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How To Drastically Reduce Chargebacks As A Business Owner
January 08, 2020
Reduce Chargebacks

How To Drastically Reduce Chargebacks As A Business Owner

Did you know that there are 459 million credit cards used in the United States? With such widespread use, you’d think accepting credit cards would be a no-brainer for small businesses. However, not everyone accepts credit cards. One of the reasons for this is chargebacks.

A chargeback occurs when a consumer pays for a product then claims the payment was unauthorized. Once the consumer submits their claim, the bank that issued their payment card reverses the consumer’s money transfer. 

Despite this challenge, to truly grow your business, you’ll likely need to accept credit cards. Fortunately, in this post, we’ll explain how to drastically reduce chargebacks. 

The Burden Of Persistent Chargebacks

Persistent chargebacks can hurt your business more than you think. At the simplest level, 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. Yet it doesn’t stop there.

Unfortunately, the more chargebacks you have, the worse off you’ll be. As they accumulate, your reputation among credit card 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. 

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 Chargebacks

Although 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. So, the tactics you choose will depend on how significant an issue chargebacks are for your business.

Utilize Clear Payment Descriptors

Payment descriptors are the short phrases that describe each charge on a credit card bill. At a minimum, the payment 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.

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.

Whenever Possible, Get Signed Contracts

Another 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.

Contract Investors

Follow Protocols Set Forth by Processors

Although 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 chargebacks.

However, if you don’t follow your processors’ protocols, you’re putting yourself at an increased risk.

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.

Ensure Customer Service Problems Are Dealt With Quickly

Technically, customers are supposed to work with you to resolve an issue before they seek 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.

Keep An Eye Out For Fraud Warning Signs

Although 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 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.

When To 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.

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 worth it. 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 most more often than not. 

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Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].