A credit card chargeback is when a merchant charges a credit card for a transaction, and the cardholder later disputes the charge. This might happen because the cardholder is truly a victim of fraud.
In other cases, merchants are the ones who fall victim. Sometimes consumers file for a chargeback with their credit card company even if the purchase was legit.
Chargebacks are unfortunately on the rise. According to a whitepaper from Juniper Research, chargebacks are increasing 20% each year — with the clothing, furniture and high-end merchandise sectors at the most risk.
Below, we’ll dive into ways you can fight credit card chargebacks to protect your business, and how to prevent them in the first place.
Why do chargebacks occur?
What causes chargebacks in the first place? Some reasons consumers may request a chargeback from their credit company include:
Credit card fraud – The customer’s credit card information was stolen
Friendly fraud – The cardholder received the product/service but still requests a chargeback); friendly fraud includes:
- Forgetting about the purchase
- Not recognizing the merchant name
- Displeased with product or service
- Unclear return policy
Merchant errors – This may include double-charging a customer, entering the wrong information, etc.
How a credit card chargeback hurts your business
Credit card chargebacks are detrimental for small businesses for obvious financial reasons: You lose the money from the transaction. But there’s more to it than that. The 2016 LexisNexis True Cost of Fraud Study reports that for every dollar of nominal loss, merchants lose a total of $2.40 due to chargebacks, fees and stock replacement.
And if it happens too frequently, you could face long-term challenges, Jacob Lunduski, financial industry analyst at Credit Card Insider says. “If a business accumulates too many chargebacks, they can lose the ability to accept credit cards from their consumers.”
Krista Fabregas, ecommerce analyst at FitSmallBusiness.com says that credit card processing companies and financial institutions may also consider this a black mark on your account. “If the chargeback rate is deemed high, processors will consider the account high-risk,” she says. “This can lead to withheld deposits, account suspension, higher processing rates, and even closure without warning.”
While you might think that you can operate without accepting credit card payments, you could be wrong. Trends indicate we’re moving to a cashless society. “In this day and age, when many people prefer cards, that could put a big crimp in the bottom line,” says Ellen Cunningham, marketing manager at CardFellow.
It’s a balancing act of what works for your business and what works for your customers. “On one hand, businesses want to please their customers and address their return issues, but at the same time handling large amounts of chargebacks becomes a timely and costly process,” says Chris Marchand, VP of business development at Verifi.
How to fight credit card chargebacks and deal with disputes
In the unfortunate circumstance that you do find yourself facing an invalid credit card chargeback, there are a few steps you can take to increase your odds of winning.
“Don’t just automatically assume that all chargebacks are valid,” says David Bakke, personal finance expert at Money Crashers. “If you’re fairly certain that you can state your case and get the chargeback attempt denied, go ahead and do so.”
Let’s look at ways to increase your odds at winning the case — and keeping your money.
Contact the customer directly
“Most of the time, customers bypass merchants when doing chargebacks and go straight to the card issuers,” says Marchand. He’s not wrong. In fact, one eConsumer Services survey found that more than 80% of shoppers have contacted their bank before trying to deal directly with the seller in cases of chargebacks.
That’s why he and many experts agree that merchants should get in contact with the customer directly to understand the issue and see if there’s a way to solve it. Fabregas recommends doing this BEFORE reaching out to the bank.
“Contact the customer to see if there’s simply confusion on the charge, or another issue, like a defect, that you can resolve outside of the dispute,” she says. “A retailer can call a customer to see if another family member made the purchase using their card. This happens often in families with teens, and usually the purchase is legitimate.”
If this is the case, Fabregas says it’s still important to respond to the dispute. “Don’t rely on the customer to call their card company and approve the charge,” she says. “Clearly describe your conversation with your customer in your response documentation.”
Once you’ve updated the dispute, you’ll still want to maintain those open communication lines with customers. “Keep them informed of the status,” says Marchand. “Nothing frustrates a customer more than a lack of communication about their dispute and/or forcing them to contact you over and over again to find out what the status is.”
Remember, the communications with your customer can — and should — continue to be friendly. “Use the chargeback engagement process as an opportunity to improve customer service and brand relations,” Marchand recommends. “If you don’t view them as the enemy or automatically presume fraud, you’ll be able to work out the chargeback by helping the cardholder find a solution that will appease them and stop the dispute.”
Time is of the essence when it comes to credit card chargeback disputes, and you’ll want to act in a timely manner to have the best chances of winning.
Pay careful attention to deadlines and timelines. Mark them in your calendar and set alerts to remind yourself. “If you miss the deadline, you have no recourse,” says Fabregas. She also points out that merchants who fail to respond could receive an additional bad mark on their account.
Cunningham recommends completing everything AHEAD of the deadline to even further increase your odds — and to limit the risk of a bottleneck somewhere along the process. “There are usually a few companies involved in passing along documents to fight a chargeback,” she says. “The sooner you provide the information, the better your chances of having everything submitted on time.”
