- A chargeback occurs when a cardholder requests their bank to reverse a credit card charge that has been posted to their account.
- When a chargeback claim is filed, a nonrefundable fee (between $20 and $100 per chargeback) is deducted from the merchant's account.
- To prevent chargebacks, have clear product and service descriptions, comprehensive refund policies, well-defined shipping expectations, and great customer service.
Navigating the financial world of business is tricky – companies strive to provide consumers with what they want while still maintaining a profit. Large e-commerce retailers like Amazon and Walmart have paved the way for shopping perks like free shipping and returns that consumers now expect from retailers. Shopify recently found that 80% of consumers surveyed expect free returns, and 71% said if they were charged a restocking fee, they would not purchase from that retailer again.
As consumer expectations grow and instant gratification becomes commonplace, businesses (especially those operating in the world of e-commerce) must adapt. If you're falling short of your customers' expectations, one or more may initiate a chargeback, which can hurt your business, resulting in higher rates or, worse, your account being dropped by your processor.
What is a chargeback?
A chargeback occurs when a cardholder requests their bank to reverse a credit card charge that has been posted to their account. This differs from a refund; a refund is money returned directly from the merchant, whereas a chargeback is handled by the card issuer.
There are several reasons why a customer might request a chargeback. Here are some of the most common:
- The customer did not receive the product or service
- The description of the product or service was not accurate
- The product was damaged or lost during shipping
- Duplicate billing
- Recurring billing was not canceled as requested
- Technical error
Although some of the above scenarios, such as products that are lost or damaged during shipping, occur, other issues, such as billing errors, can (and should) be prevented by adopting good business practices and doing due diligence.
Monica Eaton-Cardone, co-founder and chief operating officer of Chargebacks911, said that credit card chargebacks represent a real and growing financial threat to merchants, and a frequent number of chargeback claims can ruin a business's reputation with banks.
"Banks gauge a merchant's risk and reliability on the number of chargebacks they receive," Eaton-Cardone told business.com. "Multiple chargebacks on a regular basis can lead to even greater merchant challenges down the road. Merchants are essentially 'guilty until proven innocent.' Chargeback fees and reimbursements are deducted from the merchant's account automatically – no questions asked."
Nydelis Ortiz-Rivera, payments product manager at TableSafe, said that if a business wants to counter a cardholder's chargeback claim, it has a short time frame to gather information and submit a defense claim to the credit card issuer.
"The issuer will then review all documentation and determine who is liable for the transaction," said Ortiz-Rivera. "If the merchant wins the dispute, then the liability either falls on the cardholder, the issuer or the acquirer to pay for the transaction in question, depending on the nature of the dispute and the supporting documentation. If the merchant loses the dispute, they are liable for returning the funds to the cardholder."
What are the costs and consequences of chargebacks?
Having a chargeback claim filed against your business is never good. The consequences can be detrimental to your business if it's not rectified. The two primary consequences are cost and damage to your business's reputation.
The most obvious consequence of a chargeback is the lost revenue. Even if a merchant wins a chargeback dispute, a nonrefundable fee, ranging from $20 to $100 per chargeback, is deducted from the merchant account for every chargeback filed. Additionally, the merchant is often liable for covering shipping costs and returning payment to the cardholder.
Negative impact on merchant reputation
Chargeback claims negatively impact how banks and card issuers view your business. Even if you win a dispute, a chargeback reflects poorly on your company. If multiple claims are filed against you, you are enrolled in a monitoring program, which gets even more costly.
"Chargeback monitoring requires the payment of another ongoing fee," said Eaton-Cardone. "Certain merchants might receive a grace period before becoming fee-eligible, but high-risk merchants are usually hit with fees as soon as they enter the program. Businesses in a chargeback monitoring program are also subject to periodic reviews of their mitigation plan – yet another fee."
Merchants who fail to reduce their chargeback rates may be charged higher processing fees or have their account frozen, and merchants who engage in frequent forced payment reversals may be added to the Terminated Merchant File, resulting in your business being blacklisted for five years.
Is a chargeback reversible?
Although reversing a chargeback is technically possible, it is difficult to do, and the odds aren't in your favor. Card issuers typically side in favor of cardholders as opposed to merchants, and the guidelines they create around chargebacks reflect that.
"When a chargeback is issued, merchants must respond to the case with all of the supporting documentation they have to back their claim that a payment was processed without error and that the goods or services rendered were satisfactory," said Ortiz-Rivera. "If they do not respond, they are liable. If they do not provide enough documentation to back their claim, they are liable. If the issuer has additional information from the cardholder that supports their claim, they are liable."
Merchants and cardholders have different chargeback rights, with merchant rights being convoluted. Each card network has an extensive list of chargeback reason codes, but there are numerous situations where a cardholder has a legitimate dispute situation that lacks a corresponding chargeback reason code.
"When it comes to merchants' chargeback rights being violated, the single greatest threat comes from friendly fraud, also called chargeback fraud," said Eaton-Cardone. "Experts estimate that over 85% of all chargebacks may be caused by friendly fraud – meaning they file a chargeback without valid justification."
There are multiple reasons why customers might do this, including buyer's remorse, dissatisfaction with products or services provided, or simple confusion about the proper refund process.
"The only instance where a chargeback will be reversed is if the business submits a valid dispute backing their claim that the transaction was processed without error and the goods or services rendered were satisfactory," said Ortiz-Rivera. "Ultimately, it is up to the issuer to determine whether a chargeback will be reversed or not."
