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6 Steps to Handle Chargebacks

Chargeback Vector Image.pngFor most merchants, issuing refunds is the least pleasant part of running a business. This happens whenever customers are “unhappy” with a purchase and want their money back. 

  • If you sell products, you may be able to repackage and resell any returned items. After delivery expenses, restocking fees and other associated costs, you might be able to recoup some of your losses. 
  • If you sell services, however, refunds typically represent a direct and irretrievable loss. 

As unpleasant as refunds are, there are even worse ways to lose money. For example, an unhappy customer can always initiate a chargeback instead. 

What Are Chargebacks, and Why Should You Care?

Chargebacks are very similar to refunds, except the process is initiated entirely from the customer’s side. Instead of talking directly to you (the merchant), a dissatisfied customer calls his/her card-issuing bank to dispute a charge. Sometimes, the process is as simple as logging into an online banking account and hitting the “dispute” button. 

Once a chargeback has been initiated, the card-issuing bank will credit the user’s account almost immediately. That customer is pretty much done. For you, the merchant, the dispute process is just starting. 

As the merchant, the onus is on you to prove that the charge was legitimate. This is no easy feat, even if you have plenty of documentation to back up your case. 

In fact, the success rates are incredibly low, with merchants winning only 21 percent of all disputes. The average win rate is even lower for: 

  • E-merchants who process card-not-present (CNP) transactions online.
  • Certain service industries such as auto repair, hospitality and tourism. 

If you lose your case, you’ll have to pay back the full purchase amount — just as you would when issuing a refund. However, you may also have to pay penalties ranging from $20 to $100 per dispute. If you rack up enough chargebacks, your payment processor may downgrade your merchant account. 

Even if you win your case, you end up losing. That’s because disputing chargebacks involves weeks — sometimes months — of documentation, phone calls, emails, forms and signatures. 

It doesn’t matter if the disputed amount is $1 or $10,000. The chargeback resolution process involves an endless back-and-forth with the card-issuing bank. 

Customers are increasingly aware of this, which is why chargeback abuse is becoming so common. This type of “friendly fraud” happens whenever users make legitimate purchases with the full knowledge that they’ll dispute these purchases down the road. According to some estimates, merchants lose $16 billion a year from this type of deliberate chargeback abuse. 

There are steps you can take to reduce both the frequency and severity of chargebacks within your business. Below are six strategies you can use to protect yourself. 

Reduce Chargeback Risk with EMV Processing

1. Offer Hassle-Free Refunds

Issuing refunds isn’t fun, but they’re much better than getting hit with chargebacks. So, you should create a hassle-free refund policy and be prepared to give unhappy customers their money back — no questions asked.  

There always will be some who abuse the system, but these bad actors exist anyway. If you don’t refund their money, they’ll get it back using the chargeback option. 

2. Respond to Chargebacks Immediately

Even with a well-publicized refund policy, not everyone will request their money back directly from you — the merchant. That’s because initiating chargebacks is so easy for the customer. 

The moment a chargeback enters your system, respond immediately to the card-issuing bank. More specifically, you need to ask for the reason the chargeback was initiated. Although each bank and payment processor uses slightly different codes, most chargebacks fall into one of the following categories: 

  1. Clerical — These stem from sloppy paperwork, duplicate billing, incorrect amounts or refunds that never arrived. 
  2. Fraud — These chargebacks arise whenever a compromised card is used to make an unauthorized purchase. 
  3. Quality — This happens when items arrive defective, damaged, late or not at all. 
  4. Technical — This occurs when purchases are made with insufficient funds or expired cards. Technical chargebacks can also result from processing errors. 

3. Contact Your Payment Processor

Chargeback disputes are almost always handled by the customer’s card-issuing bank, and your payment processor usually doesn’t have any decision-making power. 

However, your payment processor can help you reduce the likelihood of future chargebacks by making it harder to trigger one of the above code categories. 

For example, requesting additional authorization details such as CVVs and billing addresses makes it harder for criminals to use stolen credit cards during the checkout process. As a result, you won’t experience as many fraud-related chargebacks. 

Sometimes customers make legitimate purchases but don’t recognize the merchant’s name that appears on their credit card statements, thus possibly resulting in a “clerical” chargeback. 

However, your processor can help reduce confusion by providing you with a payment descriptor that more accurately reflects the name of your business. 

4. Keep All Records

When it comes to chargebacks, the rules are stacked against you. And you can’t assume that honesty, prudence or common sense will prevail. This is why keeping accurate records is essential. 

Receipts, invoices, emails, order histories, phone records, IP addresses, timestamps, ledgers — the more documentation you can provide, the better. 

5. Follow Up Often

Chargeback resolution departments are notoriously bad at communication. They’re not generally known for making outbound calls or sending friendly reminders. 

Thus, it’s incumbent upon you to periodically check in and make sure they’ve received everything they need. If you don’t ask, they won’t necessarily tell you — until it’s too late. 

6. Dispute Every Chargeback

Never let a chargeback claim slide. Otherwise, you’re admitting culpability. This makes it much harder to dispute future chargebacks if or when they occur. 

Even if the purchase amount is only a couple of dollars, you’re better off going through the resolution process until the matter is fully settled. It’s an unpleasant and time-consuming process, but disputing every chargeback is a winning strategy in the long-run. 

Want More Chargeback Prevention Tips?

If you’d like more strategies to reduce chargebacks within your business, schedule a free consultation with our team today.

Get a free consultation today!

Topics: PCI Compliance and Fraud Prevention, Small Business Tips, Enterprise Business Tips, Getting Started with Payments

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