One key: “Don’t rush so much that you forget something,” Bakke says. Which brings us to our next tip …
Be thorough in your documentation
Jeff Neal, owner of The Critter Depot, has had to deal with credit card chargeback disputes in his business. “We normally win because we’re able to provide the documentation that banks need to confirm the customer actually received the product,” he says. They’ll use screenshots of email correspondence and tracking information, along with any other relevant documentation available.
But merchants conducting in-person transactions don’t always have digital correspondence or tracking documentation to provide. In these cases, you’ll likely have to submit your documented return policy and signed charge slips.
Before you send everything off, give it a final quality assurance review to make sure you’ve been thorough. “Check and double check the chargeback notification letter to ensure you’ve provided everything the bank requested,” says Cunningham, “If you don’t know what a particular document is, ask your processor.”
And if you have additional documentation that further helps your case, feel free to send it along. In fact, Cunningham recommends sending more information than you think you need to. “I sometimes hear from businesses that thought simply sending over a signed receipt was enough proof, only to lose the chargeback,” she says. “Send signed receipts, email correspondence, delivery tracking, anything you have to prove the legitimacy of the transaction.”
How to prevent credit card chargebacks
While there’s not much you can do to prevent a chargeback after the fact, you can take steps to prevent future instances.
Update your merchant account
Sometimes, a credit card chargeback happens because a shopper doesn’t recognize the name of the business on their statement. You might have a parent company name or a former business name that doesn’t resemble your brand now. Fabregas says this is something that many merchants forget.
“A surprising number of businesses don’t check this with their processor,” she says. “Having your exact website or store name appear on statements prevents most recall-related disputes. Plus, adding the phone number gives customers an easy way to inquire about the charge before initiating a dispute.”
Going a step further, you’ll want to be descriptive in additional billing guidelines and descriptors. This can also help customers better recall the transaction. And although there are character limitations, you’ll want to pack in as much specific information as you can to convince a cardholder that they’ve actually made a purchase.
“Fraud mitigation platforms can address the matter by sharing shopping cart-level data, such as merchant’s name and contact information, date of purchase, name of device used in the order process, and item or service descriptions (size, color, style) between cardholders, merchants, and issuers when a dispute arises,” says Marchand. “By provisioning this data directly into the issuing bank’s call center, online or mobile applications, a questionable charge can be resolved directly with the customer.”
Adopt the right technology
Technology has completely changed the way we do business. And this continues to be true when it comes to credit card payment processing. There are many tools available that can help you prevent credit card chargebacks — the main one being a credit card payment processor from an accredited company.
At a minimum, Cunningham recommends working with your processor to use the best compatible anti-fraud technology. “Some tools, like Verified by Visa and Mastercard SecureCode, reduce your liability in the case of chargebacks,” she says. “If you implement those tools, it’s much less likely that you’ll even get a chargeback in the first place.” But remember that this also has the potential to work AGAINST you, making it difficult to successfully appeal a chargeback.
Verify cardholder identity
According to data from Clearsale, stolen credit cards are the No. 1 cause for chargebacks, accounting for 30% of instances. Verify cardholder identity for every purchase with a photo ID – and don’t forget to make sure the signatures match.
As an extra step, send an immediate email receipt so that shoppers are alert instantly about purchases made on their card. The receipt should be itemized and contain details like items purchased, date and vendor location to help jog their memory.
Analyze your chargeback incidents
When you do have chargebacks, it’s important to conduct a post-mortem to help understand what went wrong and why. This can also give you further insights into how to best prevent chargebacks in your business.
This post-mortem is also an opportunity to see if there are specific issues with your products or services that you might need to address. “See if there are things you can adjust in your business model or level of customer service so a chargeback of that particular nature won’t happen again,” says Bakke.
Get your employees in on it
Your staff are the first line of defense against fraud. Include loss prevention in your employee onboarding so that they start the job with a fresh review.
“Consistently and frequently train employees on operational compliance, specifically as it pertains to points of purchase, returns and exchanges, and managing customer service issues,” says Guillot. If your employees are trained to handle issues head-on, you can avoid the chargeback dispute altogether.
How credit card chargebacks by the numbers: other stats to know:
And if you need even more convincing as to why preventing and handling chargebacks should be a priority, consider the following:
- Consumers do it because it’s easy. The onus is on you, the merchant, to prove the transaction is valid. 81% of consumers admit that they filed a chargeback simply because it was convenient
- Most consumers go straight to the bank; 58% do not reach out to the merchant when filing a chargeback. Only 14% of cardholders contact merchants prior to filing a dispute.
- The top merchant challenges that merchants face when dealing with fraud are: Customer identify verification (60%) Delay in payment confirmation (43%) Confirmation of delivery (44%) Address verification (45%) New payment methods (43%) Limited ability claim products (25%) Fraud assessment (11%) International payments (13%) Lack of specialized fraud detection (15%) Manual order reviews (14%)
- Un 2019, merchants lost 4.4% of their revenue due to chargebacks.
While they’re a nuisance to deal with, a little bit of due diligence can go a long way when fighting illegitimate credit card chargebacks. The best way to deal with them? Lessen your chances of falling victim to chargebacks in the first place.