Chargebacks are increasing for all types of merchants. While it’s impossible to avoid chargebacks entirely, the good news is there are simple steps you can take to reduce the number of chargebacks your business receives and protect your profits. Below we address what chargebacks are and why they pose a risk to your business. Most importantly, we outline what to do if you receive a chargeback and the actions you can take to reduce their occurrence.

What Is a Chargeback?

A chargeback occurs when a cardholder reaches out directly to their card issuer to initiate a dispute for a charge on their statement.

The money in question will typically be deducted from your merchant account when the dispute is made and held until it’s resolved. The issuer will then refund the amount to the cardholder while they determine legitimacy and decide who is responsible for payment.

From there, the next step will depend on the result of the investigation:

• If the cardholder is deemed responsible: If the transaction is found to be legitimate, the cardholder is responsible for paying. The issuer will credit the funds back to your merchant account.
• If you are deemed responsible: If the investigation results in your business being held responsible, the money stays with the cardholder. Additionally, your business will be charged a fee by your payment processor for the backend work required to manage a chargeback.

For merchants, a chargeback essentially places a transaction on hold and delays—or prevents—you from receiving payment from that transaction. While they provide consumers with an easy way to combat fraud, chargebacks present a challenge to business owners and can result in loss of time and profits.

Sources of Chargebacks

There are a few different reasons you might receive a chargeback, and it all depends on how the customer’s card was used.

Legitimate Fraud

If a stolen card was used to make purchases in your store, the real cardholder will see a transaction in their statements that they did not make. They will report credit card fraud to reclaim their stolen money. There are some strategies you can take as a business owner to reduce the potential of losing profits to fraud—we’ll discuss those later.

Merchant Error

Sometimes chargebacks are a result of mistakes within your business. For example:

• The customer canceled an order or subscription, but you charged them
• The customer never received their order
• Products arrived damaged, defective, or not as advertised
• The amount charged does not match the cardholder’s receipt
• You charged twice for a single order

You have the most control over this source of chargebacks and can make strides toward reducing them here by tightening up your operations.

“Friendly Fraud”

Cardholders often mistakenly report legitimate transactions as fraudulent, either because they don’t remember making a purchase they did actually make or because they share their card with family members and don’t realize a loved one has legitimately used the card to make a purchase.

Who Is at Risk for Chargebacks?

All businesses that accept credit cards as payment are at risk of chargebacks. However, there are some factors that can make you more vulnerable:

• Online transactions: Fraud is more common in online transactions than in-person ones. This is due in part to EMV (chip) cards, which significantly improve the security of card-present, or in-person, transactions.
• Advance purchases: Some industries where the goods or services are purchased well in advance, such as travel or pre-ordered products, are also more vulnerable to chargebacks because customers may not recognize a charge on their statement for a purchase they made months earlier.

Why You Need To Avoid Chargebacks

Chargebacks are more than a minor inconvenience. If left unchecked, they have the potential to cause serious issues for your business.

Direct Proft Loss

Disputed transactions either delay or totally wipe out your income for those sales. If you truly processed the transaction correctly on your end, the resources you invested to fulfill the purchase might not be reimbursed properly.

Lost Time and Productivity

Time is of the essence when handling a chargeback as you have limited time to respond or you’ll automatically lose the dispute. It may also take several days to receive a chargeback notice, so you’ll need to jump into action as soon as possible. Some appeal processes require research and paperwork to prove that you provided the products or services in question.

Dispute-Related Profit Loss

As previously mentioned, your payment processor will usually charge you a fee, which covers the work required to investigate and resolve the dispute. Sometimes appealing the chargeback may cost more than the actual product or service that’s being disputed, which is one of the main reasons you want to do everything you can to avoid chargebacks from the beginning.

Reputation Damage

Having multiple disputes against your business may impact your ability to operate effectively by:

• Disqualifying you for business loans: Financial institutions monitor your chargeback rate and use that as a crucial metric when deciding if they’ll lend your business money. Too many chargebacks may indicate a risky investment to your lender and they might deny your loan requests.
• Disrupting your merchant account: Multiple chargebacks may also impact your ability to get or keep a merchant account for payment processing. If your business’s chargeback ratio—the measurement of chargebacks-to-transactions—is above the industry standard of 1%, you might have your merchant account terminated. You might lose the ability to accept credit cards as payment or pay extra to open a new account.

