A chargeback occurs when a consumer pays for goods or services, then claims the payment was unauthorized. Once the consumer submits their claim, the issuing bank reverses the consumer’s money transfer. Despite this challenge, you'll likely need to accept credit cards to truly grow your business. Fortunately, in this post, we’ll explain how to drastically reduce your business's chargeback rate in the future.
What Is The Burden Of Persistent Chargebacks?Persistent chargebacks can hurt your business more than you think because they represent the loss of a potential sale. However, consumers don’t have to return what they purchased, so not only do you lose out on payment, you also lose inventory. Beyond that, you’ll also be charged a $20 to $100 fee by the bank that issued the chargeback. Add in the cost of the time you spend dealing with chargebacks, it’s easy to see how this burden piles up. Unfortunately, the more chargebacks that you accumulate over time, the worse off your business will be in the long run. As they accumulate, your reputation among credit card issuers and processors suffers. Unless you take action to prevent chargebacks, your ratio will rise. Once that ratio reaches a certain point, you’ll be blacklisted by one or more processors. For example, Stripe reserves the right to blacklist merchants whose chargeback ratio rises about .75 percent. Although the loss of inventory and issues with card networks are notable problems, it's important to note that chargebacks shouldn't affect your credit score. At most, you may see a note on your credit report, but it typically doesn't hurt your credit. With that said, chargebacks are a cost of doing business in today’s world, especially if you sell goods online. While the burden is real, it’s not impossible to manage. In the following sections, we’ll help you alleviate the burden of chargebacks.
How To Avoid or Reduce ChargebacksAlthough the prospect of preventing chargebacks may seem daunting, there’s quite a bit you can do. Some of the ways to avoid or reduce chargebacks go hand in hand with common-sense business practices. Of course, other methods require a strong understanding of the chargeback process and your rights as a merchant. In addition, different tactics require various levels of investment. Therefore, the tactics you choose will depend on how significant an issue chargebacks are for your business.
1. Utilize Clear Payment DescriptorsPayment descriptors are the short phrases that describe each charge on a credit card bill. At a minimum, the billing descriptor will contain your company’s name. It can also contain information about the products or services that were purchased. When someone reviews their credit card bill, they’re looking for unfamiliar charges. Due to this, unclear payment descriptors often cause customers to mistakenly identify an unauthorized charge and initiate a chargeback. By making your payment descriptors clear, you can prevent chargebacks caused by mistaken identity. It’s important to use the name of your company that customers are familiar with. Also, if you sell many products, your descriptor should contain clear product information.
2. Whenever Possible, Get Signed ContractsAnother place you can create a built-in defense against chargebacks is with signed contracts. After all, a signed contract is physical proof that the customer saw, understood, and agreed to the terms of your transaction. Without a signed contract, the debate will simply devolve into your word against theirs. In the contract, you must spell out exactly how, when, and why you’re billing the customer. By doing this, you make it less likely that a consumer will even think to file. Plus, even if they do try to claim foul play, you can send the contract to the bank and have their chargeback denied.
3. Follow Credit Card Processors' ProtocolsAlthough it might not seem like it, payment processors aren’t working against you. In fact, they have the tools and processes set up to help reduce friendly fraud. However, if you don’t follow your processors’ protocols, you’re putting yourself at a high risk for issues. Protocols may differ depending on your processors but the rationale behind the protocols is essentially the same. They’re all trying to ensure that every transaction is legitimate and that the customer gets what they paid for. For example, some processors require that you provide proof of delivery when a customer has received your products. Others also require identity verification protocols.
4. Ensure Customer Service Problems Are Dealt With PromptlyTechnically, customers are supposed to work with you to resolve an issue before they file a chargeback. However, if you’re slow to respond, customers will often go over your head. So, even if you’re working to solve a problem, being too slow can result in chargebacks. In this way, fast and helpful customer service can be your best weapon against chargebacks. This is easier said than done, of course, and it’ll require an investment. However, if you sell a relatively high volume of products, the payoff will generally be well worth the costs.
5. Keep An Eye Out For Fraud Warning SignsAlthough they’re often abused, chargebacks exist to give consumers protection against fraudulent use of credit cards. So, if you can eliminate or reduce fraud in the first place, you eliminate the need for chargebacks. To prevent chargeback fraud before it happens, you need to know how to recognize it. Fortunately, there are some telltale fraud signs you should look out for. While this won’t eliminate all instances of fraud, it will help you reduce chargebacks. Warning signs include repetitive orders, inconsistent billing and shipping information, and unusually large transactions. By having a fraud prevention plan in place, you'll be able to better protect your business from this issue.
When Should You Fight Chargebacks?If you accept credit card payments, you’ll have to deal with chargebacks at some point. That said, how you choose to manage them is up to you. In high volume businesses, it’s nearly impossible to fight every action. Therefore, you should pick and choose which chargebacks are worth fighting so that you don't waste valuable time. Conversely, if chargebacks are uncommon for your business, it may be worth fighting all of them. Ultimately, the choice to fight back depends on the cost and benefits of doing so. If you’ll need to dedicate hours upon hours going back and forth, even winning won’t be worthwhile to you as a business owner. This is why it’s important to have, for example, strong written contracts. If fighting a chargeback is as simple as sending the bank your customer’s contract, the cost to you is low. As you can see, there’s no cut and dry approach to fighting chargebacks. However, if you weigh the pros and cons for your business, you’ll effectively take any emotion out of your decision. That way, you’ll make the right choice regarding chargebacks most more often than not. Are you wondering how to make informed decisions about other small business issues? Sign up for our newsletter and stay in the loop on the latest business topics. [cta-newsletter]
Editor’s Note: This post was updated for accuracy and comprehensiveness in January 2021.