With online shopping on the rise, credit card transactions are also increasing. Most people prefer to use a credit card to pay for their online purchases, so if you’re a small online business, the term ‘chargeback’ may frequently pop up. But what does it really mean?
A chargeback isn’t just a simple refund; it provides security and trust for consumers. For businesses, understanding chargebacks is essential for smooth operations. This post aims to explain what a chargeback is, how the dispute process happens, how it can hurt your business, and how to handle it.
Understanding chargebacks: Everything you need to know
What is a chargeback?
A chargeback occurs when a credit or debit card user requests that a charge be reversed by their bank. This usually happens when the cardholder thinks there’s a problem with their transaction. For example, if they didn’t authorize the charge or if they’re dealing with fraudulent transactions, they can report it and potentially get their money back.
Chargebacks started in 1974 in the United States with the Truth in Lending Act, later amended into the Fair Credit Billing Act to protect credit card holders. Before then, it was difficult to resolve issues related to incorrect charges or unauthorized usage of your credit card. With chargebacks, customers have a way to fight these unfair charges, giving them more power over bad and fraudulent transactions.
Over the years, this idea has grown and changed, especially with online shopping, but its main job of protecting people who shop with credit cards is still the same.
Why do chargebacks happen?
There are plenty of triggers for chargebacks, each highlighting the need for vigilance in the payment process. Some of the most common reasons include:
- Unauthorized transactions. This happens when a cardholder claims that they never authorized a particular transaction. It’s a common issue in the case of stolen or lost cards.
- Fraudulent activity. Here, the cardholder might be a victim of identity theft or credit card fraud, where their details are used without their knowledge.
- Merchandise not received. A straightforward scenario where the customer paid for a product or service but didn’t receive it.
- Dissatisfaction with product or service. This occurs when there’s a mismatch between what was advertised and what was delivered, leading to customer dissatisfaction.
- Billing errors. This includes being charged the wrong amount, being charged twice for the same transaction, or other mistakes in the billing process.
- Subscription cancellations. When a customer cancels a recurring payment or subscription but continues to be charged.
- Refunds not processed. This happens when a customer returns a product or cancels a service but doesn’t receive the promised refund.
The chargeback process: How does a chargeback dispute work?
A chargeback dispute can get tense, with both sides worried about money. Merchants try to show the sale was fair to avoid losing money and getting fined. Customers want to fix a charge they think is wrong and get their money back.
If ever you get a dispute, the chargeback process unfolds like this:
Step 1. The customer disputes a transaction
The chargeback process begins when a cardholder spots a problem with a transaction on their credit card statement. This “something off” could be any of the reasons we listed above.
So, what does the customer do next? They reach out to the bank that issued their card and raise a flag about this issue. They’ll explain what’s wrong and why they think the charge shouldn’t be on their statement.
Step 2. The credit card issuer starts an investigation
When a bank gets a chargeback request, it kicks off an investigation to see if the claim has merit. They dig into the details of the transaction, looking at things like receipts and proof of delivery to figure out if the dispute is valid.
If the issuing bank thinks the dispute makes sense, they’ll pass it along to the card network, like Visa, Mastercard, American Express, or Discover. At this point, you might see a temporary credit in your account.
The card network then takes a closer look at the transaction. They have a couple of options:
- Tell your bank to cover the charge
- Send the dispute over to the merchant’s acquiring bank
From there, the merchant’s bank can either push back, saying the card issuer is wrong or pass the dispute to the merchant.
Step 3. The merchant receives a notification
If the issuing bank thinks there might be a valid reason for the chargeback, they’ll notify the merchant involved. If the merchant disputes the chargeback, there may be several rounds of back and forth as the merchant, acquiring bank, and card issuer try to settle the matter. They can send evidence to show the transaction was okay or that they delivered the product or service as promised.
For example, if a customer says they didn’t recognize a charge, the merchant can show details of the purchase. If the issue is about not getting a product, the merchant can provide proof of delivery, such as tracking numbers or delivery receipts. And if it’s about the quality of what was bought, the merchant can show their return policy or any emails where they talked about the issue with the customer.
Step 4. The issuing credit card company decides on an action
After both the merchant has provided evidence defending the transaction and the cardholder has made their case for disputing it, the issuing credit card company steps in to make a crucial decision. The credit card company reviews all the submitted evidence, considering the guidelines and rules set forth by the credit card network to ensure fairness and compliance.
The credit card company’s decision hinges on several factors, including:
- The nature of the dispute
- The validity of the evidence provided by both parties
- The transaction’s adherence to the network’s policies
Step 5. A resolution is made
The final stage of the chargeback process essentially settles the dispute. Once the bank has made its decision, there are two primary outcomes, each with significant implications for both the merchant and the cardholder.
- Chargeback upheld. If the credit card company finds that the cardholder’s reasons for the chargeback are justified, they will proceed with reversing the transaction. This means the amount that was originally charged will be credited back to the cardholder’s account.
