Chargebacks are a fact of life for any business that accepts credit cards or debit cards. While the risk of chargebacks is higher for card-not-present payments, both ecommerce and brick-and-mortar merchants should be aware of what chargebacks are and how to avoid them.
If you’re not quite sure what chargebacks are - and how they can impact your business - see our answers to frequently asked questions below. We also detail five ways to help prevent chargebacks before they happen.
What is a credit card chargeback?
Simply put, a chargeback occurs when a customer disputes a charge on their card account directly with the card issuer. This dispute is then communicated to the business’s payment acquirer and ultimately to the underlying merchant. At that point, the merchant can choose to fight the claim via representment.
What is chargeback representment?
Chargeback representment is the process in which merchants present evidence to counter the chargeback claim. Examples of evidence include sales receipts, proof of delivery, and copies of customer communications. Once all relevant documentation is gathered, the merchant disputes the claim by submitting the evidence and a rebuttal letter to their payment acquirer.
What happens if a business doesn’t fight the chargeback?
If a business chooses not to represent, funds are removed from the merchant account and the card issuer reimburses the disputed amount to the customer.
Are chargebacks expensive?
The costs of chargebacks can add up quickly. Merchants are subject to a fee each time a chargeback is issued, and an excessive amount of chargebacks can lead to steep fines.
As a final measure, a business can have its card acceptance privileges revoked if their chargeback ratio is too high. Even though businesses have the option to represent, this process often requires time- and money-intensive resources to gather evidence and issue rebuttals.
How can businesses prevent chargebacks in the first place?
The most effective way to manage chargebacks is to prevent them from happening. Here's a shortlist of five approaches that can help:
1. Make refunds simple and straightforward.
Issuing refunds to unhappy customers helps avoid the headaches and financial costs associated with chargebacks. In addition, the chargeback process can take several months to complete whereas a refund can settle in a matter of days.
To encourage refunds instead of chargebacks, a business should make sure the billing descriptor that appears on card statements includes a phone number to facilitate direct outreach. It’s also important to have customer service contact information clearly spelled out on the business’s website so customers can initiate refunds quickly and easily.
2. Communicate often.
Frequent communication keeps customers aware of new orders, from initial purchase to delivery. Proactive communication is key to making sure they aren’t surprised by payment transactions and is also imperative in tracking the refund process.
3. Verify card payments with AVS and CVV.
Address Verification Service (AVS) and Card Verification Value (CVV) are extra pieces of cardholder account information that can be used to verify card-not-present transactions.
4. Make it easy to cancel recurring charges.
Recurring charges associated with subscriptions and/or memberships may lead to chargebacks if customers can’t find an easy way to cancel. Make sure cancelling your product and/or service is as easy as signing up.
5. Understand friendly fraud.
Chargebacks were designed to protect consumers, but they can be abused by so-called “friendly fraud”. One example of friendly fraud is when a household member makes a purchase that another household member (the bill payer) doesn’t know about or agree with. Another example is that the consumer missed the return window and seeks their money via the chargeback process instead.
A payment processor can help guide you through the ins-and-outs of chargebacks. Click below to learn how we can help with your payments needs.