What Is a Chargeback?
Credit card chargebacks happen when customers contact their credit card issuers to dispute charges. If an issuer deems a dispute valid, your merchant account is debited for a credit card charge that had previously cleared — and you’re out the money, plus a chargeback fee from the processor that may range from $15 to $100.
Disputes may be considered valid for a number of reasons. In some cases, the purchase was made fraudulently by a third party, using the customer’s identity. Customers also may dispute charges if they:
• Didn’t receive an item they ordered.
• Feel that a product or service was substandard or not what it was represented to be.
• Were incorrectly billed.
• Don’t recognize the charge on their credit card statement.
Chargebacks can cause many headaches for merchants. When customers dispute a transaction for a reason, merchants go through a rather complicated process. As a result, they not only lose a sale but also end up with unnecessary fees.
E.g., if a consumer is a victim of identity theft and unauthorized transactions have been made, this consumer should contact the bank right off the bat. The cardholder will want to recoup the stolen amount. The bank can also help avoid future losses. Even if the customer is dealing with fraud (or he/she thinks it’s fraud), the consumer should communicate directly with the merchant.
Merchants need to be well aware of chargebacks and how to manage their chargeback ratio. Why? Very often, too many chargebacks result in closed accounts or make it impossible for merchants to obtain a new one.
This list of eight ways to reduce the risk of chargebacks can help guide the process.
1. Follow processor protocol. Every credit card processor has its own protocol when it comes to accepting credit cards, says Margo Lamb, a Paso Robles, California, small-business credit card consultant. For card-present purchases, in which the card is swiped in person, be sure to check the expiration date and enter the security code on the front or back of the card.Your credit card processor may need to specifically give you permission to process card-not-present purchases transactions, such as those made online or over the phone, Lamb says. To be approved, you may have to capture additional information such as the customer’s IP address, digital signature or social media profiles. Some processors may want additional identity confirmation through services like Verified by Visa or MasterCard SecureCode, which require customers who opt in to enter an extra password to authorize credit or debit card payments online. They may also require you to get proof of delivery when you ship items.
2. Use a clear payment descriptor. Verifi’s Lynch says that the majority of disputes his firm handles have to do with unclear payment descriptors. Your payment descriptor is the merchant name and other identifying details that appear on the customer’s credit card statement when they make a purchase from you. If you list a different name than what the customer might recognize — a parent company name instead of your store’s specific brand name, for example — the customer may not recall the purchase, Lynch says. The solution is to be sure your descriptor reflects what the consumer will recognize.
3. Get it in writing. Entrepreneur Glenn David has never lost a chargeback request with his Skokie, Illinois, party services company, Glenn David Productions. He says one of the most important things he’s done to protect himself is to require customers to sign a contract that spells out the specific services his company will provide. He gives them lots of options — they can return the signed contract via fax or email, or sign it electronically online or with a fingerprint via a smartphone application. The key is to get the customer’s authorization in writing.
“The card isn’t present, but the contract says that so-and-so authorizes us to bill their card in this amount,” David says. “Once we had to address a dispute with American Express, who defends their customers like no one else. We submitted the contract and, within 24 hours, they found in our favor.”
4. Deal with customer service issues promptly. Your credit card processor will likely offer chargeback notifications so you can find out quickly if a customer is disputing a charge. Lynch says it’s a good idea to take advantage of those notifications so you can address chargebacks promptly. David tries to head off chargebacks with good customer service. If a customer expresses dissatisfaction, he gets in touch with them quickly to try to solve the issue, he says.
Businessman Signing An Official Document5. Learn to spot warning signs of fraud. In 2012, New York City e-cigarette retailer Bedford Slims Vapourette Company had been in business for just over a year when owner Jesse Gaddis received his first chargeback for $244.68. Someone had used a stolen credit card to purchase goods and the rightful owner disputed the charge.
Gaddis was so furious that he went to his local police precinct, but was told they couldn’t help with Internet fraud. “It was one of those things where we just had to suck it up,” he says.
Since then, Gaddis has developed a “chargeback protocol,” that helps him detect signs of fraud. The company moved its shopping cart functions and payment gateway — which transfers information to the payment processor — to more secure systems.
He now pays attention to alerts that inform the Bedford Slims team if there are any suspicious details, such as if the credit card security code isn’t correct or if the billing and shipping addresses don’t match. That way, Gaddis and his team can make inquiries to ensure that the customer is legitimate. He says he has often been able to confirm or deny sales by making a phone call to the customer or confirming information on a Facebook or LinkedIn account.
6. Train employees. Verifi’s Lynch says it’s a good idea to train employees thoroughly in how to deal with both card-present and card-not-present transactions. Good training includes teaching them fraud and chargeback prevention techniques, such as looking for suspicious transactions, verifying signatures in card-present transactions, and obtaining signatures on contracts and sales orders when appropriate.
7. Keep good records. Cardone recommends that at a minimum, you keep accurate records of customers’ credit card transaction dates, amounts and authorization information, in case you need them to fight a chargeback. If you have signed documentation such as receipts or contracts, that helps, too. There’s not much you can do if you have been the victim of a fraudulent purchase, but this paperwork can help you win a dispute against a customer who is unfairly trying to take advantage of the chargeback system or who may have simply forgotten the purchase.
8. Fight back when it makes sense. Each chargeback could cost you an additional fee. Plus, if you have a history of chargebacks, it could hurt your relationship with your merchant account provider. You may not choose to devote the time and resources to fighting every chargeback, but if you think you could win a case, it may be worth pursuing. If it’s too much to do on your own, consider hiring a chargeback management firm to help you, but weigh the cost of these firms against what you could reasonably do on your own.
Proactive and effective customer service can go a long way toward resolving chargebacks or preventing them altogether. Chargebacks are most commonly initiated when customers feel as if they are unable to recover their funds through a company’s customer service department. By clearly displaying customer support contact information on your website and making your refund policies available to customers, you can prevent buyers from feeling powerless and perhaps encourage them to think twice before pursuing a chargeback.
When a customer initiates a chargeback, you’ll typically have a small window of time (7-10 days) to dispute it via the channels required by Visa and MasterCard. In this period of time, it can often be helpful to contact the customer directly and inquire as to the reason for the chargeback. Customers can undo chargebacks by contacting their card issuer, so reaching out to the dissatisfied party in a genuine and timely manner may persuade them to stop pursuing the claim.
If the customer’s complaint is valid, you should issue a refund as soon as possible rather than concede the chargeback. If you feel that a refund is not in order, this exchange may at least provide some idea of why the customer felt compelled to initiate a chargeback rather than request a refund in the first place. This information will be useful both during the dispute process and when assessing your chargeback prevention policies.
A good general rule:
If you believe the customer is in the right to request a reversal of the sale, refunding the customer is the recommended course of action. However, If you believe the customer’s complaint is without merit or perhaps an attempt to avoid paying for a legitimate transaction, evaluate the strength of your case before proceeding with a chargeback dispute.
If you do not feel 100% confident that you will win the chargeback dispute due to a lack of documentation, an inability to respond on time, or any other factors that put the strength on the customer’s side, you may be better served by issuing the refund instead of risking a defeat to your counter-claim. It may seem like a senseless loss to concede the funds, but, by doing so, you can avoid a hit to your chargeback success rate and save yourself the headaches involved with the chargeback process. Issuing a refund is always preferable to losing a chargeback dispute.
That being said, if you have solid documentation and the time and energy to contest the chargeback, you should by all means submit a counter claim and try to recover your money.