What are chargebacks? How can you protect your business from it?

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| Last Updated: May 26, 2017 |

Reading time: 8 minutes

One of the things business owners have to be wary about when selling services or products online is chargeback. When chargebacks get out of control, you will incur huge losses and your company’s image may be tarnished among credit card processors. To operate profitably, businesses have to take steps to ensure they have the lowest chargeback rate. In this article, we explore what chargebacks are and what you can do to minimize them in your business.

Any business that sells goods or services online has to take control of chargebacks. Too many chargebacks can break a business’s bottom line and reputation among credit card merchants and processors. But let’s start with the basics, what are chargebacks?

What are Chargebacks?

In simple terms, chargebacks are disputed transactions. These are charges that customers dispute on their credit cards for different transactions. When a dispute is made, the merchant reverses the transaction and the customer receives his money back.

Chargebacks are meant to protect consumers from unauthorized transactions. Instead of wasting time arguing with suppliers on the legitimacy of a transaction, customers can simply initiate a chargeback transfer.

However, there are some unscrupulous customers who use chargeback heedlessly and can cause a small business major losses. Take the example of a small business owner who purchases a video camera for $300. If the business decides to sell the camera at $500, it will make a tidy profit of $200. However, if a customer initiates a chargeback during the billing-and-payment circle, the business will lose both the $200 profit and the $300 spent n purchasing the camera.

Sometimes chargebacks are caused by clerical errors. Regardless of the cause of chargebacks, businesses should take measures to reduce them.

Reasons for Chargeback

Chargebacks can occur due to various reasons, ranging from defective goods to fraudulent transactions. Understanding the reasons for chargebacks can help you take steps to reduce them. Below are some of the top reasons why customers may initiate chargebacks against transactions done at your website.

Goods or Services

  • Items not shipped or defective goods shipped. Customers will usually dispute a transaction if they do not receive the items they buy. It is therefore important to keep shipping receipts and track the goods that you ship. This will help you in case there is a dispute on goods not delivered.

Credit Card Issues

  • Unauthorized mail or telephone transactions. Customers may deny that they made a transaction over the phone or mail. If you accept phone orders, make sure you get as much information as you can from the customer. Specifically, ask for the customer’s address and the CVV2 of the credit card.
CVV of Credit Card

CVV of Credit Card

  • Invalid credit card or account number. Make sure your system is configured to reject any expired or invalid credit cards. A chargeback can occur if the system cannot locate a valid account number of the credit card that has been used.

Technical Problems

  • Duplicate processing. Sometimes, there may be a system error that can lead to the customer’s credit card being charged twice.  Also in case of an online transaction, if the customer has pressed the PAY button twice may lead to a duplicate charge.

  • Human Error.  If an accountant is processing the credit card manually, there is a chance he/she might make an error.  Avoid doing manual processing.

Protect your Business from the Risk of Chargeback

While chargebacks are annoying and can eat into your margins, they are usually a small percentage of the total transactions. Moreover, since you now know the reasons for chargeback transfers, you are better off at protecting your company from them. Below are some tips that can help you prevent chargebacks at your company.

Business Name

  • Stick to a DBA (Doing Business As) name that your customers will recognize. Most customers initiate chargebacks when they see payments to companies that they do not recognize. Keep in mind that your customer may know you product brand but may not be aware of the company behind it. It is up to you to ensure your credit card charges are understood by the customers. 37 Signals reduced their chargebacks by 30% through an awesome strategy by changing the way the charge appeared on Customer’s Credit Card Statement.  Rather than saying “37 Signals, LLC”, they changed it to “37signals-charge.com 800.xxx.xxxx IL”, which urged the customers to visit the URL on the statement. This URL, clearly explains what the charge is for and allows the customers to contact their support and billing team. Be innovative while staying within the credit card processor’s rule.

  • Have your phone number printed on the customers’ billing statements. In case customers do not know what they are being charged for, they will be able to contact you directly. This will reduce instances of chargebacks. Again 37 Signals did this with their innovative strategy.

Credit Card Security

  • Fraud is the most common cause of chargeback. When a customer’s credit card is fraudulently used for a transaction, the merchant is held solely responsible. Therefore, it is up to you to ensure that the credit cards used to purchase your goods or services have not been stolen.  If you are accepting transactions through an Commission Junction, make sure that you’ve installed fraud tracking mechanism. Scammers tend to sign up as an affiliate and do fraud transactions.

  • Verify the address, customer details and phone number** by the bank that issued the credit card. Many banks offer fraud services including CVV2 and AVS (Address Verification Services); use them. You should also put tougher credit card verification steps for transactions originating in countries that are known for credit card fraud. Generally, orders from the Middle East, Asia and most parts of Africa are considered high-risk.

Goods and Services

  • Sometimes, chargebacks are initiated not because of fraudulent credit card use, but because the goods or services purchased are substandard or did not meet the customer’s expectations. Make sure you provide value to your customers and clearly indicate what they should expect when they make a purchase. On your website, have a refund policy page that indicates when customers can dispute charges for goods or services you provide.

  • Do not accept an expired credit card and make sure you obtain authorization (Get an invoice signed with the credit card hold signature) for the full amount that is on sale. All transactions should be paid in full and from the same credit card. Do not accept to split declined transactions (this might be an exception for SaaS Companies). If you are shipping any large suspicious order, call or fax the customer to confirm. If you cannot reach the customer, the order may have been fraudulently placed and the fraudster may be deliberately keeping out of reach.

Reducing Chargeback

To ensure your chargeback percentage stays at the bare minimum, take steps to ensure customers know what they are being charged for and what to expect. Be transparent with your services, products and your fees. Your website should indicate the costs that customers will pay, after how long they should expect a product, any guarantees or warranties on the product, shopping refunds or return policy and so on.

Apart from this, be innovative and research customer behavior. If there has been an increase in chargeback within a particular time, perhaps there is something wrong with your product. Watching customer behavior can help you avoid many chargebacks.  If you are running a SaaS business, track usage of your customers and if they are not using your product reach out to them through email or phone.

Chargebacks can lead to major losses especially when you are starting up and sell high ticket items. To ensure you do not get caught in the web of online fraudsters, take steps to protect your business as well as your customers. By following the above steps, you will be in a better position to prevent any transactions that may lead to chargebacks.

But Remember: It is very very difficult for merchants to win a ChargeBack.  Especially if you are into SaaS business and you’re accepting credit cards online.

Your turn now.  What other techniques are you following to reduce chargebacks in your business?  Please use the comment box to share your thoughts.

Author of the post

John Solomon

Marketing Leader / Sales Enabler. Head of India Operations for @Infrascale / @sosonlinebackup.

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