If your small business accepts credit and debit card payments, you must be diligent about minimising credit card chargebacks. If you don’t prevent chargebacks, excessive instances will cost your business a fortune in losses. They may even jeopardise your ability to accept credit card payments altogether. For a small business owner especially, the impact can be severe. You can keep these frustrating transactions at bay, but you have to be proactive about it.
What Is a Chargeback?
A chargeback is a disputed transaction that results in the bank refunding a customer’s money. The purpose of chargebacks is to protect customers from dishonest businesses and identity thieves. In many cases, though, it’s the customer that’s committing fraud.
A chargeback isn’t the same as a standard refund. If the customer comes to you and asks for their money back, and you grant it, that’s a refund. It’s only a chargeback if the customer goes straight to the bank to dispute the charge. Refunds don’t count against you, but excessive chargebacks can jeopardise your merchant services account.
What Happens When a Customer Disputes a Charge?
If a customer calls the bank to dispute a charge, the bank will often submit the refund immediately and then investigate the charge. In some cases, the bank may conduct the investigation first and issue the refund if it’s determined that the merchant was at fault. When a bank issues a chargeback, it holds the merchant responsible for the funds—along with penalties.
Consider the following examples:
- Example 1: Fred wants a new computer, but he can’t really afford it. So Fred devises a plan to get the computer for free. He buys the computer online, receives it in the mail, and then complains to his bank that the computer never arrived. The bank investigates but is unable to track the item. The bank issues Fred a refund.
- Example 2: Fred steals a credit card out of Maria’s purse and uses it to buy a computer from Amazon. Maria calls her bank to report the card stolen, but the purchase has already been made. The bank has no choice but to refund Maria’s money.
- Example 3: Fred saves up his money and buys a computer. One week later, the computer arrives damaged. Fred tries contacting the retailer, but the retailer blames the postal service and scolds Fred for not getting shipping insurance. Fred complains to his bank, and the bank determines that a chargeback is warranted.
The above scenarios represent three common types of chargeback. Example 1 is friendly fraud. Example 2 is theft. Example 3 is a legitimate dispute. Each of these chargeback scenarios has its own prevention requirements, which we’ll break down individually.
How to Prevent Friendly Fraud Chargebacks
Friendly fraud, as outlined in example 1 above, occurs when the buyer requests a fraudulent chargeback from the bank. They may claim that the item never arrived, that the item was damaged, or that the item was falsely advertised. Whether or not the buyer originally intended to demand a refund, all friendly fraud chargebacks have one thing in common: The buyer uses dishonest means to obtain a refund on an item they legitimately received.
Friendly fraud is the most common type of chargeback. Research shows that 58% of consumers never contact the merchant to dispute a charge, instead going straight to the bank.
There are several reasons why a customer might request a chargeback with the bank rather than contacting the vendor:
- To avoid paying a restocking fee on an unwanted item
- To get a quicker refund on an unwanted item
- To avoid having to return the unwanted item
- To receive a refund for an item after its return-policy expiration
- To get something for nothing
You’ll never completely eliminate friendly fraud, but there are steps you can take to minimise it:
- Make customer service a top priority. Ideally, you’ll want some form of 24/7 customer service in place, such as phone or live chat. If a customer loses patience, they’re more likely to run straight to the bank. Make sure you’re always available to address complaints. If you’re a small business owner that can’t afford round-the-clock help, you can set up a live chat option that forwards directly to your phone like a text message.
- Ship items quickly and maintain a clear, generous return policy. You want to ensure that items arrive promptly and that customers feel comfortable reaching out if they have a problem with an order. Yes, returns are a huge inconvenience, but they cost far less than a bank chargeback, as you won’t be slammed with the exorbitant penalties that a bank imposes.
- Ban customers who make fraudulent chargebacks. If no action is taken by the vendor, customers are more likely to make additional chargebacks. This is one reason why businesses exceed their maximum chargeback ratio with merchant services providers. If you gain a reputation for allowing customers to freely make chargebacks, your business is more likely to be targeted by unscrupulous buyers.
- Provide a tracking number for every shipment. If possible, you’ll also want to opt for delivery confirmation. When you track your shipments, it’s more difficult for a customer to falsely claim that an item was never received. Track returns as well.
- Contest any chargebacks that look suspicious. If you dispute fraudulent chargebacks, your merchant services provider may be less inclined to allow them in the future. Be proactive, and show that you’re doing your due diligence to fight fraud. See “How to Fight Chargebacks” below for more information.
How to Prevent Chargebacks From Unauthorised Transactions
Most of us have been in this situation at least once. You notice an unfamiliar charge on your credit card statement, so you call the bank. The bank apologises, refunds the money, and sends you a replacement card.
Most of us don’t give it another thought beyond that, but there’s more to the story. When this type of identity theft occurs, the bank charges the business for the fraudulent transaction along with fees and penalties. The business takes a loss, even though they probably weren’t in on the scam. Somebody just used stolen credit card information.
There are numerous ways in which thieves make fraudulent credit/debit card purchases:
- By stealing the card outright
- By creating a swipeable duplicate of the card
- By gaining access to the credit card number
When the card owner discovers the fraudulent charge, they typically demand a refund from the bank. The card is then canceled and replaced, but the damage is done. For small businesses especially, it’s important to safeguard against this type of fraud.
