As a business owner, you’ve got a lot going on. You’re trying to run your business, keep your digital storefront up-to-date, manage employees, providing top class customer service, and make sure you’re realizing revenue. It’s a lot harder than it looks and small costs can add up to large losses.
It’s essential for you to understand chargeback fees and how they impact your business. Many merchants reject chargeback fees, not realizing that there is more to chargeback fee than the dollar amount you’re assessed and penalized.
What are chargebacks?
A chargeback is a refund initiated by the bank for a credit/debit card purchase done by a customer. Rather than contacting the merchant who facilitated the purchase, cardholders can contact their bank and initiate a chargeback siting various reasons.
In other words, it’s the reversal of a credit/debit card payment that comes directly from the bank. Chargebacks seem to be very similar to traditional refunds, yet there is one significant difference: rather than contact the business for a refund, the consumer is asking the bank to take money from the business’s account forcibly, herein called the merchant. A thorough investigation is carried out, and if the bank feels the cardholder’s request is valid, funds are removed from the merchant’s account and returned to the consumer; the consumer, on the other hand, is in no way obligated to replace whatever was purchased.
When Can Consumers Legally Use Chargebacks?
In today worlds, credit cards are an essential part of our lives, and we don’t even realize that we have chargeback protection provided by our card issuer. Those who do know often misinterpret how the chargeback is supposed to work. They don’t comprehend what isn’t–and what is–a chargeback situation.
For example, customers who fall prey to identity theft have the very right to file a chargeback if fraudulent purchases are made. Cardholders should contact the bank immediately, both to recover the stolen money and to prevent additional losses.
It’s important to note that this is the only situation where the customer should call the bank first; in every other case, the cardholder needs to communicate directly with the merchant.
The primary concern is to resolve the issue without the banks getting involved at all. Sometimes, the perceived fraud might be an accident. Perhaps the consumer has forgotten about the purchase, or the merchant made an innocent mistake. Such situations can be settled quickly and efficiently to everyone’s satisfaction. Many customers don’t realize it, and a refund is anytime better than chargebacks as it puts the money on the customers’ account quickly compared to the settlement time in case of chargebacks.
If the merchant isn’t able–or willing–to work toward a mutually agreeable solution, a chargeback may be in order. However, even if a customer is unsatisfied with a purchase, merely filing a chargeback without first seeking a traditional refund is the equivalent of cyber-shoplifting , because the cardholder keeps the purchased item and gets the cost of the item refunded; whereas the business herein called, the merchant has to pay twice for the same thing or service. Legally customers are “required” to request a traditional return/refund from the merchant first … and should only file a chargeback in extreme situations. Otherwise, the customer is taking the item for free—which is like stealing.
Why are chargebacks sometimes called “Friendly Fraud”?
If you want to know, “What is a chargeback?” you’d also ask another: “What is friendly fraud?” Friendly fraud–often called chargeback fraud because customers are misusing the chargeback scheme–here in such cases customers deliberately stealing from merchants by claiming legitimate purchases are fraudulent.
Chargebacks were meant for consumer protection. However, industry regulations have not kept pace with rapid changes in technology and payment options, which has allowed chargebacks to be used as weapons by consumers against merchants.
Cardholders might file a chargeback for numerous wrong reasons:
- The consumer uses a chargeback to avoid a restocking or handling fee.
- The consumer has “buyer’s remorse.”
- The return process seems too cumbersome.
- The consumer wasn’t patient enough to wait for (or didn’t understand) the delivery schedule.
- The consumer didn’t act promptly and the return time limit has expired.
- A family member made the purchase, but the cardholder doesn’t want to pay the bill.
- The cardholder forgot about or didn’t recognize the transaction.
- The cardholder wants to make some extra money and/or wants something for free.
According to reports, nearly half or chargebacks initiation is due to unauthorized transactions. A recent survey, however, found that over 80% of cardholders filed a chargeback merely because they didn’t have time to request a refund from the merchant.
Precautions a merchant can take to avoid credit card chargebacks
Chargebacks are costly and unfortunate for many small businesses that accept credit or debit cards. However, there are ways a merchant can protect themselves against unfair chargebacks.
Follow processor guidelines.
Every credit card processor has its own rules when it comes to accepting credit cards. For card-present purchases, in which the card is swiped in person, be sure to check the expiry date and enter the security code on the front or back of the card. Your credit card processor may need to explicitly permit you to process card-not-present purchases transactions, such as those made online or over the phone. To be approved and protect yourself from chargebacks, you may have to capture additional information such as the customer’s IP address, digital signature or social media profiles. Some processors require further identity confirmation through services like Verified by Visa or MasterCard SecureCode, which require customers who opt-in to enter an additional password to authorize credit or debit card payments online. They may also need you to get proof of delivery when you ship items.
Use a descriptor which relates to your business.
Many chargebacks arise due to 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 purchase from you. If you list anything else which the customer may not recall the purchase, will result in a dispute or chargeback.
Customer’s written authorization
One of the most important things to protect your business is to require customers to sign a contract that spells out the specific services the company will provide. Customers can return the signed contract via fax or email, or approve it electronically online or with a fingerprint via a smartphone application. The key is to get the customer’s authorization in writing.
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. If a customer expresses dissatisfaction, try to get in touch with the customer immediately to try to solve the issue. Prompt customer service helps in reducing chargebacks to a great extent.
Learn to spot warning signs of fraud.
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 or the IP address doesn’t match with the card issuing country, due diligence is required to find if that the customer is legitimate.
Training employees thoroughly in how to deal with both card-present and card-not-present transactions is a good practice. Proper 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.
Keep good records.
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 nothing 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 just forgotten the purchase.
Fight back when it makes sense.
Chargeback could cost you an additional fee, and on top of that, 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.
If you want to know more about chargebacks and how iPayTotal can help you in preventing the chargebacks and keeping your account intact, contact us right now.