Avoiding Chargebacks

Avoiding Chargebacks

Chargebacks are a costly hassle for small businesses. They can happen for any number of reasons ranging from fraud, to dissatisfaction with the quality of good or service received. The process is designed to increase consumer confidence so it’s very easy for a credit card user to dispute a charge and the burden of proof to show that a customer has been rightfully charged falls on you. In today’s highly competitive market when a consumer successfully dispute charges, you lose both the product sold and the revenue from that sale.

Even when you successfully dispute a charge back, the bank will withhold payment until the matter is completely resolved. When you consider the time effort and additional fees involved a successful resolution is still a costly proposition.

First a little background for those fortunate few who are not familiar with the process.
A charge back occurs when a customer disputes a charge on their credit card bill. This can happen for a number of reasons:

  • Clerical Error
  • Customer Dissatisfaction
  • Customer Confusion Over An Order
  • And Good Ol’ Fraud

Most customers have up to 120 days to dispute a charge. That’s three months folks. And the process ain’t pretty it can take up to 75 days in some cases and people can refile too.

What Happens During A Chargeback

Whenever a client disputes a charge, the issuing bank will give a reason for the dispute, usually with some inscrutable bit of code with a reason for the chargeback. Each credit card company has different reason codes, e.g. 41: Cancelled Recurring Transaction for Visa or 4831: Transaction Amount Differs for Mastercard.

Once your bank is issued a chargeback, the cardholder’s account is credited for the amount of the transaction, and your account is debited for the funds until the matter is resolved. It’s important to note every acquiring bank has their own procedure and it’s important to follow them to protect your rights.

Now the important part… It is vitally important to understand that a customer’s bank will refund the balance of a disputed transaction as soon as the customer initiates a chargeback. Should you decide to agree to the charge back, under no circumstances should you refund the customer on your own. This means you are more than welcome to accept the charge back or reverse a charge yourself should you feel so inclined but don’t ever send a credit card purchaser a cash or check payment. There are a number of scams based on this model where the client over pays for a service and asks you to send a check or money order to them. Don’t do it, they are usually initiated with some type of email come on asking if you accept credit cards.

If you decide to contest the chargeback and reject the cardholder’s dispute and the card association decides in your favor, the cardholder will be billed for the appropriate amount and you will receive payment. If the customer’s dispute decided in the client’s favor the client will retain the the credit already issued and you will not be paid. If any goods or services have been delivered then you are… what’s the technical term? Oh yeah, screwed.

Final Arbitration

If you dispute a chargeback and the issuing bank sides with the cardholder, you will receive a letter from the bank that asks if you’d like to pursue final arbitration directly with the credit card company. If you decline the chargeback is upheld and your out of the money. If you accept then the credit card company will determine who wins the chargeback and once it makes it’s ruling— it is final.

Note there are lots of fees associated with this process, retrieval fees, arbitration fees, chargeback fees, etc. If you go all the way through arbitration it can run upwards of $400 for a single chargeback. A business whose chargebacks exceed 1% of total sales volume can be subject to additional monitoring, fines up to $5000.00, and even termination.

Preventing Chargebacks

There are a number of steps a business may take to protect themselves from chargebacks:

#1. Deliver Great Customer Service
This is simply and straight forward. Do what you say you will do within the allotted amount of time you said you’d do it. It’s not complicated. If something happens be reasonable and communicate with the customer. Keep them in the loop.

#2. Clearly State Your Terms of Service
Make sure everyone is required to read them BEFORE they make a purchase. This includes phone in orders as well as online orders. No one should be able to place an order without having categorically acknowledging having read your terms of service. This is serious, if a customer is displeased with some aspect of your company’s product or performance, even if it is perfectly reasonable and clearly defined within your terms of service. If don’t have any proof of them acknowledge having read it before purchasing. You are very likely to be out of luck if they dispute the purchase. So make sure to require that they check the box marked I have read the terms of service.

#3. When Possible Swipe the Cards & Get a Signature
This is truly the best way, but of course it’s not always possible. Especially with an online store.

#4. Do Everything You Can To Ensure The Card Is Legitimate

  • Always require CVV/CVC Codes
  • Use Address Verification
  • Use Verified by Visa or MasterCard Secure Code
  • Avoid Errors Clerical or Technical
  • Abide by the Card Company’s Terms of Service

Chargeback Fraud

In spite of all your efforts sooner or later you will be a victim of fraud. It’s just a matter of time. A client may take delivery claim the order is not what they wanted or that it was not delivered. If you are delivering a product and it is of a significant value make sure to require signature, send it only to the listed credit cardholders address, make sure the product is clearly described and that the terms of service that you have made sure they signed (see #2 above) covers you in case of minor contingencies that are likely to occur from time to time, e.g. shipping delays, return policy, etc.

If you are delivering a service all of the above applies too. I suggest that you bill out your service in stages, with the caveat that payment for services rendered indicates acceptance of the quality of the work provided. I also suggest that you clearly state that changes to work previously accepted and paid for will add to the cost and delay completion. Don’t leave anything to change put this in your estimate, get them to agree to it in writing, you don’t necessarily have to have a signature, a string of emails can be just as good so get a confirmation every step of the way.