Navigating business finances can be a challenge. Companies must strive to give consumers the products and services they want while maintaining a profit. E-commerce giants like Amazon and Walmart have paved the way for perks like free shipping and returns, which means consumers now expect these extras from all retailers.
As consumer expectations grow and instant gratification becomes commonplace, businesses — especially e-commerce sites — must adapt. Unhappy consumers may initiate a chargeback, which can hurt your business and result in higher credit card processing fees. Your credit card processor may even drop you.
Here’s what businesses need to know about chargebacks and how to reduce them.
A chargeback occurs when a cardholder asks their bank to reverse a credit card charge posted to their account. Chargebacks differ from refunds. Merchants issue refunds, while card issuers handle chargebacks.
Customers might request a chargeback for several reasons, including the following:
Some issues are outside your control. For example, a product may have become lost or damaged during shipping. However, It’s crucial for brick-and-mortar and e-commerce retailers to reduce other issues, like billing errors, to help prevent chargebacks.
Monica Eaton-Cardone, co-founder and CEO of Chargebacks911, says credit card chargebacks represent a real and growing financial threat to merchants. Too many 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 explained. “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, senior manager at LegitScript, says businesses that want to counter a cardholder’s chargeback claim have only a short time 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,” Ortiz noted. “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.”
Chargeback claims are never good. The financial and reputational consequences can harm your business if the situation is not rectified.
The most obvious chargeback consequence is lost revenue. Even if a merchant wins a chargeback dispute, the credit card processing company charges a nonrefundable fee ranging from $20 to $100 per chargeback. This money 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.
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 will be enrolled in a monitoring program, which becomes 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 accounts frozen. On top of that, merchants who engage in frequent forced payment reversals may be added to the Terminated Merchant File, which would result in your business being blocklisted for five years.
Although reversing a chargeback is technically possible, it’s not easy — and the odds aren’t in your favor. Card issuers typically side with cardholders, and their guidelines reflect this bias.
“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,” Ortiz explained. “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.”
In some cases, consumers will dispute a legitimate purchase for fraudulent reasons. “When it comes to merchants’ chargeback rights being violated, the single greatest threat comes from friendly fraud, also called chargeback fraud,” warned Eaton-Cardone. “Experts estimate that over 85 percent of all chargebacks may be caused by friendly fraud — meaning they file a chargeback without valid justification.”
There are multiple reasons for chargeback fraud, including buyer’s remorse, dissatisfaction with the products or services provided, or 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. “Ultimately, it is up to the issuer to determine whether a chargeback will be reversed or not.”
Never wait to fight a chargeback dispute. The sooner you address the issue, the more likely you are to experience a favorable outcome.
To fight the chargeback, you must 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 learn the reason for the chargeback and any other pertinent details. The reason code also presents a timeline to fight the chargeback and what evidence is needed to reverse the chargeback.
Review your credit card processor’s policies to understand its chargeback dispute process. Your business may not have to handle all chargeback cases — the processor will provide automatic representation in some instances. Don’t waste resources on chargeback incidents being handled externally. If you must provide documentation, submit the completed rebuttal form with the requested files quickly.
In addition to chargeback issues, merchants should understand credit card payment processing rules and laws like the Payment Card Industry Data Security Standard and the four levels of PCI compliance.
It is essential to take protective measures to keep your business from falling victim to fraudulent chargeback claims. Eaton-Cardone recommends seeking a chargeback management service with an end-to-end, multitier approach that helps fight chargebacks while reducing the risk of future chargebacks.
“The best is a turnkey chargeback management system covering the entire chargeback process,” Eaton-Cardone advised.
Ortiz advises that brick-and-mortar businesses adopt EMV-capable terminals (chip readers) to reduce their liability risk for fraudulent transactions. Businesses that process card-present transactions and are not EMV compliant are liable for fraudulent transactions.
Dissatisfied customers are the second-most common reason for chargebacks (fraud is the most common). Take preemptive measures to provide an excellent purchasing experience that will foster customer satisfaction.
Eaton-Cardone recommends that businesses adopt the following best practices:
Additionally, consider the following ways to standardize business procedures and prevent chargebacks.
Automate your phone and email system to provide more efficient customer service to help head off chargebacks. The automated messages should state when a customer can expect a callback and share essential information.
Although dealing with chargeback claims can be time-consuming, proactively managing disputes can save you from unnecessary, painful losses to your 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.
As a small business owner, you should have chargebacks on your radar to monitor and rectify promptly.
Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.