A Beginners Guide to Chargebacks

Sadly, many business owners are ignorant of a deadly setback in the business world when they embark on their new adventure. And unless you've experienced one firsthand, you might still be in the dark. Wonder what we're talking about? Chargebacks. If you aren't careful, chargebacks have the potential to destroy your company. The first step to chargeback management is education.

What are Chargebacks?

Without a lot of technical jargon, a chargeback is basically a credit card refund. A customer contacts the bank and requests his or her money back. If the bank feels the cardholder has a valid claim, they will award the refund.

This means funds are forcibly removed from your account and returned to the cardholder. Not only do you unexpectedly lose out on the profits (and the item sold), you also have to pay an administrative fee (usually between $25 and $70 for each chargeback).

But wait. It gets worse. If you, the merchant, incur too many chargebacks in an arbitrary time (usually about 1% of total sales each month), the bank will slap you with a hefty fine. If you can't get your chargebacks under control in a timely fashion, the processor can simply terminate your account.

If you lose your merchant processing account, it will be nearly impossible to get another. If you can't secure a processor account, you can't accept credit card payments. And if you can't accept credit card payments, you'll probably have to close up shop.

What Can Be Done?

Obviously, the financial ramifications associated with chargebacks are quite significant - especially if you experience multiple chargebacks each month. Therefore, it is essential to learn a few basic chargeback management techniques.

A chargeback can be filed for a variety of reasons. For example, a cardholder might initiate a chargeback if the item was never delivered.

However, the two leading causes of chargebacks are faulty customer service and friendly fraud.

Improving Customer Service

The easiest way to reduce the risk of chargebacks is to ensure you offer top-notch customer service. Some things that can help prevent these financial burdens include:

  • A website upgrade - Make sure your website is customer friendly. Each item you sell should have several high-quality images, taken from different angles and zoomed in on various details. The product descriptions should be concise and accurate. The policy page needs to be easy to find. And above all, make sure customers can easily contact you. Your phone number and email address should be clearly visible on each page of your site. Additionally, you should have a highly detailed "contact us" page.
  • Old school policies - It may sound simple, but answer the phone within the first three rings. The customer is probably already irritated; making him or her wait forever will only make things worse. Likewise, send out an auto-response to all your emails. Let the customer know you received their grievance and you'll address it shortly.
  • Don't hide your identity - Check how your trade name appears on cardholders' credit card statements. If your name is Joe's Candy Shop, that is what shoppers should see. Anything else could be confusing (causing them to initiate a chargeback simply because they don't recognize the purchase).
  • Tell it like it is - With each shipping option available, let shoppers know exactly when their package will arrive. If it takes two days to process the order, let them know those extra days will be added to the time it takes to deliver it.
  • Wait it out - Don't charge the customer's credit card until the item has been shipped. Also, if the item is backordered, let the customer know - and offer them an "out."

Improving customer service is only half the battle. You'll also want to check your fraud detection and prevention techniques.

Deterring Fraud

Dubbed "friendly fraud," many chargebacks are intentional attempts to steal from your business. Detecting these fraudsters is challenging; stopping them is difficult. However, if you don't attempt to keep their antics at bay, you'll lose a lot of money.

Here's what you need to do:

  • Get it in writing - Get delivery confirmation. This will thwart the attempts of anyone who claim the package was never delivered. This might be too much of a hassle for low-dollar orders; you might want to implement the practice for only larger transactions.
  • Be on the lookout - Visa has issued a list of possible indicators of fraud. Read this list carefully and be on the lookout for these hidden criminals.
  • Use appropriate tools - Take advantage of the tools offered by Visa and MasterCard. Things like address verification and CVV help keep fraudsters away during card-not-present transactions.
  • Don't be fooled twice - If you do come across a fraudster who gets the better of you, don't let it happen again. Work with your merchant processor to create a blacklist. Ban any criminal from ordering again by blocking their name, email address and/or IP address.

Preventing fraud is difficult. However, you really must try to keep these bad guys away. Even the most basic fraud prevention techniques will make a big difference.

The chargeback process is quite extensive and confusing. Take the time now to educate yourself about what to expect. Learn about the response deadlines, representment essentials, and other chargeback management techniques. Considering half of all online business close their doors because of chargebacks (and the fees associated), it is in your best interest to take action now!

Juli works for Chargebacks911, educating business owners about the chargeback process. Since the chargeback is a so complex procedure, she feels education is the foundation of successful chargeback management. Juli spends a lot of her time helping business owners learn how to save money and improve their bottom line.

If you have any questions, please ask below!