Chargeback, a term dreaded by merchants everywhere! A chargeback is when a card holder disputes a charge made with their credit card, resulting in a reversal of the original sale and leaving the merchant holding the bag for costly chargeback fees.
For merchants, the chargeback system can seem arduous and often unfair but it is important to remember that it is a vital protection for consumers and part and parcel of accepting credit card payments today. For any business to navigate chargebacks, it is essential to understand them and the how to protect your business. Keep reading to learn more!
What Are Chargebacks?
In the simplest terms, a chargeback is a return of funds to the card holder that is forcibly initiated by the issuing bank. Given this definition, a chargeback may sound very similar to a return and refund. However, unlike a return, the card holder does not contact the merchant directly and instead requests the refund through the card issuer.
The process of a chargeback begins when a card holder contacts their card issuing bank and disputes a charge. The card issuer then reverses the charge in question, returning the funds to the card holder (crediting their account). When the card issuer credits the card holder’s account, the card issuer also debits the merchant’s bank. The merchant bank then debits the merchant’s account.
In addition to losing the funds from the original sale, chargebacks come with significant fees. Additionally, if your business is plagued with too many chargebacks it can result in the closure of your merchant account.
What Are Some Common Reasons for Chargebacks?
Now that we understand fundamentally what a chargeback is, we need to get a better understanding of why they happen and, ultimately, how to avoid them.
There are various reasons why a card holder may initiate a chargeback, the most common being:
Charge not recognized by the card holder
Item was returned, but a refund was never issued
Fraud, where the card holder’s information was stolen and/or used without consent
Card holder received a damaged or broken item(s)
Items or services were never received
Items or services were not as described
Incorrect dollar amount billed
As we can see, some reasons for chargebacks are clerical (duplicate billing, incorrect dollar amount, etc.) and some are dependent upon the card holder’s satisfaction with their purchase of goods or services.
"How Can I Protect My Business from Chargebacks?"
Although there may never be a way to protect your business 100% from chargebacks while accepting credit cards, the following can greatly diminish the chance of chargebacks.
Create an easy and hassle-free refund policy
No merchant wants to have to return and refund a previous sale, but refunding a customer/card holder is much better than dealing with the damage a chargeback can do to your merchant account. Having an easy and hassle-free refund policy will encourage customers/card holders to contact you first instead of initiating a chargeback.
Be diligent with your billing practices
Avoid costly clerical errors, such as duplicate billing and entering incorrect dollar amounts. In the event of a duplicate billing, ensure that the duplicate has been voided.
Always get a signature for “card present” transactions
Make sure you get your cardholder’s signature for any “card present” transactions and that the signature matches the back of the card presented.
Clearly and accurately describe your merchandise or service
Card holder’s will often initiate a chargeback when they feel that what they purchased is not in line with what they believed they were purchasing. This is an important consumer protection and helps avoid any bait-and-switch by the merchant. This issue can be avoided if the merchandise or service is clearly and accurately described by the merchant.
Make yourself available to customers and provide contact information
Make sure that your business’ contact information is easily accessible, so that in the event that a customer/card holder needs to get into contact with you regarding a purchase they can easily do so.
Clearly explain and outline shipping timetables
Set your customer’s/card holder’s expectations by clearly explaining the shipping process and shipping timetable of their purchase.
Keep all records and receipts
Keeping clear, legible, and complete records can help you in the event of a chargeback situation. There are some unscrupulous customers/card holders that file fraudulent chargebacks in an attempt to get merchandise or products for free. In the chargeback process, the onus is on the merchant to provide proof that the original sale should be honored. Keeping all records and receipts is the first step in fighting chargebacks.
Chargebacks are an unpleasant part of accepting credit card payments, but they are here to stay and business’ must learn to deal with them. It is important to remember that in order to avoid costly chargeback fees, that refunds are always a better option. Furthermore, while you may disagree with a card holder’s chargeback reason (merchandise not as described), there are some chargebacks that occur as a result of merchant error and in these cases it is important to accept these chargebacks and try to be more careful in the future.