- Chargeback denied. On the other hand, if the evidence favors the merchant, indicating that the transaction was legitimate and met all the necessary criteria, the bank will decide to let the charge stand. The merchant gets to keep the payment, and the cardholder remains responsible for the charge.
In either case, the resolution of the chargeback brings closure to the dispute. The resolution is key to maintaining trust in the payment system, ensuring that disputes are handled fairly.
How does a chargeback affect your business?
Chargebacks, while protective for consumers, can have significant implications for merchants:
Financial loss
Each chargeback can lead to a direct financial hit. First, you lose the money from the sale as the disputed amount is pulled from the merchant’s account. If you’ve already sent out the product, you lose that too. Plus, it can come with additional chargeback fees, and these can really add up, making a dent in your profits.
Increased processing fees
If your business experiences a high number of chargebacks, payment processors may consider you a higher risk. This can lead to increased transaction fees or even the possibility of your payment processing services being terminated.
Higher resource allocation
Responding to chargebacks requires time and effort. You need to allocate resources to gather evidence, communicate with banks, and handle the administrative aspects of disputing chargebacks. This is time and effort that could be spent on other areas of your business.
Damaged brand reputation
High chargeback rates can damage your reputation with both customers and partners. Customers may start to question the quality of your products or services, while banks and payment processors might view your business as risky. A high frequency of chargebacks can flag a business as unreliable or risky, potentially affecting customer trust and relationships with payment processors.
Operational disruption
Every time a chargeback pops up, you have to spend time and resources to look into it and come up with a response. Over time, the ongoing need to manage these disputes can slow down your operations, affecting your team’s productivity and possibly even your ability to meet customer needs or hit your business goals.
Potential for increased scrutiny
Excessive chargebacks can lead to increased scrutiny from regulatory bodies. If they find anything concerning, this could lead to audits where they check your records and practices in detail. They might also ask you to follow some extra rules or meet more requirements to make sure you’re handling things properly.
Prevention and mitigation strategies: How your small business can avoid chargebacks
Navigating the world of chargebacks can be daunting for small businesses. However, with the right strategies in place, you can significantly reduce the likelihood of facing these costly disputes. Here’s how you can protect your business from the disruption and financial strain of chargebacks:
Put up transparent product descriptions
Ensure that all your products or services are described accurately and comprehensively on your website or sales platform. Clear images, detailed descriptions, and specifications can help set the right expectations.
Provide detailed receipts
Make sure that every transaction comes with a detailed receipt, including a breakdown of costs, contact information, and a clear return policy. This can help resolve any confusion or disputes directly with the customer before they escalate to a chargeback.
Provide prompt customer service
Offering quick and responsive customer service can help address and resolve customer issues before they consider filing a chargeback. Make it easy for customers to get in touch through multiple channels. You can even implement AI and automation tools for a more prompt service.
Use clear billing descriptors
Ensure that your business name and contact information appear clearly on customers’ statements. This can reduce the chances of a customer not recognizing a transaction and filing a chargeback.
Implement fraud prevention tools
Utilize security measures like the Address Verification Service (AVS) and require the Card Verification Value (CVV) during transactions to minimize fraudulent purchases.
Regularly update security measures
Keep your payment processing and website security up to date to protect against data breaches and unauthorized transactions. Add a secure socket layer SSL certificate to your website. SSL certificates keep information sent between someone’s browser and a website safe by scrambling it, ensuring that only the intended receiver can understand it. By using encryption, you can safeguard your customer’s data from theft and avoid potential disputes.
Train your staff
Make sure your team is knowledgeable about identifying potential fraud and understands the importance of accurate and honest customer communication.
Review transactions regularly
Keep an eye on transactions that might seem unusual or risky. High-value orders, rapid multiple purchases by a single customer, or orders from regions with high fraud rates might warrant additional verification.
Follow up on purchases
Sending a follow-up email to confirm the order and offer additional support can reinforce a positive customer experience and reduce misunderstandings.
Encourage direct resolution
Let customers know that they can and should reach out directly to resolve any issues, potentially preventing the need for them to contact their bank.
In cases where a chargeback does occur despite your efforts, you need to give a prompt and efficient response. Provide all the necessary evidence to dispute the claim. The sooner you settle the dispute, the better. Then make sure you learn from each case. Analyzing the reasons behind each chargeback helps implement strategies to prevent future incidents.
Protect your small business from chargeback disputes
Understanding chargebacks is crucial for both consumers and businesses. For consumers, they offer a layer of protection in the digital marketplace. For your business, they’re a challenge that needs careful preparation and management.
Ramp up your security measures and avoid future disputes. By following the tips in this guide and using Network Solutions’ reliable web security solutions, you can minimize the impact of chargebacks and maintain a healthy relationship with both your customers and payment processors.
