There are many costs in business that entrepreneurs have to weather, including rent or mortgage charges, marketing fees, account-keeping costs, and legal fees. However, one expense that can really hurt your bottom line that you might not expect, is a chargeback.
Having to deal with this issue can be energy-sapping, time-consuming, and a stress on your bottom line. To find out more, and to help you avoid this common problem, read on.
What Is a Chargeback, and Why Is It a Problem?
For starters, you’re probably thinking, what is a chargeback? A chargeback is the term used when a financial institution debits a merchant’s bank account by the amount of a transaction previously credited. This happens when a customer disputes a transaction that has been charged to their card with their issuing bank. The financial institution that issued the card charges this transaction amount back to the merchant. This is where the name ‘chargeback’ comes from.
Having this happen is frustrating because it affects your cash flow and can cause overdrawn bank accounts, particularly if you receive a bunch of chargebacks within a short period of time. Since banks and other issuing institutions remove the funds from your account, often without warning you at all, you can suddenly find the balance of your bank account has dropped dramatically.
Even if you are notified prior to funds being reversed, you usually won’t get much notice, and can’t stop the chargeback from happening anyway. As well, if you have already sent out merchandise or completed a service, you may never end up recuperating the money for your offerings.
While you will certainly get a chance to defend yourself against the chargeback, through the provision of paperwork, screenshots, and more, this is a very time-consuming process. Plus, unfortunately even when you keep as many detailed records and other documentation as you can, credit card issuers still often find in favor of the cardholder. When this happens, not only will you be out of pocket for the product or service involved and the transaction amount, but in some case you might also have to pay a penalty chargeback fee.
When Do They Occur?
There are many different reason codes (actually over 100) that come into play when dealing with the different credit card networks. The issuing financial firm collects evidence from the customer after they lodged a dispute, and depending on whether it is a Discover, American Express, MasterCard or Visa chargeback it is then categorized according to the particular card-specific reason code seen as the best fit.
While there are many potential reasons to wrap your head around, they typically fall into a few main categories. One of the most common reasons why chargebacks get issued is because customers don’t recognize the store name or recall making the purchase. Sometimes people look at products in numerous stores and then forget who they ended up shopping with, or they don’t connect a particular item with a brand name.
Sometimes someone may be authorized to use a card, but forget to alert the cardholder to the purchases they make. As a result, that person may think there has been a fraudulent or incorrect charge placed on their account. Speaking of fraud, this is an increasingly common chargeback cause. These days more and more people are having their credit card or identity information stolen, so unfortunately merchants can do everything right but still end up with chargebacks because cards or the details on them, have been accessed by criminals.
Other common chargeback reasons are that customers didn’t receive the items they ordered (packages may have got lost or gone to another person); they weren’t happy with the goods they received (e.g., they felt items were misrepresented online, or came defective); or they feel that they were incorrectly billed. There can sometimes be disputes over sales prices, shipping costs, automated billing cycles, and added service charges.
How Can You Avoid Chargebacks?
To reduce your risk, there are some proactive steps to take. For starters, always provide detailed descriptions and extensive photos and dimensions of the products you’re selling so customers can be clear on what they’ve ordered, and you can prove more easily that you sent the correct thing.
As well, ensure the name that shows up on client credit-card statements will be recognizable to them as your business, so they don’t think the charge is fraudulent. Then, when shipping out goods, choose postage options which will enable you to get proof of delivery. If the items are expensive, you should always pick a service that gets customers to provide their signature on delivery, too.
It’s also wise to cancel any payments for goods which occur after a bunch of declined transactions have come through for the same order. In this scenario, a cybercriminal was likely trying a variety of stolen credit-card numbers to try and find one that would work. Ask the customer to use a different payment method instead. If they’re legitimate they will typically provide one with no drama.
In addition, use a reputable merchant services firm to process your transactions, and activate the Address Verification System. This will check that the customer is providing you with the legitimate billing address for the card they used.
