebacks:
- Fraud: As mentioned about, fraudulent transactions are the most common cause of chargebacks. These occur when a credit card is used without the authorization of the cardholder, and liability falls on the merchant.
- Returned merchandise for wrong product: This happens when the customer receives the wrong or damaged product for the transaction, returns it, but does not receive the credit on their account. In this situation, the merchant is responsible for posting the money to the customer's account.
- Item not received: When the customer claims they did not receive the item they ordered, they file a chargeback, and yes, you guessed it, the merchant is again responsible for the charge.
- Technical difficulties: Sometimes technical issues may arise during the payment process, such as the customer getting charged twice for a transaction (maybe they hit that payment button one too many times), or insufficient funds that lead to an account being charged, even if the transaction was declined.
These four reasons for chargebacks all result in unnecessary time and resources of your business being allocated to fight these disputes. It is essential when combating chargebacks to know what to expect when a customer files one against you.
The chargeback process
There are quite a few steps that occur when a customer initiates a chargeback. As a merchant, knowing what to expect can help you protect your business.
- The cardholder files a complaint with their issuing bank about an inaccurate transaction.
- The issuing bank checks to see if the complaint is valid. If there is a potential error, a provisional credit is issued to the customer until the customers issuing bank can get credit from the merchant's bank account.
- The merchant's bank will then investigate the validity of the claim. At this point, the merchant is notified that they have a chargeback request.
- After checking to see if any processing errors have occurred, the merchant's bank will then decide to accept or decline the chargeback request, and inform the customer's bank of the decision.
- If the customer’s complaint is invalid, the merchant’s account will not be charged.
- If the customer’s claim is valid, the amount of the chargeback will be transferred from the merchant’s account to the card-issuing bank.
- To rectify a chargeback, a merchant must present sufficient evidence to prove the transaction is indeed invalid.
Legally, customers have up to 2 years to file a chargeback. Unless the merchant can prove the transaction to be valid, the amount of the chargeback is sent to the customer.
What are chargebacks costing you?
The liability during the chargeback process falls almost entirely upon the merchant. Credit card companies are focused on protecting their customers, and rightfully so, but unfortunately, this process negatively affects the merchant. While it is easy for customers to file a complaint, merchants are left with little or no support.
If a merchant cannot provide enough evidence to dispute a chargeback, they lose out on the transaction. Making matters worse, your business may become a risk to credit card companies the more chargebacks you have.
Any time you are doing anything other than running your business, your losing money. Chargebacks are a complicated process, and even if you do end up winning, you never get back the time spent fighting.
How you can prevent chargebacks
Be an honest seller. Be transparent in your pricing, your return policy, and provide the best customer support as you possibly can. Simple things such as confirmation emails and making sure your business name matches the name on the customer's credit statement are easy to implement and go a long way.
Make sure your shipping policy is clear on your website, and that customers are kept up-to-date if an order is taking longer than usual.
If an item is out of stock or is no longer available, notify the customer personally, and offer a similar replacement or allow them to cancel the transaction and process a refund. Communication is critical, and being upfront with the customer will help avoid a chargeback.
Proper communication with the customer will help you avoid chargebacks, and these fraud detection tools will help reduce your risk of fraud:
AVS: Address Verification System (AVS) checks that the billing address of the credit card provided matches the one on file with the credit card company. You can even take it a step further, asking for the customer’s phone number and card issuing bank to verify their account.
CVV: Card Verification Value (CVV) is the 3-4 digit code on the back (or in the case of AMEX, the front) of the credit card that proves the cardholder has the card on hand.
As a merchant, knowing what to expect from chargebacks will help you prepare your business to defend against them. Take the steps necessary to ensure fraud does not occur, and that you are communicating your policies and products/services clearly to your customers.
The time and resources you save from not fighting chargebacks will go towards growing and maintaining your business, which is the real reason why you got into entrepreneurship in the first place.