How to fight a chargeback dispute
Never wait to fight a chargeback dispute. The sooner you address the issue, the more likely it is that the outcome will be favorable. Quick responses also make it easier to find the customer order details.
To fight the chargeback, you need to submit a chargeback rebuttal letter. When a company notifies you of a chargeback, a reason code is attached to the document. Review the code to find out the reason for the chargeback and any other pertinent details. According to Verifi, the reason code also presents a timeline to fight the chargeback and what evidence is needed to reverse the chargeback.
Not all cases are handled internally by the business. According to BlueSnap, merchants need to review policies to understand what cases are handled on their behalf by the acquirer. Certain issues have automatic representments while others do not. Don't waste resources on chargeback incidents that are already being handled externally. If documentation is required by your business, submit the rebuttal form in full with the requested files quickly.
How do you protect your business against chargebacks?
It is important to take protective measures to keep your business from falling victim to chargeback claims. Eaton-Cardone recommends seeking out a chargeback management service with an end-to-end, multitier approach that helps fight chargebacks, while also reducing the risk of chargebacks in the future.
"The best is a turnkey chargeback management system covering the entire chargeback process," she added.
Ortiz-Rivera advised brick-and-mortar businesses to adopt EMV-capable terminals (chip readers) to reduce their risk of liability for fraudulent transactions. Although the U.S. was one of the last countries to adopt EMV technology, as of October 2015, a liability shift occurred. Businesses that process card-present transactions and are not EMV compliant are liable for fraudulent transactions.
How to reduce and avoid chargebacks
After fraud, the second most common reason for chargebacks is dissatisfied customers. Take pre-emptive measures to ensure you are providing the best purchasing experience for your consumers.
Create standard procedures for accepting credit cards, and train employees on those procedures, to ensure that everyone is following best practices. Evaluate your team periodically and update your protocols as needed. Eaton-Cardone recommends using the address verification system, and consistently collecting CVC2/CVV2 verification codes should be standard procedure on every order taken – and that's just the start of it.
To standardize your business procedures and prevent chargebacks, Eaton-Cardone recommends adopting the following best practices.
Create clear, detailed product or service descriptions.
Be as transparent as possible with your customers. Let customers know exactly what they are purchasing. This not only prevents chargebacks but also improves brand reputation.
Have a comprehensive, easy-to-understand refund policy.
Businesses need to have a clear refund policy if they want to avoid chargebacks. Display your return policy at registers, post the information on your website, and print the details on each receipt. Be as specific as possible, including stating the window of time for returns, any restocking fees and any exclusions.
Use self-explanatory billing descriptors.
Make certain all product descriptions reference the product or service by name, and are clear and understandable on receipts. When clients receive a credit card bill, they should see the store name, the date of the transaction and the amount. Along with clear billing descriptors, maintain your own records. Meticulous record-keeping helps you fight back against any chargeback incidents.
Post company contact info so consumers can easily find it and reach you
In frustration, customers may open a chargeback if they find it difficult to contact your customer service team. Set parameters for when customers can reach your business. For instance, you may schedule customer service hours daily between the hours of 8 a.m. and 8 p.m. local time. Return any client messages promptly to address any issues in house.
Maintain and publish clearly defined shipping expectations.
In the age of Amazon, many clients mistakenly expect lightning-fast shipping times. This is the reason that small and medium businesses must reiterate expected shipping times. Advertise shipping policies on your website and provide a copy of them after each purchase.
Provide highly responsive customer service.
Never leave calls or emails unanswered. Nothing is more frustrating than trying to get through to a business about a problem with an order and not receiving any response. Automate your phone and email system. The automated messages should state what time frame a customer could expect a callback.
Analyze chargeback incidents.
Take the time to analyze and review any chargeback incidents. If you have kept detailed records, you could fight the chargeback. All employees should know your company's payment protocols and follow the policies for each and every transaction. Most importantly, be leery of any suspicious purchases made via credit cards. Before processing the payment, investigate the charge and confirm the legitimacy. Credit card companies have protocols in place, including fraud alerts to help protect consumers and businesses.
Guidelines surrounding chargebacks are updated regularly, so merchants need to monitor regulations and adjust their internal procedures to reflect the most recent rules (e.g. EMV-compliant payment transactions). If your business's chargeback rates increase, review your chargeback history and identify any trends.
"Are you receiving a lot of chargebacks due to fraud? This may be an opportunity to invest in an EMV-capable terminal," said Ortiz-Rivera. "Are your chargebacks related to the quality of goods or services? This may be an opportunity to examine potential areas of improvement within the business."
At some point, you'll have a cardholder who needs to rightly dispute a fraudulent charge. If you are alerted before a chargeback is filed, it is best to remedy the situation as soon as possible. This may cost you shipping fees on top of lost product revenue, but it is usually better than incurring a chargeback request (that you will likely lose anyway) and a nonrefundable fee.
Although dealing with chargeback claims can be time-consuming, Ortiz-Rivera cautioned that businesses ‒ small businesses in particular ‒ that don't take the time to manage disputes can experience unnecessary, painful losses to their bottom line.
"My advice is to be proactive and take measures to help reduce the number of chargebacks you are initially exposing yourself to, and if you're strapped for time, maybe prioritize managing chargebacks that are above a certain dollar amount," said Ortiz-Rivera.
As a small business owner, chargebacks should be on your radar as something to monitor and rectify as soon as possible.