You’ve probably heard the term chargeback thrown around before, but if you don’t exactly know what it means, you’re in the right place. We’re here to break down everything you need to know about this topic and to share chargeback prevention techniques. Because chargebacks can cost your business a lot of money, it’s critical to understand what they are and how they work.
Also known as reversals, chargebacks occur when a cardholder disputes a charge. If the chargeback is approved, the issuing bank reverses the charge, reimbursing the cardholder and debiting the business’s account. Unlike a refund, a chargeback lets the customer bypass the retailer and get their money directly from the card issuer. Chargebacks are a powerful tool for cardholders. At the same time, they are a massive headache for businesses of all sizes.
There is a whole host of reasons people file chargebacks, but the most common ones include:
- Customer dissatisfaction: The customer didn’t receive the items purchased, the products were damaged, or the products were not as described
- Fraud: The cardholder didn’t authorize the transaction or charges were made on a stolen card
- Returns: Cardholder returned merchandise but the business didn’t successfully process the credit
- Processing errors: Transaction was incorrectly billed
Although chargebacks are put in place to help fight fraud, they can actually be used to perpetrate fraud as well. Commonly referred to as friendly fraud, chargeback abuse happens when legitimate charges are disputed and accounts for around 50% of chargebacks.
People commit friendly fraud for a lot of different reasons, sometimes unintentionally. For instance, people commonly fail to recognize a transaction they made in the past, a family member may have used their card without their knowledge, and so on. However, people sometimes intentionally commit friendly fraud. They may lie that they never got their product when in reality they did. Whatever the reason, friendly fraud costs businesses big bucks every year.
How chargebacks affect businesses
Chargebacks alone cost businesses between $20 and $100 per transaction. In addition to the chargeback fee, there are also many hidden costs that many businesses don’t take into consideration. These include:
- Transaction fees: Every time you process a payment, you pay a transaction fee. This fee ranges from 1.5 to 4% per transaction.
- Operational costs: A significant amount of time and labor goes into processing each and every order. It begins with ordering the inventory and ends with shipping it. These costs tend to amount to about 20% of the revenue, which is lost with chargebacks.
- Marketing costs: Considerable marketing budget is typically put towards winning each customer’s business. Every time a sale is reversed due to a chargeback, this money put towards acquiring new customers and keeping old ones is wasted.
When you add these costs up, businesses can lose more than twice the transaction amount per every chargeback. The bottom line? It’s in your interest to do whatever you can to avoid having to deal with chargebacks.
Aside from the financial hit businesses take, constant chargebacks can damage a business’s reputation. Businesses can dispute chargebacks, but it’s often a long drawn out process with no guarantee that the chargeback will be repealed. And even if the disputes are legitimate, a high volume of disputes can cause banks to shut down your business account or cause card acquirers to cancel contracts. However, there’s good news: there are a lot of ways to prevent this from ever happening in the first place.
How to prevent chargebacks
Here are eight steps you can take to keep chargebacks to a minimum.
1. Make your return and refund policy clear
Clearly communicating your return and refund policy will prevent future misunderstandings from happening which ultimately prevent chargebacks. It’s also a good idea to include your company’s Terms and Conditions in the checkout process so everything is clearly laid out on the table.
2. Ask for reviews after returns
Getting reviews after returns are made is tapping into the power of free data. It allows you insights into why people were dissatisfied with your products, and can equip you to make the changes necessary to prevent future returns and chargebacks.
3. Be transparent with shipping times and costs
Many people initiate chargebacks when they think a product they ordered got lost in the mail. You’re likely to cut back on chargebacks if you keep cardholders in the loop. We recommend including details such as the shipping carrier, confirmation and tracking numbers, and expectations about delivery time.
4. Bill once goods have been shipped, not before
When customers see transactions on their statements before goods arrive, it often causes confusion and leads to a dispute. To prevent this altogether, simply wait to charge cards until goods are in the mail.
5. Provide good customer service
This important step can prevent routine issues from turning into chargebacks. Ensure whoever runs your customer service, whether it’s you or an employee, is well trained and resolves customer complaints promptly and thoroughly. Also be sure your business contact details are easy to find on all your materials.
6. Keep online inventory up to date
If your website isn’t updated and people are able to place orders on out-of-stock items, you are in for a whole bunch of chargebacks. The easy way around this is simply ensuring your website stays up to date and accurately depicts the status of your inventory.
7. Write clear product descriptions
When customers are dissatisfied, they often resort to chargebacks. Customer dissatisfaction can be drastically reduced when accurate product descriptions are included. With accurate product descriptions and photos come expectations that are aligned with reality.
8. Ensure your company name shows up on credit card statements
One of the most common reasons people pursue chargebacks is because they don’t recognize the company name on their credit card statement. Sometimes, business names aren’t recognizable or don’t appear at all. If you ensure your company name is accurately reflected on the statement, you're bound to have less chargebacks.
Chargeback protections have your back
We know that’s a lot of information to digest. But rest assured you can take matters into your own hands to prevent chargebacks and ensure things continue running smoothly.
If you also want your bill pay process to run smoothly, Melio is a great place to start. An AP/AR tool built specifically for the needs of small businesses, with Melio you can pay how you want while your vendor still gets paid their way, rack up credit card points on payments, increase cash flow, and maintain tight control over your finances. Sign up today.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.