However, many small business owners have no idea how to prevent chargebacks from happening, much less what it takes to put adequate fraud prevention practices in place.
Therefore, it’s important for every small business owner to understand:
- What a chargeback is
- The impacts chargebacks can have on your business
- How to prevent chargebacks from occurring
- Why it’s best to take every step they can to continue to prevent chargebacks from happening in the long term
What is a Chargeback?
A chargeback (also known as a reversal) happens when consumers dispute a charge on their credit card statement listing your business name as the merchant of record.
The chargeback process was implemented by Visa, Mastercard, Discover, and American Express (the major credit card brands) as a failsafe method to protect consumers from fraudulent transactions that might get posted to their credit card account due to fraud.
They are administered by the credit card company that is behind the consumer’s credit card account, and they often involve a chargeback fee, much like a bank does for a cancelled check request.
To initiate a chargeback request, the consumer submits a claim to the card issuer (the bank that issued their credit card). The request explains why the consumer feels the charge was invalid or unacceptable, and includes a reason code backing the dispute, along with any evidence or proof they have that will validate the request.
There are three basic types of chargeback disputes:
Customer Chargebacks – No Fraud
There are plenty of reasons a customer might dispute a credit card transaction with a small business through a chargeback.
In most cases, it will be related to charges customers know they didn’t authorize.
However, non-fraud-related circumstances can also result in a chargeback request; especially when communications between the customer and the merchant are non-existent or customers feel they haven’t been treated fairly.
Here are a few examples:
- Product quality: Chargebacks often happen when the product quality has been misrepresented, and the merchant is unwilling to take the item back, replace it, or issue a refund.
- Damaged or defective merchandise: When a product gets delivered damaged and/or defective, and the merchant won’t send a replacement or refund the customer, chargebacks are typically the customer’s next course of action.
- Undelivered merchandise: When an order is not fulfilled or a problem happens during the delivery process and there is no proof of delivery, customers will often file for a chargeback. In the case of fraud, customers will say they never received the merchandise, then file a chargeback request to get the money paid for the product or service credited to their credit card account.
- Duplicated charge: When a purchaser is charged more than once for a product by a merchant, they may have to dispute the second charge through a chargeback.
- Refund not received: When a product gets sent back by a customer per the merchant’s return policy, but the bank credit never gets applied, a chargeback may be needed for the customer’s money to be returned.
Customer Chargebacks – Friendly Fraud
If the chargeback is a result of a fraudulent charge, it could be a legitimate customer abusing the chargeback privilege for illegitimate gain.
This is one type of fraudulent situation that can be avoided with best practices for qualifying your customer and their purchases upfront.
A number of things like a clear return policy, closely tracking the shipping process, and the implementation of tools that closely monitor your purchasing and delivery details will help you prevent friendly fraud from happening.
Non-Customer Chargebacks – True Fraud
When stolen credit card information is used to purchase merchandise from your store, it’s known as true fraud.
In this case, your business name appears on a consumer’s credit card statement, but they were never your customer.
Most of the time, customers know whether they’ve purchased something from your store or not, so the chargeback dispute process is in place for them to fight against a fraudulent transaction.
Why are Chargebacks a Problem for Your Merchant Account?
Since the chargeback process is the method used by credit card brands to protect consumers from being billed for something they didn’t buy, it’s no surprise that merchants with more chargeback claims are viewed in the payment processing industry as higher risk businesses to support with credit card processing.
Too many chargebacks are considered a warning sign that a merchant is operating with a faulty business process or with payment practices that don’t protect customers and their transactions.
As a result, merchant services companies and payment processors now have rigid guidelines – and consequently – very little tolerance for customer transaction disputes.
In some cases where third-party processing providers such as Stripe or PayPal are used to support an ecommerce website, the tolerance threshold is so low, even a single chargeback claim can result in your merchant account getting flagged, bank funding being frozen, or an account being shut down without warning.
For most businesses, a disabled credit card processing account will cripple the company’s ability to support customer sales and services. Therefore, doing everything you can to ensure you’re preventing chargebacks from happening in the first place is one of the most important things you can do to protect the long-term viability of your business.
Preventing chargebacks will also save your company’s bottom line from absorbing chargeback fees and spending money on the manpower time it takes to fight against chargebacks, billing disputes, and bank transactions that weren’t from actual customers.
Furthermore, by going to bat against chargebacks, you’ll be doing your part to help address the problem of true fraud, prevent your chargeback rate from climbing, and boost your firm’s cash flow with less chargeback fee expenses charged for processing a dispute claim.
Why do Some Merchants Have More Chargeback Risk?
Attempts by criminals to fraudulently charge against consumer credit cards occur every day.
The fraudsters might secure cardholder information on the dark web, steal the data through an online scam, or simply use a card they’ve stolen from a consumer.
Virtually all merchants can be targeted by criminals using stolen card data to purchase products.
However, there are certain business situations that make it far easier for criminals to get fraudulent transactions through, making cardholder chargeback disputes more common in these situations as well.