- Collect as much credit card information as possible. If you accept credit/debit card payments online or over the phone, you’ll want to collect as much information as you can: the cardholder’s full name, the card number, the expiration date, and the CVV. This won’t prevent all fraud, but it will weed out the thieves who only have limited card information.
- Verify the customer’s name, address, and phone number with the cardholder’s bank. Some banks offer address verification and other forms of fraud protection. Use whatever methods are available, and deny any suspicious transactions.
- Ensure that your merchant account is set up to automatically deny expired or invalid credit cards. You may need to contact your merchant provider and determine what types of safeguards they have available for account holders.
- Be wary of billing and shipping addresses that don’t match. Some online customers will use a shipping address that’s different from the billing address, but if they also ask for expedited shipping, there’s a high likelihood of fraud. Always investigate further before shipping.
- Consider blocking IP addresses from countries you don’t ship to. This can help to prevent credit card fraud from abroad. Be wary of any IP address that originates from a country different than the customer’s stated address.
- Restrict the number of declined transactions. Some scammers use malicious software script that automatically enters several credit card numbers until one proves successful. Also keep a log of how many credit cards a customer uses over time. If a customer uses 5 or more credit card numbers, you’re likely looking at fraud.
- Use PCI-compliant security on your website. You want the maximum encryption and security. You might also opt for a trust mark security service that scans your site daily for malware and vulnerabilities.
How to Avoid Chargebacks From Legitimate Disputes & Misunderstandings
Finally, you’re going to encounter occasional chargebacks from honest customers who feel legitimately cheated—despite your best efforts. By being proactive and maintaining a tireless effort to customer service, you can minimise these disputes as well. Consider the following examples:
- Problem: A customer doesn’t remember the transaction and doesn’t recognise the charge on their credit card statement. They demand a refund from the bank.
- Solution: Make your business name part of the descriptor that appears on credit card statements. When a charge appears on your customer’s statement, they should see exactly where it came from.
- Problem: Your website promises 3-day shipping. After a week, your customer still hasn’t received the item. Rather than reaching out to you, they go straight to the bank assuming they’ve been cheated.
- Solution: Always set accurate, realistic expectations for the customer. If an order is delayed, send them immediate updates so they’re never left guessing. Don’t just assume the customer will reach out to you with concerns.
- Problem: A customer receives a damaged item in the mail. After one unsuccessful attempt to reach you, they take the issue to their bank.
- Solution: Offer shipping insurance for high-value items, and opt for delivery confirmation. Always solicit feedback from customers after an item is delivered. Be diligent about addressing customer concerns immediately.
The important thing is to always put the customer first and be proactive about ensuring their satisfaction. It takes a bit of extra effort, but it will save you a fortune in losses.
How to Fight Chargebacks
When a chargeback occurs, you can and must take action. Chargebacks reflect poorly on your small business and can compromise your standing with your merchant services provider. By investigating and disputing chargebacks, you:
- Demonstrate to your merchant services provider that you run an honest business and are serious about fraud prevention.
- Have the ability to resolve honest disputes with customers and solidify customer relationships.
- Reduce the amount of income lost to chargeback penalties.
To dispute a chargeback, the first step is to investigate. Review the sales record and any associated documentation (like tracking information). Then reach out to the customer directly to see if the matter can be resolved amicably. Often, a frustrated customer will go straight to the bank simply because it’s the easiest way to dispute a charge.
If your investigation confirms that the charge was valid, the next step is to submit a chargeback rebuttal letter with compelling evidence to the bank. This is known as a representment. There are strict time limits to file (usually 45 to 120 days), so make sure to act quickly.
It’s difficult for a business to win a chargeback dispute, as the bank tends to give consumers the benefit of the doubt if there’s any ambiguity. However, you can win if your evidence is compelling. You’ll need to provide concrete documentation such as:
- Delivery confirmation
- Tracking numbers
- Customer communications
Be as thorough as possible in your dispute. Even if you don’t win, your efforts still help. Banks look at undisputed chargebacks as admissions of guilt, and you don’t want that on your record.
What Is Chargeback Protection for Merchants?
Some merchant services providers and third-party payment processors are now offering chargeback protection. You pay a small transaction fee for each sale (often about .3% to .4% per transaction), and the provider affords you additional safeguards to weed out problematic buyers. It’s not a perfect system, and in some cases it can filter out legitimate buyers, but it can also save you a fortune in the long run.
The best thing about chargeback protection is that it shifts much of the liability from you to the merchant services provider. Ask your provider if they offer this type of protection, and decide if it’s right for your business. At QPay Europe, we take automatic measures to safeguard you against excessive chargebacks. Review our complete guide to chargeback prevention to learn more.
What a Credit Card Dispute Does for Your Business
It’s exceedingly difficult for a merchant to win a chargeback dispute, so it’s important to be diligent about keeping these under control.
Chargebacks are especially concerning for small businesses because you’re usually working with limited profit margins and shoestring budgets as it is. For every dollar lost, the business actually loses $2.40 on average, according to one study. That’s because you’re not just losing the item. You also have to deal with the hefty fines and penalties.
Too many chargebacks in a given period may even result in your merchant services provider terminating your account.
The good news is that it’s not too difficult to minimise chargebacks. Just remember:
- Always take a customer-first approach
- Be transparent with the customer throughout every phase of the shipping process
- Learn to identify and deny suspicious credit card activity
- Track and document everything
- Dispute all suspicious chargebacks
You have enough to worry about with a small business. Don’t let chargebacks stand in your way.