What Are Chargebacks and How to Prevent Them

There are many things that business owners have to be mindful of when selling their products and services online and these include chargeback. When this goes out of control, businesses might incur serious losses. And this will affect their standing among credit card processors. If you wanted to ensure that your business operates efficiently and profitably, you need to take the necessary steps to make sure that you have low to zero chargeback rate.

What Is A Chargeback Anyway?

A chargeback is a type of consumer protection where a bank or a card company requests a certain charge from the merchant to be reversed. This can be the result of malicious intentions or even unintentional mistakes, and the merchants can be subject to penalties in case chargebacks exceed certain defined thresholds.

Many e-commerce merchants encounter chargebacks more often than not, but do little or nothing to fight back, even if the buyer is in the wrong. Most of these merchants believe that it will just cost too much to avoid chargebacks and, rather unfortunately for smaller businesses, these transaction disputes are usually considered as a cost of doing business and are usually unavoidable.

But, chargebacks are actually very preventable.  Preventing these is not just to reduce the risks but to deal with this essential task. Failure to do so might hurt your business in many ways.

Can Chargebacks Hurt Your Business?

Chargebacks can cause harm in the short-term for businesses or even over a longer-term if not handled correctly. With every completed chargeback, you tend to lose revenue from transactions; whether that be through loss of direct revenue, or combined if you lose the value of your product/service as well as the direct revenue if the customer is particularly unscrupulous and malicious.

If the time comes that your chargeback ratio reaches a certain point, you will either pay a much higher processing rate or in some cases, you will completely lose your ability to maintain and hold a merchant account, usually being provided with little notice of your merchant account being withdrawn. If this happens, you will have to look for a processor who is willing to commit to high-risk merchants at higher risk rates just to keep your business from sinking. Potentially, a nightmare. However, it can get even worse as there have even been instances where chargebacks destroy or kill a business completely – don’t let this be you!

What Are The Reasons For Chargebacks

There are many different reasons for chargebacks. Taking time to understand these reasons can equip business owners with the right know-how so they can the necessary steps to prevent them. The following are the common reasons for chargebacks that every business owner need to know:

Services or Goods – Defective Goods were Shipped or Items Not Shipped

Clients will commonly dispute transactions if they fail to receive the items they have paid for. It’s, therefore, crucial to keep the shipping receipts and track the items or goods shipped to the customer. This helps a huge amount especially during disputes where the customer claims that the items have not been shipped – great for overturning any disputes maliciously filed by thieves.

Credit Card Problems – Unauthorized Phone or Mail Transactions

Some customers fraudulently deny that they have engaged in transactions over mail or phone. If you happen to accept orders via phone, ensure that you get all the needed information from customers like their complete address, CVV2 of credit card and email address in order to verify that they placed the order. It might be worth also requesting a confirmation over email before shipping any goods out.

Invalid Account or Credit Card Number

This is another reason for chargebacks. Ensure that your system is properly configured to reject invalid or expired credit cards. Chargebacks usually occur if a system can’t locate the valid credit card or account number that was used is invalid or the card expired. Often this is nobody’s fault (I’ve made the same mistake myself paying with an expired card), but you’ll want to avoid this happening so always verify payments at checkout.

Technical Problems – Human Error

If accountants process credit cards manually, there’s a fair chance that they can commit human error. It would be best to avoid manual processing altogether and opt for an automatic or electronic system like Stripe or PayPal.

Technical Problems – Duplicate Processing

There are times that system error can result in the credit card of customers being charged twice. In the case of online transactions, if customers have pressed the “pay button” twice, this may lead to duplicate charge, so using popular payment checkout systems can often prevent this human error and ensure that the customer must physically either choose a quantity of two, or run through the checkout process again to place two separate orders.

How to Prevent Chargebacks

By simply considering the following, you will be able to keep your customers happy and discourage the fraudsters from destroying your business, while also keeping your merchant account in good stead:

Give Clear Data to Clients

Your product pictures and descriptions must be precise so customers won’t be disappointed when the products they ordered arrive. Your return policies and shipping should also be visible on each site page so that customers know what’s in store for them before they purchase and to prevent any product not as described disputes. Ensure that the billing descriptor that shows up on clients’ financial records is also recognizable and correlates to their purchase to avoid uncertainty for the customer. Use your shop name or another term that you have told clients to expect on their statement.

Track your Shipments

Tracking your packages and shipments will surely help both parties. Clients won’t be expecting their package or item to get lost if they can keep track on its real progress.  The fraudsters will be in a tough situation asserting the package never arrived if you have tracking and proof that it actually did.

Deliver Excellent Customer Service

Customer service contact data or information need to show up on each page of your site and on the receipt in each item or package that you have shipped. Round-the-clock help and support and opting for a customer-friendly approach can really diminish the risk of clients going straight to their card issuer to resolve problems – the old saying ‘the customer always right’ might help here!

Screen Your Every Transaction for Fraud

Third-party fraud prevention systems, your in-house team or your payment processor can look for warning signs or red flags like billing and shipping addresses that don’t coordinate or match, high-value purchases by new customers, many similar purchases from a similar IP address in a short timeframe and purchases coming from locations known to have high cases of fraud. Stripe is a great payment gateway that has very intelligent fraud prevention systems, so take a look at them here.

Keep a Detailed Record of Transactions

The more data you record for every transaction, the better. A few things are required such as the paid amount, date, the name of the cardholder and other basic information. Go above and beyond to incorporate what card issuers commonly call “compelling evidence”-customer service e-mails, delivery signatures that prove receipt of products, customer phone number, and IP addresses. Every issuer has its own sets of rules that you need to pay close attention to, but can really save you in a dispute case.

So, follow these easy tips in order to minimize the risk of chargebacks and keep your business up and running smoothly and profitably. Chargebacks can kill your business without you even realizing so better equip yourself with the knowledge on how to prevent cash back the right way, than fall short when it really matters!