It’s far more difficult to use stolen credit card information (where the cardholder’s identity can be easily confirmed) when making a purchase as an in-person customer.
Therefore, most fraudulent transactions – and associated chargebacks – happen by customers making a payment in card-not-present business environments, with ecommerce merchants having the highest risk of being targeted by criminals.
Additionally, since products purchased online are generally not available for customers to inspect in person prior to making the purchase, it’s much easier for any purchaser to try making a friendly fraud attempt online, and much harder for merchants to go through the process that will fight against it.
This is also true when customers order a product by mail or over the phone because the card and the customer aren’t present for merchants to verify the transaction is valid.
This is why businesses that sell a service or product online need to be especially careful about knowing who their customers are, evaluating every payment attempt, having solid shipping and return practices, and providing contact information and services to address the needs of purchasing customers.
Reduce Your Risk of Fraud and Chargebacks
To avoid being vulnerable to both card-present and card-not-present fraud, as well as the chargebacks that go with them, there are several best practices merchants should be aware of. You will want to address many of these areas in your own business, if you haven’t done so already.
Most of these practices involve simple ways to spot potential payment fraud before it happens in the first place. And by adopting all of these recommendations, you have a good chance of creating a winning chargeback management formula to fight against payment disputes, should they happen.
Plus, better card security and chargeback prevention also gives much greater protection for your customers, which is a great selling point.
Below are several tactics you can take to ensure your company is in a strong position to prevent chargebacks, billing and bank disputes, and most importantly, transaction fraud.
Get customer validation:
Take time to ensure your site’s checkout and payment pages ask all the right verification questions about the cardholder.
For example, address verification is a great way to protect the credit cards of customers making online purchases.
Furthermore, a process for checking the identification and purchase information from customers that have made a transaction online but want to get the product through an in-store pickup, is a simple way to prevent potential chargebacks.
You’ll have the evidence you need to validate the products and services are going to the same person that ordered them.
Keep exemplary records:
Track everything, including all products ordered, order dates, shipping information – and most importantly – delivery dates and proof of delivery.
Having everything on hand to prove chargebacks are not valid is a lifesaver.
This is also another area where having a good address verification system during the payment process can help you match up data later if you are faced with consumers that want their money back.
Beware of unusual buying behaviors:
Set up tools that will help you monitor the following order activities:
- Large quantities, odd product and service combinations, and multiple orders.
- Non-matching billing and shipping addresses.
- Customers overly concerned about shipping details and/or not overly concerned about incurring extra high shipping costs.
- Customers that have problems providing personal information (especially over the phone).
- The use of electronic voice assistance tools.
- Unknown and unqualified international buyers.
Watch for strange payment activity:
Almost all of these circumstances are a reason to suspect fraud.
- Multiple cards tried on one purchase (this is called card testing).
- Multiple orders from one customer (especially a new one), purchased with different cards.
- Several orders from one customer using the same receiving address, but different cards.
- Successive order attempts with decreasing purchase amounts.
- Repeated card declines due to inaccurate credit card expiration dates and/or CVV codes.
Ramp up customer service:
- Prominently communicate purchasing and return policies and fees.
- Provide detailed and accurate product descriptions.
- Display customer services contact information prominently on websites, marketplace listings, billing and credit card statements, and always include the company name and a direct phone number, with any applicable email addresses, chat links, or other specific product and service contact details.
- Be sure to cover processing, shipping, and delivery details (including fees) thoroughly at the onset of the ordering process and contact customers with any changes or issues promptly.
- Make the refund process simple and easy, and avoid charging fees for refunds whenever possible –remember, refunds are far less risky for your company to handle than chargebacks are, and you won’t have to deal with a fee or high chargeback rate.
- Ensure your store’s description is recognizable on receipts and credit card statements, including the actual company name and phone number.
- Provide great service before and after each purchase, so that the customer is more inclined to reach out to you first before submitting a chargeback claim to get their money returned.
Additional Ways to Protect Your Business from Chargeback Risk
As we’ve noted, chargebacks are a way of life for merchants; especially those that provide services or sell products on the internet.
Unfortunately, this also means finding a merchant services provider that is the right fit for your business can seem like a process of elimination.
This is not only expensive for your business, but exceptionally disruptive.
Easy Pay Direct can help.
Helping merchants get set up to avoid chargebacks is a core service promise here.
In fact, we even offer a unique automation that enables a merchant to process transactions concurrently across multiple merchant service accounts. This ensures there is always a functional account to transact business if another one happens to get audited or frozen due to chargeback concerns.
Another one of our customer service priorities is to provide as many resources and information to our clients as we can offer. In fact, we’d like to share an article from American Express on chargebacks and fraud for those who might like a few more tips and ideas on the subject.
Don’t hesitate to call us at 800.805.4949 if we can help you address a chargeback situation or you have questions about what your business can do to avoid payment fraud and chargebacks.