eCommerce has opened many new avenues for aspiring entrepreneurs. It gives you a chance to expand the reach of your business across greater distances than before – and at a minimal cost, too. All this could not have been possible without online payment methods, such as credit cards.
However, with credit card transactions come the risk of chargebacks – the bane of many online businesses. They can often appear without warning, causing both short-term losses as well as long-term damage to the reputation of your business.
If you are in the process of building your business and trying to cultivate a customer base, chargebacks can be particularly disheartening. Unfortunately, if you get stung by one, the only thing you can do is learn from your mistakes and move on.
While it is not possible to completely eradicate this risk, there are steps you can take to mitigate and reduce it, though. In this article, we will explain how to prevent chargebacks.
What Are Chargebacks and Why Are They so Damaging?
First, though, it's necessary to understand what precisely a chargeback is. A safety mechanism that has been implemented within most modern credit card payment systems, its main aim is to protect the consumer against fraud, dishonest merchants, and unauthorised use of the card by third parties.
When a customer initiates a chargeback request, the bank will start an investigation. If they find the claim to be justified, the bank will then forcibly withdraw the funds from the merchant's account and return it to the customer.
It's important to note that chargebacks are different from refunds. In the case of a refund, you, the merchant, has a say in deciding whether to honour the request. In the case of chargebacks, however, you are powerless to prevent the money from being withdrawn. To make matters worse, with each chargeback, you will likely receive an additional administrative fine that can be anywhere from between $10 to $100.
For a small business, the loss of a sale and the fees associated with a chargeback can be a huge blow – especially if it happens more than once. If your business continues to get hit by chargeback requests, the bank will eventually terminate your account.
Therefore, it is crucial that you do absolutely everything in your capacity to avoid chargebacks as much as possible. The first step is to understand the main reasons for chargebacks.
The Reasons Behind Chargeback Requests
There are many valid reasons for a customer to initiate a chargeback request. Whenever such a dispute is raised, the card company will send your business a notice with a chargeback reason code. All credit card companies have a classified list of chargeback reason codes.
The blame for the most common kinds of chargebacks can be laid at the foot of one of these three parties:
Mistakes on your side of the equation can often trigger a chargeback request from the client. Most often, the lack of adequate customer support is a significant factor, especially if you are not responding to their communications. If the customer is unable to contact you with a complaint regarding the order, or a refund request, then they may be left with no option but to take the extreme step of a chargeback. In such cases, this would be your fault.
Credit card fraud is always a real risk that you have to consider when dealing with customers. Stolen credit card information can be used for unauthorised purchases; indeed, chargebacks were first introduced to counter this specific threat.
By its very nature, the chargeback system is skewed heavily in favour of customers. Unfortunately, this has led to a trend commonly known as "friendly fraud", whereby customers abuse the system to enrich themselves at the cost of you, the merchant.
In some cases, this can be due to a misunderstanding. However, in many others, it can be down to factors such as buyer's remorse, being too lazy to deal with the refunds or returns process, or impatience with delivery times.
As you can see, the chargeback threat has multiple heads. As a business owner, you will have to focus on numerous aspects of your business to counter the threat posed by this beast effectively.
As mentioned at the start, it's impossible to remove this threat entirely. Chargebacks are part of the business ecosystem – you cannot make them go away with expensive investments. Luckily, though, there are actions you can take; in many instances, it is all about performing due diligence on certain fronts.
Here are seven steps you should always follow:
1. Comply With Credit Card Processor Protocols
All major credit card processors, such as VISA and MasterCard, have specific protocols for businesses. For example, online merchants are required to get more customer details during the transaction for identity confirmation. Check your processer requirements frequently and ensure that you follow them explicitly.
2. Check Your Payment Descriptor
Whenever you bill a customer's credit card, that individual will get a card statement with your payment descriptor – the name and other identifying labels of your business organisation. If your descriptor is not clearly linked to your business name, the customer may not be able to recognise that particular transaction, resulting in a chargeback request. Make sure that your payment descriptor is the same as (or closely linked to) your business name.
If your descriptor varies drastically (such as with sensitive purchases that require discretion), then ensure that you notify the customer how the transaction will appear during the checkout process.
3. Include a Signed Contract in the Transaction
This step may not be viable for small-value retail purchases, but for those involving more valuable products or services, it can potentially save the day. Create a contract spelling out the details of the transaction and get the client to sign it. You can use fax, email, fingerprint verification, or electronic signatures to get the client authorisation without causing them too much hassle.
4. Improve Your Customer Support Systems
As previously discussed, in many cases, customers resort to chargebacks when they are unable to contact the business in the event of wrong delivery of the product, damage during transit, or other such issues. Having robust systems in place to receive and handle customer complaints, as well as refund and replacement requests, are highly preferable to being slapped with a chargeback.
5. Provide Clear Information About Your Product
This is especially important for online-only businesses where the customer won't see the product until it arrives. Always provide clear and accurate descriptions and images of your goods online, and don't make unrealistic or false claims. Make sure that the customer understands exactly what they will be getting when they pay your business. Also, provide clear and precise details on all the terms and conditions, return policies, and terms of service.
6. Hold on to All Paperwork and Transaction Records
All data pertaining to an online transaction should be kept for at least six months to a year, if not longer. If you ever have to fight a chargeback request, this data can come in handy to prove your innocence and avoid the associated penalties. This step will only help to combat instances of friendly fraud, though; not a stolen credit card, or other kinds of fraud where the card owner is the victim.
7. Focus on Fraud Detection Training for Your Staff
When it comes to credit card fraud, strict vigilance can often provide the best form of defence. Train your staff to be on the lookout for clear red flags, namely:
- Orders from countries with a reputation for online fraud
- Orders involving unusually large quantities
- Multiple failed payment attempts from the same IP address
These incidences don't necessarily mean that there is an occurrence of foul play, but you should definitely investigate further before you ratify the transaction. If you have the resources, it can be a good idea to hire a Know Your Customer (KYC) specialist to monitor transactions more closely.
While they can cause multiple headaches for business owners, chargebacks are undoubtedly a necessary evil in the fight against credit card fraud. While they pose a clear threat to your business, it is important to look at the positives, especially since they are here for the foreseeable future.
Indeed, the fear of chargeback penalties can be used to improve your business. Make it more customer-friendly, use better online security systems, improve your products and services, and make your terms and conditions more transparent.
From that perspective, chargebacks don't look all that bad. They can be leveraged to your advantage, and their adverse effects minimised. All that is required is some determination, perseverance, and vigilance on your part.
Was this article helpful? What other advice would you give for mitigating the risks of chargebacks? Let us know in the comment section below.