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What are chargebacks and what do they mean for your business

chargebacks

When selling products online, every merchant should be cautious about chargebacks. A merchant may incur huge loss and company’s image is affected if chargeback ratio is not controlled. In such a case, credit card processors may also put your companies name in the blacklist. To increase the profitability, the merchant should take measures to control chargebacks and decrease chargeback ratio. In this article, we will discuss what chargeback is and how to minimize them.

What is Chargeback
Chargeback is also known as the reversal and is a charge on credit card which cardholder wants to dispute due to reasons like unauthorized transactions, duplicate transactions, product do not match the description etc. Let us take an example for better understanding.

Suppose a customer has ordered and paid for a product with the credit card but is not satisfied with the quality of that product or quality of the product is not as mentioned. In this case, customer files the complaint with issuing bank and receives the amount spent. Chargeback notification is then transferred to the merchant through proper channel and then it is in merchant’s hand to dispute it or accept it.

Chargeback frauds
Basically, chargeback facilitates customers with the refund for any unauthorized transactions but it is not always merchants fault. There are customers, who deliberately, execute fraudulent activities and then file chargeback to make the profit. So, it is important to understand the different type of frauds and who to identify them. Chargeback frauds are categorized as:

  • Merchant error or clerical error
  • Unauthorized card use or stolen identity
  • Friendly frauds

Reasons for chargebacks
There is not any specific reason for chargeback. Customer can raise complain/chargeback is he feels cheated or is not satisfied with product and service, but this is not the only reason, customer can file chargeback due to reasons like:

  • Delay in delivery of product
  • Defective product received
  • Duplicate transaction
  • Use of stolen card/ identity stolen
  • False promise made by merchant

These are just few examples but the list can go on and on. Better understanding of these reasons can help merchant in reducing chargeback ratio and save business from bad publicity. If you are planning to start up an inline business, it is important to understand these reasons of chargeback and have a broad idea about them. For better understanding we have classified these reasons into four parts.

Goods and services
The customer can raise chargeback if he is not satisfied with service or product or can claim ‘product not received’, so it is important to get the delivery receipt signed by the receiver and keep records of the transaction at least for a year. In this case, reasons a customer can quote are:

  • Wrong product received
  • Defected product received
  • Did not receive shipment
  • Did not receive product on time or specified date
  • Quality or feature of product is not as mentioned on website

Issues related to credit card

  • Unauthorized Mail/telephonic orders: If the merchant is using services like MoTo (mail order/telephone order), the customer can, at any point, deny that he has made credit card transaction to place an order. On taking mail or telephonic order make sure to ask the customer about two things:
    • Customer’s address (for address verification)
    • CVV2 of credit card used
  • Invalid account number: When accepting credit card for carrying out transactions, make sure to configure your system to inspect credit card and reject it if it is expired or invalid.

Technical problems

  • Duplicate processing: Due to fault in system, sometimes customer is charged twice for the same transaction. It can also occur if the customer has pressed the PAY button twice while placing online order.
  • Clerical error: If the credit card is being processed manually, charge of human error increases. So it is always better to use credit card processor instead of manual processing.

Effect of chargeback on business
To assume that you can avoid chargebacks is like sitting in dark to avoid problems. But problems find a way to catch you. Similarly, no matter what chargeback alert services you use or chargeback prevention services you opt for, chargeback find its way to reach you.
Chargeback not only eats up your margin but also affects the fund flow, smooth running, image and prolonged existence of your business. Merchant loses the value of the product, product itself and has to bear chargeback fee as well. But merchant should not recognize all the chargebacks as the drop in profitability,if the merchant can identify fraud and can provide compelling evidence to prove it, the merchant should always opt for chargeback representment.

Tips to prevent chargeback

  • Stick to DBA(doing business as) name
  • Provide customer with contact number, get it printed on billing statement
  • Authorize every transaction
  • Verify customers details like address, CVV2, phone number
  • Do not accept expired cards

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Chargeback Prevention