The word “chargeback” strikes fear into the hearts of most merchants. But they can be avoided – and challenged.
What is a chargeback?
A chargeback occurs when a credit card transaction is refunded to a cardholder at the direction of the card issuing bank after a dispute from a customer.
Chargeback period
The customer has 6 months to dispute a transaction in many cases. If you offer subscription services, the situation is even worse as the chargeback can still be made 6 months after the end of the subscription and for the full subscription amount.
How does the chargeback process work?
1. Customer lodges complaint with card issuing bank
2. Bank researches the issue
3. Bank debits merchant account and credits cardholder
4. Merchant account provider sends you documentation
5. You can then challenge the chargeback by providing suitable evidences as to why the transaction was valid.
6. Further evidence may then be required, or a decision is made.
7. In the even the chargeback challenge is successful, cardholder is debited again
8. If the chargeback challenge ultimately fails, merchant is charged a chargeback fee along with having refunded the purchase.
Due to the to and fro with evidence requests and counter challenges, it can literally take months to resolve a chargeback one way or another. It’s a frustrating, time-sucking and life wasting affair.
Chargeback danger levels
If your chargeback level is too high, you can lose your merchant account. Usually the danger figure is around 1% of transactions. However, this can mean 1% of transaction *value*. If you have lots of small sales and few large ones; and one of the large sales is charged back, that can threaten your merchant account!
Losing your merchant account is not only a short term problem, but it’s a bit like having a criminal record – you’ll find it harder to get another account and could possibly have to swallow higher processing fees.
The costs of chargebacks
Chargeback fees are usually around the $30 mark. That’s rather nasty, but then there’s all the time you spend in dealing with the issue too; plus also the loss of the sale itself where there may not be goods involved or the good are not returned. Even if your chargeback levels don’t quite hit the 1% level, your merchant account provider may get jittery and up your transaction fees. Every chargeback inches you closer towards such a situation.
Preventing chargebacks
While you can challenge chargebacks, prevention is better than cure, particularly when you understand that the way the chargeback system works is in favor of the customer – and is abused. Here’s a few tips to minimise the number of chargebacks you’ll see and things that will help you when you receive them.
Accurate marketing
If you’re exaggerating or simply misleading people in your marketing, expect a ton of chargebacks. Keep things above board.
Fraud
Fraud is a major reason for chargebacks – so ensure you have the proper screening processes in place. You should also ensure you use CVV2 on your order forms, also known as the Card Security Code (CSC). The CVV2 number isn’t included on the magnetic stripe of the card; so if card numbers are stolen, without the CVV2 number, there’s less of a chance they’ll be used successfully in fraud.
Refund policy
Refund policies can be quite contentious critters with some companies adding in all sorts of conditions. Wherever you can, be as flexible as possible with refunds as it’s cheaper to refund than to deal with a chargeback. A solid refund policy can also help boost your sales.
Communications
Offer multiple points of contact, clearly posted on your site. It’s unusual for a customer to engage the chargeback process without having first tried to contact the merchant and it’s something that the card issuing bank will usually advise them to do first.
A sure way to see more chargebacks is to not respond promptly to customer complaints or support requests; so ensure that it’s easy for people to contact you and that you do check and respond to your email regularly.
Always provide invoices and receipts to customers that very clearly state the business name that will also appear on the statement – it helps the customer to recognize your company name when they see the charge on their credit card statement and lessens the chances that they will think it’s a fraudulent transaction.
It’s also crucial your contact details on file with your merchant account provider are current as chargeback notifications are usually sent via fax or snail mail unfortunately – and often they are delayed.
Clear terms of service
Be very clear in your terms about issues relating to cancellation, refunds and the way your services and/or products are provided. Any grey area that’s challenged will likely work against you.
Record keeping
You need to keep a copy of all receipts and communications with a customer as these may be valuable evidence in a chargeback challenge.
Be civil
You need to be professional in all communications with your customers. If you’re aggressive, this can work against you in a chargeback review. Even if the customer is being totally unreasonable and rude themselves; stay calm – their behavior will work against them.
Be thorough in challenges
A chargeback notice will contain specific instruction on what you need to provide in order to challenge it. Read these notices carefully as failure to supply the information will just waste time and money as the review will be delayed. If you’re unable to provide a particular item; call the merchant account provider for advice – they may offer ideas as to what other forms of evidence would be acceptable.
For online merchants, chargebacks are a particularly threatening problem, mainly because the cardholder signature isn’t provided. In many ways, the banking and credit card system is still quite antiquated. Until such time that the card industry is dragged screaming into the 21st century on these issues, merchants just need to cover as many bases as they can.
Tags: chargeback, ecommerce, online business