One of the many things that can endanger the success of your business is the dreaded chargeback. Here we explain what they are and what you can do when one comes your way.

As a business owner, have you armed your business with proper tools and procedures against a serious risk that comes from your own customers? Say, chargeback?

Considered as a complicated and costly problem, chargebacks affect merchants of all types. With chargebacks, your own customers can cause financial harm to your company and involve you in nasty disputes with financial institutions.

So what exactly are chargebacks and why do they occur?

Chargebacks were first applied to safeguard consumers against fraud and dishonest merchants. When a customer files a chargeback with his bank, his money is returned to his account and removed from the merchant’s account until the merchant can give evidence that the transaction was valid.

Generally speaking, there are two types of chargebacks that should concern eCommerce merchants — criminal fraud and friendly fraud. The criminal fraud chargeback typically is classified as identity theft. The consumer didn’t authorize the transaction and the card number was obtained illegally. This type of chargeback can be virtually eliminated by using fraud filters provided by your merchant account provider in conjunction with services like Fraud Labs Pro. Friendly fraud chargebacks happen when a cardholder disputes a charge that he didn’t authorize. This is sometimes called the “I didn’t buy that” fraud or cyber-shoplifting.  

If the bank takes sides with the customer, they get their money back and the merchant loses that money. Typically the merchant will pay the chargeback fees and can see a bump in transaction fees. Get enough of these and your business will be labeled “high-risk.” Once that happens, you can expect to see your transaction fees dramatically increase.

Why should you be concerned?

Because chargebacks cost your business money.

To keep a good status, it’s imperative your chargeback ratio be below 1%. Once your ratio is above 1%, your merchant account almost certainly will be closed and you’ll be listed on the MATCH list — a merchant’s nightmare. Once you’re in there, you’ve got about 5 years in merchant account purgatory.

The first step in preventing chargebacks: GREAT customer service.

Settle issues with your customers before bigger problems occur. It’s been said before, but great customer service not only saves money (reduced chargebacks, for example) it MAKES money. Satisfied customers oftentimes share their experiences through reviews and with friends and “word of mouth” advertising is the best advertising you can find.

Other ideas:

  • Make sure your contact link and support information is clearly visible on your site. My recommendation? Place it on the header and/or footer.
  • Refund policy should be clear and straightforward so customers will know what to expect. Don’t confuse them with legal jargons.
  • Respond to customer queries and concerns quickly and effectively. You need to make sure you solve the problem before it escalates.
  • If the customer’s claim is legit, refund him. If not, create a proper defense in case they issue a chargeback. Remember, you can win a chargeback, but not without the correct documentation. If you plan to fight it, understand it can be a lengthy and time-consuming process.

If you do get a chargeback, do these:

  • Respond Quickly.  Merchants typically have a brief period of time to reply to chargebacks. Acknowledge the chargeback and start the process of preparing the necessary documentation to fight it.
  • Did the customer contact you first? Chargebacks are typically what happens when all else fails. One of the first things most banks require to start a chargeback is proof the customer has attempted to resolve the issue with you directly. If you have no record of this contact, be sure to let the bank know. Offer to settle the dispute with the customer directly. But don’t roll over, only do what you think is fair. If you can’t come to an agreement, let the process move forward.
  • Provide clear details about the purchase. Good document collection is ALWAYS CRUCIAL. If you don’t have the essential documents, it will be difficult, if not impossible to win disputes. Locate the purchase and explain the steps that were taken after the purchase was made. Provide date of purchase, date and item shipped, carrier information, shipping confirmation information, customer communications, etc.

Remember, merchants have rights too.

How are your chargeback strategies? Are they enough to prevent future chargebacks? Feel free to share more tips on the list.

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