Taking plastic is a smart move for the vast majority of merchants, and a necessity for any company operating online. Some key reasons to facilitate the use of credit cards include mitigating your business risk, selling your products online, and making your accounting processes drastically easier.
What’s more, the convenience for your customers will likely result in more business – outweighing the fees, monthly charges, and equipment costs that you have to pay (or not pay, depending on if you’re using a free credit card processing solution or not). However, allowing customers to pay with a card comes with an increased risk of chargebacks, the bane of high risk merchants in every industry.
To minimize chargebacks, you must first understand them. Read on to learn what chargebacks are, the different types, plus how you can prevent them from causing too much trouble for your business.
Table of Contents
- Different Types of Chargebacks
- Primary Examples of Credit Card Fraud
- How to Prevent Chargebacks
- Final Thoughts
1. Chargeback Definition
Simply put, a chargeback is the return of funds from a merchant to a customer who used a credit or debit card to pay for that merchant’s products or services. They usually occur as a result of disputes lodged by customers, particularly ones who feel that they’ve been subject to fraud or unsatisfactory service.
Chargebacks are handled by the “issuing bank” – the institution which approved and furnished the customer with their credit card. When the chargeback occurs, the funds from the transaction are removed from your account and credited to the customer’s card.
It’s imperative that your chargeback ratio down, because you may get penalized or fined by your processor. Even worse, they may simply decide your business isn’t worth dealing with, and cut ties with you entirely.
2. Different Types of Chargebacks
Major credit card companies such as Visa, MasterCard, Discover, and American Express have together created over 100 “reason codes” to classify the chargeback requests that they receive. For example, Visa has more than two dozen reason codes, ranging from to “Incorrect Currency” to “Not as Described or Defective Merchandise/Services.”
Although there are a variety of reasons why customers might request a chargeback, most can be placed in one of the broader categories below.
This category includes both technical problems and human error. The system might have charged the customer twice for the same transaction, or an employee may have entered an extra number to the price of the merchandise.
Issues with recurring transactions can also fall into this category. Customers may believe that they’ve already cancelled their subscription with your business, but are still being billed for your product or service.
In other cases, a chargeback may not be the fault of the merchant, but of another intermediary such as the shipping and handling company. Items that customers order may never arrive, or they may be different from how they were described at the time of purchase.
Legally, customers are not responsible for most purchases that have been made as a result of identity theft or other fraudulent activity. This means that as the other party in the transaction, your business may be on the hook for the missing money.
Naturally, both you and your customers have a vested interest in keeping fraud as low as possible. In the next section, we’ll go over the different types that you may encounter during the chargeback process.
3. Primary Examples of Credit Card Fraud
True fraud occurs when a customer becomes the victim of identity theft due to unauthorized use of their card. This can occur for several reasons:
- The card data may have been exposed during a massive data breach at a retailer, such as Home Depot or Target.
- The card may have been lost or stolen, and subsequently discovered by a malicious actor.
- The card data may have been captured using a “skimmer,” a small device that thieves place over the credit card slot in places such as gas stations and ATMs.
- The customer may have entered their card data into a malicious website or provided it to a scammer over the phone.
Regardless of the reason, true fraud can be devastating to your business. Merchants lose $190 billion every year as a result of credit card fraud.
While the name “friendly fraud” sounds like an oxymoron, it’s a very real phenomenon, responsible for 28 percent of all merchant losses to fraud.
In fact, the term “friendly fraud” is a bit misleading. It occurs when customers file a dispute without intent to defraud the merchant, but also without being in the right.
For example, a customer may request a chargeback because they don’t recognize a transaction on their credit card statement. However, the transaction isn’t actually fraudulent: it may have been a family member using the card, or the customer may have simply forgotten about a recurring charge on their account.
While true fraud occurs as a result of identity theft by a third party, chargeback fraud occurs when customers themselves are the ones attempting to defraud the merchant.
By filing a credit card chargeback request, some customers hope that they’ll be able to get their funds back while also holding onto the product or service that they’ve already received. They may also want to purge a purchase that they regret from their card history.
During chargeback fraud, customers will provide a number of illegitimate reasons for requesting a chargeback:
- The customer did not receive the product or service
- The product or service was not as described, damaged, or defective.
- The customer had already requested to cancel a recurring transaction.
4. How to Prevent Chargebacks
Most chargebacks occur when customers feel unsatisfied with the product or service that they’ve received from your business. In order to keep your clients happy and protect your business against fraud, there are a number of steps that you can take to prevent chargeback requests:
Step 1: Use a clear descriptor for transactions
If customers don’t recognize the name of the merchant, they’ll be much more likely to file a chargeback. Make sure that the transaction’s description helps customers recall the purchase.
Step 2: Be proactive in customer service
Customers who are dissatisfied with their product or service are also more likely to file a chargeback. Reach out to customers who leave bad reviews or who complain about your company on social media, and encourage them to contact you before their card company.
Step 3: Keep records
Don’t rely on your payment processor alone to help you fight fraudulent chargebacks. By keeping your own records of transaction times, dates, and amounts, you can win more disputes in the event of friendly fraud and chargeback fraud. Using receipts or payment contracts also helps you prove that the customer had authorized the transaction.
Step 4: Use the right payment processor
Not all payment processors are created equal. Some have extra features to help prevent fraud or to cover losses in the event of a chargeback. By looking for these merchant-friendly processors, you can reduce your liability.
5. Final Thoughts
Credit card chargebacks are a necessary evil to ensure that customers are defended against identity theft and unauthorized use of their card information. However, you need to make sure that your business refunds customers with legitimate complaints too. It’s a tenuous balance, but if you learn to manage it, your business will be in a good position to succeed.
Want to learn how to reduce your risk, in terms of not just chargebacks but other payment problems merchants encounter these days? Set up an appointment with our team of experts, and we’ll connect you with both credit card and chargeback solutions that will help you grow and protect your business.