Chargebacks are just a part of life when a business owner. However, understanding the process and how to fight back could save you thousands of dollars each year in merchant account fees. Keep reading for a description of chargebacks, why they’re bad for business, and what you can do to prevent them.
What Are Chargebacks?
Chargeback Prevention Table of Contents
Chargebacks are reversals of funds previously charged to a customer’s credit or debit card. They occur when a cardholder disputes a transaction with their bank, claiming it is unauthorized or fraudulent. The bank then investigates the charge, and if they find the dispute is valid, the transaction amount is returned to the cardholder’s account and deducted from the merchant’s account.
Why Are Chargebacks Bad?
Chargebacks can be costly and damaging for merchants for several reasons. Every year, the amount of money that merchants lose to chargebacks increases.
Not only do business owners lose a sale and the merchandise that went out the door with it, but they also get charged additional fees for processing the chargeback. It’s a no-win situation for merchants.
Here are the critical ways in which chargebacks can impact your business:
- Merchants bear the chargeback cost, which includes the lost revenue from the original sale and any fees charged by the bank for processing the dispute.
- Time-Consuming: Disputing a chargeback and gathering evidence can be time-consuming and divert resources from other business activities.
- Reputation Damage: A high volume of chargebacks can negatively impact a merchant’s reputation and ability to accept future card payments.
- Customer Confusion: Customers may become confused or frustrated if a chargeback results in a product or service being taken away after receiving it.
- Fraud Prevention Challenges: Fraudulent chargebacks can also create challenges for merchants looking to prevent fraud and protect their business from loss.
How do Chargebacks Work?
Understanding the process is an essential next step in your journey to decrease chargebacks in your business. When a consumer files a dispute with their bank, it sets various processes in motion to process the chargeback. That workflow generally looks like this:
- Dispute initiation: The cardholder contacts their issuing bank and disputes a transaction, claiming it is unauthorized or fraudulent.
- Bank Investigation: The bank investigates the dispute and determines its validity. If it is, the bank will process a chargeback. During this step, the bank often issues a preliminary refund to the customer to keep them happy until the investigation is closed.
- Notification to Merchant: The merchant is notified of the chargeback and provided with a reason code explaining the reason for the dispute. Reasons can vary, but are often one of the following three: merchant error, friendly fraud, and criminal fraud.
- Evidence Gathering: The merchant can provide evidence to dispute the chargeback and prove the transaction was legitimate.
- Bank Decision: The bank reviews the evidence and decides on the dispute. If the chargeback is sustained, the funds are returned to the cardholder and deducted from the merchant’s account. If not, the bank will typically withdraw their preliminary refund from the cardholder’s account.
- Appeal: If the merchant disagrees with the decision, they may have the option to appeal the chargeback.Note: The chargeback process may vary slightly depending on the bank and card network involved. This is a general overview of the steps involved in the process. It’s also important to know that every bank and every processor has different timelines during which merchants may respond. Be sure you know those timelines and don’t miss them, or you could miss the opportunity to fight back.
Ways to Prevent Chargebacks
Preventing chargebacks can help save your business time, and money and value street cred. Chargebacks and friendly fraud have risen, and merchants have paid the price. If you’re struggling with chargebacks and want to get them under control, here are some critical steps to consider:
- Offer customer support: Offer customer support through multiple channels, including email, phone, and chat, to help resolve customer issues before they escalate into chargebacks. Customer service is one of the best ways to prevent chargebacks, refunds, poor reviews, and other business problems. Unfortunately, many companies don’t put a lot of thought or resources into this area. However, the better your customer service is, the more likely your customers will turn to you with a problem, rather than going straight to their bank.
- Communicate policies: Communicate your return, refund, and cancellation policies to customers to reduce confusion and disputes. Offer reasonable shipping times, tracking features, and updates. Make it clear how your products are shipped and how to get a hold of you if there is something wrong with the order once it’s delivered. Customers are more likely to contact you to correct an issue if they feel like your business is receptive and easy to contact.
- Provide email confirmation for purchases: This may sound silly, but some people make purchases online and then forget about them. When the credit card statement comes, they may not remember making the purchase and try to file a chargeback. If you set your system up to send email confirmations upon purchase, and updates along the way, your customers are more likely to remember making the purchase.
- Set up your billing descriptor correctly: Your billing descriptor is the name on the customer’s card statement when they purchase. If the descriptor is a strange combination of letters and numbers, or an LLC that doesn’t match the DBA or store name from which they made the purchase, they may think it’s fraudulent. Be sure to set up your billing descriptor to read so that your customers know exactly who charged them for a purchase.
- Verify information: Verify the customer’s billing information and shipping address to reduce fraud and prevent disputes related to incorrect charges. This includes using AVS functionality in your payment gateway and asking your customer to enter identifying information. You may also want to explain why they should provide this information.
- Monitor transactions: Monitor transactions for signs of fraud and promptly refund or cancel any suspicious orders to reduce the risk of chargebacks.
- Signs of fraud may include some or all of the following:
- Multiple transactions on the same card in a short amount of time
- Large quantities of the same item purchased on the same card
- Transactions that fall outside of the cardholder’s typical purchase patterns
- Fraud Prevention Tools are among the best ways to protect your business and customers. There are tons of tools available for these purposes. Here are some of the key features you should implement:
- Address Verification (AVS)
- Credit card security codes (CVV and CVC)
- 3D Secure technology
- Two-factor authentication
- PCI DSS compliance
- SSL-certified website and shopping cart
- Fraud detection software to catch unusual transactions in progress
- Record Keeping: To assist with chargeback disputes keep accurate records of all transactions, including detailed product or service descriptions. The ability to pull transactions, credit card information, purchase verification, and other vital information could be the difference between getting a chargeback or not. If a chargeback comes your way and you can provide enough evidence to prove that the customer made the purchase, chances are pretty good that you can win the dispute. But none of that is possible if you don’t keep track of your transactions.
- Prompt Responses: Timely replies to customer complaints: Respond promptly to customer complaints and resolve any issues quickly to reduce the likelihood of a chargeback. You may want to consider having a dedicated customer support team, or a chatbot at the very least. If a customer reaches out to your business to file a complaint or fix an issue with an order, you have a concise window of time to contact them before they go to their bank. Consumers want instant gratification, especially when it pertains to their money.
Final Thoughts
While eliminating chargebacks is challenging, you can positively impact them by implementing some or all of these tactics. Fraud prevention tools and protocols should already be part of your business operations. You may need to beef them up a bit. Customer service is also an essential factor that can continuously be enhanced. Take the time to look at your current situation and see where you and your team can improve!
