What is a chargeback?
When a customer contests a transaction on either their debit or credit card, and the issuing bank moves to reverse the transaction – you have a chargeback.
Why do chargebacks happen?
Chargebacks typically happen for one of these general reasons:
- The customer doesn’t recognize the transaction at all
- The customer never authorized the transaction
- The customer didn’t receive the goods or services purchased
- The customer doesn’t believe the goods or services were as promised
Chargebacks can also be classified under the following categories:
- Technical: The authorization expires, the processing bank makes an error, or there aren’t enough funds (i.e. non-sufficient funds).
- Clerical: A refund was never issued, or an incorrect or duplicate amount was billed.
- Quality: The customer is displeased with the goods or services, or they never received them.
- Fraud: The customer claims to have never authorized the transaction, and there may be identity theft occurring.
What happens with a chargeback?
The chargeback process is actually incredibly easy for the consumer to initiate. All they need to do is contact their card company and ask to dispute a transaction. The card company will ask the merchant to provide proof and determine whether or not the chargeback is valid. If found valid, the card company will debit the transaction amount from the merchant’s account. They will give this amount back to the customer to cover the contested charge.
Do merchants ever win the war?
It’s very rare for a card company to decide in favor of the merchant. In fact, only 21% of chargebacks fall this way, according to Wikipedia.
How do chargebacks affect merchants?
It’s not just the transaction amount that is lost in a chargeback. For the merchant, there’s actually a lot at stake. Penalties and fees are often charged by the acquiring banks in order to pressure merchants to avoid chargebacks. A merchant that has a lot of chargebacks suggests potential insolvency and therefore increases risk. Acquiring banks are not interested in funding these types of merchants and push against practices like excessive chargebacks.
The card companies themselves often also have fees for the acquiring banks if they take on merchants with a high volume of chargebacks. These fees will typically get passed on to the merchants, adding even further to the overall cost of a chargeback. Word is over 1% of sales as chargebacks can initiate a costly fine up to $100,000 per month – or more. No one in the payment industry wants a risky merchant, but chargebacks can be a reality for all types of businesses.
How can merchants protect themselves from chargebacks?
Some consumers abuse chargebacks by frequently authorizing transcations, then “changing their mind.” Others even engage in forms of friendly fraud, where they might authorize then claim to have never made the purchase.
Generally speaking, a merchant can reduce and prevent chargebacks with these simple tips:
Keep track of information
Be sure to retain all documentation for transactions, including those that are non-swiped. With swiped transactions, make sure to collect a signature and description of the item.
Pick a good, clear DBA name to appear on receipts and billing statements. If your business is called “Oscar’s Pizza and Pasta,” but a customer sees “Ohio – OPP 42523” (which may be how it’s internally organized), confusion could occur.
Also, utilizing multiple receipt methods such as printed, email and text message leaves not only a comprehensive paper trail, but also blasts the transaction several times to the customer.
Don’t be elusive with shipping, pricing, and return policies. Elucidate everything in bright lights on your website, in your store, and on your documents.
Don’t ignore customer issues. Address and resolve disputes right away to avoid heading down the chargeback road.
Visa also recommends that you stop attempting to collect a transaction once it is declined and ship merchandise before depositing the transaction. They also suggest if a shipment is delayed, offer the customer an option of proceeding as is, swapping for a different item, or cancelling altogether.
Chargebacks are a nasty part of conducting business with credit card processing. But by mitigating and handling them appropriately, you can diminish your chances of a costly problem.