How to Stop Chargebacks

Preserve your reputation and safeguard your profits by stopping chargebacks before they come up. Here are a few tips and tools you can use for prevention.

Use Secure Credit Card Processing Devices

If you haven’t already done so, upgrade your payment devices to ones that accept EMV chip cards, which are inserted into the terminal and provide a much more secure way to process transactions than traditional magnetic stripe cards that are swiped.

Use Online Security Programs

For online transactions, take advantage of the security programs offered by the major card brands and follow best practices when setting up your website, such as requiring your customers to enter the 3- or 4-digit CVV code on the back of their card and their billing zip code when completing an order. Doing so greatly reduces the chance of fraudulent purchases with stolen credit card information.

Stay PCI Compliant

PCI compliance ensures your business adheres to a standard set of payment card processing security protocols and best practices to prevent fraudulent transactions. While PCI compliance isn’t a legal requirement, you’ll likely need to be compliant in order to work with credit card companies and payment processors—and following these protocols will help you avoid chargebacks, as well.

Don’t Hand-Key Card Numbers

Chip-read and swiped card transactions are much more difficult for customers to dispute than ones where a credit card number is keyed into your payment device by hand. In fact, disputes over key-entered transactions in a card-present environment are considered an immediate loss.

In the event you’re not able to process a chip-read or swiped card transaction, you should request another form of payment as opposed to hand-keying card numbers. For merchants with dual processing environments (i.e., card-present and card-not-present), you may want to consider setting up two separate merchant accounts to ensure greater chargeback protection for card-not-present payments.

Obtain Proof of Purchase

Requiring customers to sign documentation can make a huge difference for your business in the event of a dispute. Written proof helps substantiate your claims, so ask your customers to sign a contract, itemized invoice, or payment receipt.

Implement a Clear Return Policy

When you clearly state your return policy, you help protect your business from chargebacks by educating customers about their options before initiating a dispute with their credit card issuer. Post your policy online, around your business, and print it on the back of your receipts. Have customers sign the receipts in-store, which means they acknowledge the policy, or have them check an acknowledgement box when purchasing online.

Write Detailed Product Descriptions

When selling online, provide as much information in your product descriptions as possible. You need to ensure customers understand exactly what you’re offering and what they’ll receive if they place an order. This enables your customers to feel confident in what they’re purchasing, leading to less returns and potential chargebacks.

Inspect All Items Before Selling

At checkout or before you prepare an online order for shipment, train your staff to inspect products for defects or damage. It may take a little more time, but you’ll make up for it with less chargebacks to manage. Implementing quality control of this sort is even more critical if your business doesn’t accept returns.

Send Shipping Confirmations and Obtain Proof od Delivery

Emailing customers a shipping confirmation and tracking details for their online orders is a great way to not only provide good service, but also help you prove that your goods were delivered in the case of a dispute. The proof of delivery (POD) should show the entire address, not just the city and state. It’s also good practice to obtain a signed POD for valuables or large transaction items.

Watch Out for Red Flags

Keeping an eye out for potentially risky transactions can help you reduce chargebacks. For example, if most of your orders are less than $100.00 in total, an order for $500.00 may warrant extra scrutiny before being fulfilled.

Batch Out Daily

Settling your batches every day helps reduce both higher transaction fees and cardholder disputes.

Use Recognizable Payment Descriptor

Your business’s payment descriptor is the merchant name that appears on a customer’s credit card statement when they make a purchase from your store. To make it easier for your customers to recognize their charges and reduce the occurrence of chargebacks, make sure your descriptor matches the name of your business.

Issue Refunds and Credits to Original Form of Payment

In the instance you need to issue a refund or credit, the exact refund amount should be applied to the original credit card to ensure the transaction can be traced. If the credit is issued to another credit card or form of payment (e.g., cash or check), it may be challenging to document the credit transaction and obtain proof of the refund acknowledgement in the instance of a dispute.

Encourage Customers to Contact You Directly

To decrease chargebacks, encourage your customers to contact your business directly to rectify issues rather than initiating a dispute with their card issuer. You can handle the issue one-on-one and avoid the extra fees associated with a formal investigation.

Find a Supportive Payment Partner

While chargebacks can be a serious challenge, there are numerous methods you can employ to reduce their occurrence. For the best protection, it can help to have someone in your corner who understands payment security and PCI compliance and how to help merchants run a successful business while navigating the pitfalls of credit payments.