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Your business is susceptible to chargebacks: Are you prepared?

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Having the ability to accept credit cards can increase your income opportunities by selling products online or serving clients who simply prefer that method of payment. In an ideal world, you’ll never run into any problems, but it could happen. Lindsey Dahlberg of Chargebacks911 explains the risks of chargebacks, when and why they occur, and what you can do to prevent them.

Credit card chargebacks: are you prepared?

Photo ©sovietmole, used under a Creative Commons License

Many solopreneurs and small business owners feel passionately about the services they provide—and this passion is what drives them. Trivial details that pertain to the business’s operation don’t usually generate much enthusiasm.

However, if you aren’t mindful of certain aspects of your business, they could become your downfall. Chargebacks are one of those details that catch business owners unaware.

What are Chargebacks?

Chargebacks are a form of consumer protection. They were designed to protect cardholders from fraudulent charges. If someone made an unauthorized purchase, the cardholder wouldn’t lose any money.

The practice was originally intended to encourage confidence in the credit card concept. These days, no encouragement is necessary!

Basically, a chargeback is a forced credit card refund. Rather than contact you directly for a refund, the client contacts the credit card company instead.

It may seem like an insignificant detail to worry about who intercepts the unhappy client’s phone call—you or the credit card company. However, there is a huge difference.

What are the Ramifications of a Chargeback?

With a traditional refund, you’ll lose any profits associated with that sale. The same holds true for a chargeback. However, a chargeback comes with additional losses.

  • Fees ranging from $20-75 each
  • Penalties from the acquiring bank ranging from $5,000-$10,000
  • Termination of the Merchant Account due to excessive chargeback levels and placement on the MATCH List
  • Going out of business because of the inability to process credit card transactions

What are the Leading Causes of Chargebacks?

Now that we’ve succeeded in terrifying you, let’s take a look at the most common causes of chargebacks. Chargebacks usually fall into one of three categories.

Merchant Errors

You might be tempted to skip over this section, assuming there is nothing you do that causes these financial setbacks. In reality, merchant error is the leading cause of chargebacks.

Actions that typically fall into this category include:

  • Accidentally charging the card twice
  • Failing to terminate a reoccurring transaction in a timely manner
  • Authorization errors that result from overriding a declined transaction
  • Faulty customer service

Unauthorized Transactions

Fraud is one other leading cause of chargebacks. Criminals gain access to credit card information and make unauthorized purchases.

Unfortunately, fraud detection and prevention is the only form of chargeback management available for these transactions. If the charge was legitimately placed without the cardholder’s consent, the only thing you can do is accept the loss.

Friendly Fraud

Friendly fraud is perpetrated by real customers who—knowingly or unknowingly—act irresponsibly.

Rather than contact you directly for a refund, they file a chargeback. Many of these clients don’t know their actions have severe repercussions for the business owner.

Other forms of friendly fraud are more common in an ecommerce only (or card-not-present) transaction. The shopper might claim the item was never delivered or was of sub-par quality.

How can I Prevent Chargebacks?

Chargeback prevention is complex. There are various practices that you can implement.

  • Do not complete a transaction if the authorization request was declined.
  • Always obtain the cardholder’s signature and compare it to the signature on the card.
  • If your business has policies related to returns, refunds, or service cancellations, make sure the client is aware of these rules before completing the transaction.
  • Deposit sales receipts with your bank as quickly as possible.
  • Terminate all reoccurring transactions as soon as the customer makes the request.
  • If the service provided will be delayed, inform the customer (in writing) immediately.
  • Don’t charge the client’s card until the service has been provided.
  • Keep accurate and organized records of transactions. If a chargeback dispute is necessary, you’ll need to provide written documentation.
  • Always use the Address Verification System (AVS).
  • Answer the phone within three rings.
  • Send auto-replies to emails and then address the query personally with two business days.
  • Consider providing 24/7 customer service.
  • Be familiar with the most common indicators of fraud.
  • Be honest about the services you provide. Misleading information will likely result in a chargeback.
  • Make your contact information readily available (on your website, printed materials, etc.)
  • Check how your name appears on the client’s credit card statement (they may file a chargeback simply because they don’t recognize the charge).

Unfortunately, this is just a small sampling of the best chargeback prevention tactics available.

For additional information about chargeback management—including detailed descriptions of terms like chargeback-to-transaction ratio and excessive merchant programs, tips for detecting and preventing fraud, information about improving customer service, and best practices for disputing chargebacks—check the Chargebacks911 blog.

Have you experienced a chargeback? If so, how has your business adapted since then?

Lindsey DahlbergLindsey Dahlberg works for Chargebacks911, educating merchants and business owners about the risks associated with chargebacks.

When she isn’t writing, Lindsey is usually out watching the local teams at whatever sporting event is in season.

Please visit Your Organizing Business to read and comment on Your business is susceptible to chargebacks: Are you prepared?.


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