Chargebacks Are on the Rise: Learn What You Can Do
Chargebacks are increasing for all types of merchants. While it’s impossible to avoid chargebacks entirely, the good news is there are simple steps you can take to reduce the number of chargebacks your business receives and protect your profits. Below we address what chargebacks are and why they pose a risk to your business. Most importantly, we outline what to do if you receive a chargeback and the actions you can take to reduce their occurrence.
What Is a Chargeback and Who Is at Risk for Them?
A chargeback occurs when a cardholder reaches out directly to their card issuer to initiate a dispute for a charge on their statement. The issuer will then refund the amount to the cardholder while the dispute is investigated to determine legitimacy and who is responsible for payment. The money in question will typically be deducted from your merchant account when the dispute is made and held until it’s resolved. If the transaction is found to be legitimate and the cardholder is responsible for paying, the issuer will credit the funds back to your merchant account. If the investigation results in your business being held responsible, the money stays with the cardholder. Additionally, your business will be charged a fee by your payment processor for the backend work required to manage a chargeback. In the end, chargebacks exist to protect cardholders and give them an efficient way to dispute any charges that may be inaccurate or fraudulent. But as a business owner, they can be challenging to deal with and lead to lower profits and a loss of time.
All businesses that accept credit cards as payment are at risk of chargebacks. However, there are some factors that can make you more vulnerable. Fraud is more common in online transactions than in-person ones. This is due in part to EMV (chip) cards, which significantly improve the security of card-present, or in-person, transactions. Some industries where the goods or services are purchased well in advance, such as travel, are also more vulnerable to chargebacks because customers may not recognize a charge on their statement for a purchase they made months earlier.
Common Reasons for Chargebacks
Cardholder doesn’t recognize the charge
Orders, including subscription fees, were canceled but continue to be charged
Cardholder never receives their order
Cardholder receives damaged or defective items
Goods/services purchased were not as advertised
The amount charged is different than the amount on the cardholder’s receipt
The purchase was fraudulent
What to Do When You Receive a Chargeback
Know that time is of the essence when handling a chargeback as you have limited time to respond or you’ll automatically lose the dispute. Another important detail to note is that it may take several days for you to receive the notice a chargeback occurred, which means you have even less time to respond.
Part of the appeal process to a dispute may include showing proof that you provided the products or services in question. This can be time consuming as it may entail research and gathering paperwork. Sometimes appealing the chargeback may cost more than the actual product or service that’s being disputed, which is one of the main reasons you want to do everything you can to avoid chargebacks from the beginning. For further guidance, reach out to your merchant services provider or payment processor.
Reasons to Avoid Chargebacks
Besides costing you time and money, chargebacks have other negative impacts on your business. As previously mentioned, your payment processor will usually charge you a fee, which covers the work required to investigate and resolve the dispute. What’s worse, having multiple disputes against your business may damage your reputation. Financial institutions monitor your chargeback rate and use that as a crucial metric when deciding if they’ll lend your business money or offer you a merchant account for payment processing. In fact, if your business’s chargeback ratio, the measurement of chargebacks-to-transactions, is above the industry standard, you might have your merchant account terminated. That means you wouldn’t be able to accept credit cards as payment at your business—a potentially devastating blow. If that happens, you’d need to open another merchant account, which would cost you significantly more to address the higher risk posed.
How to Reduce Chargebacks
Take advantage of these recommendations to help your business decrease chargebacks, preserve your reputation, and safeguard your profits.
Provide secure credit card processing. If you haven’t already done so, upgrade your payment devices to ones that accept EMV chip cards, which are inserted into the terminal and provide a much more secure way to process transactions than traditional magnetic stripe cards that are swiped. For online transactions, take advantage of the security programs offered by the major card brands and follow best practices when setting up your website, such as requiring your customers to enter the 3- or 4-digit CVV code on the back of their card and their billing zip code when completing an order. Doing so greatly reduces the chance of fraudulent purchases with stolen credit card information. In addition, ensure your business is PCI compliant, which means you’re adhering to a set of payment card processing security protocols and best practices to prevent fraudulent transactions.
Avoid hand-keying credit card numbers. Chip-read and swiped card transactions are much more difficult for customers to dispute than ones where a credit card number is keyed into your payment device by hand. In fact, disputes over key-entered transactions in a card-present environment are considered an immediate loss. In the event you’re not able to process a chip-read or swiped card transaction, you should request another form of payment as opposed to hand-keying card numbers. For merchants with dual processing environments (i.e., card-present and card-not-present), you may want to consider setting up two separate merchant accounts to ensure greater chargeback protection for card-not-present payments.
Obtain proof that the customer agrees to the purchase. A signed contract, itemized invoice, or payment receipt is another way you can help prove a legitimate transaction should a chargeback occur.
Implement a clear return policy. When you clearly state your return policy, you help protect your business from chargebacks by educating customers about their options before initiating a dispute with their credit card issuer. Post your policy online, around your business, and print it on the back of your receipts. Have customers sign the receipts in-store, which means they acknowledge the policy, or have them check an acknowledgement box when purchasing online.
Include detailed product descriptions of your items online. Provide as much information in your product descriptions as possible with the goal of representing your offerings accurately. This enables your customers to feel confident in what they’re purchasing, leading to less returns and potential chargebacks.
Inspect all items before selling them. At checkout or before you prepare an online order for shipment, train your staff to inspect products for defects or damage. It may take a little more time, but you’ll make up for it with less chargebacks to manage. Implementing quality control of this sort is even more critical if your business doesn’t accept returns.
Send shipping confirmations and obtain proof of delivery. Emailing customers a shipping confirmation and tracking details for their online orders is a great way to not only provide good service, but also help you prove that your goods were delivered in the case of a dispute. The proof of delivery (POD) should show the entire address, not just the city and state. It’s also good practice to obtain a signed POD for valuables or large transaction items.
Watch out for red flags. Keeping an eye out for potentially risky transactions can help you reduce chargebacks. For example, if most of your orders are less than $100.00 in total, an order for $500.00 may warrant extra scrutiny before being fulfilled.
Batch out daily. Settling your batches every day helps reduce both higher transaction fees and cardholder disputes.
Use your store name as your payment descriptor. Your business’s payment descriptor is the merchant name that appears on a customer’s credit card statement when they make a purchase from your store. To make it easier for your customers to recognize their charges and reduce the occurrence of chargebacks, make sure your descriptor matches the name of your business.
Issue a refund or credit to the original form of payment. In the instance you need to issue a refund or credit, the exact refund amount should be applied to the original credit card to ensure the transaction can be traced. If the credit is issued to another credit card or form of payment (e.g., cash or check), it may be challenging to document the credit transaction and obtain proof of the refund acknowledgement in the instance of a dispute.
To decrease chargebacks, encourage your customers to contact your business directly to rectify issues rather than initiating a dispute with their card issuer. And partner with a merchant services provider that’s dedicated to giving you next-level support when chargebacks do occur. Discover JollyPayments industry leading service, low-cost payment processing, and other benefits for yourself.