Gravity Payments

Chargebacks: What Every Business Owner Needs to Know

Inconvenient to manage, a red flag for fraud, and can hurt a business’s bottom line and reputation. All things you might hear when discussing the topic of chargebacks (also called payment disputes) with a business owner.  To understand a little more about chargebacks, we’ve answered some key questions we always get about chargebacks as a […]

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Inconvenient to manage, a red flag for fraud, and can hurt a business’s bottom line and reputation. All things you might hear when discussing the topic of chargebacks (also called payment disputes) with a business owner. 

To understand a little more about chargebacks, we’ve answered some key questions we always get about chargebacks as a payment processor.


What Is a Chargeback?

A chargeback occurs when a consumer disputes a credit card transaction with their bank or credit card provider. The card issuer typically refunds the amount to the cardholder while they investigate whether the dispute is legitimate and who is responsible for paying back the money.

The money is then immediately debited from the merchant’s account and held in limbo until the dispute is finalized.

If the merchant is not found responsible, the money will be credited back to the merchant’s account temporarily and the bank or cardholder will have a certain amount of time to respond. 

If the merchant is found responsible, they lose the money permanently unless they go through the small claims process to dispute the matter further. The merchant will also be charged a nominal fee by the payment processor for the dispute.

A chargeback is different from a refund, which is typically requested directly to the merchant and settled without a dispute.


Why Do Chargebacks Happen?

Originally, chargebacks were created to protect the consumer economy, creating a way to mediate disputes between buyer and seller.

Over the years and the evolution of how consumers purchase their goods and services, these disputes have morphed and become more frequent for many business owners.

Here are some common reasons a consumer may charge back a purchase:

The item purchased was not as advertised

This is when the buyer receives an item that differs from what they thought they were going to receive.

The item purchased was never delivered or arrived damaged

Damaged goods or undelivered items are common reasons for chargebacks, as it now becomes the card issuer’s responsibility to figure out who is at fault.

A subscription fee is still being charged after a request for cancellation

This can happen when the request for cancellation was not processed in time for the next subscription amount to be charged. Sometimes, consumers may also forget to cancel a subscription and attempt a chargeback to try and retroactively cancel.

The purchase was fraudulent

A common reason for customers to file a payment dispute is that they suspect fraud and don’t recognize a transaction on their credit card statement.

The amount charged to the customer differs from the sales receipt amount

When the merchant charges more than is stated on the sales receipt of the purchase, a dispute may be raised to resolve the discrepancy.

Your business name displayed on credit card charges is unrecognizable

Another common reason for chargebacks is that the merchant’s business name on a credit card charge is not recognized. This can cause customers to mistake the credit card charge for something they did not purchase.

The consumer expected a refund or credit but never received it

If a consumer requested a refund from the merchant but never received it (whether it got delayed or not granted at all), the consumer may request a chargeback instead.

The consumer was dissatisfied with the item purchased

Even if the merchant is not at fault, the customer can still decide they don’t like the item and decide to request a chargeback.

While none of these situations are fun to be in as a customer, many can be rectified by reaching out to the merchant instead of requesting a chargeback. If the merchant has a no return policy, the customer is more likely to file a chargeback.


Who Is at Risk for Chargebacks?

If your business accepts credit cards, you are at risk of chargebacks. Some factors can make you more or less prone to chargebacks, though. 

Online transactions are more likely than in-person transactions to be fraudulent, especially since the introduction of EMV (aka “chip”) cards, which greatly improves the security of in-person (aka “card-present”) transactions.

Certain industries are also more susceptible to chargebacks than others. Some, like firearm dealerships and adult services, have increased risk because the laws – and therefore financial rules – governing how they operate may vary from state to state.

Others, like the travel industry, are at risk because consumers typically pay for their goods or services well in advance of receiving them.

Retailers making medical or health claims – like dietary programs or supplements – are also at risk.


How Can You Avoid Chargebacks?

While there is no way to guarantee a customer will not initiate a dispute against you, there are several things you can do to help protect your business against chargebacks.

Have A Clear Return Policy

Clearly outlining your return policy to the consumer – by displaying it in your store (if you have one) and on your website and printing it on the customer’s receipt or invoice – will help protect you in the event a customer disputes a charge because you would not provide a return.

Make sure the consumer acknowledges the policy at the time of the transaction so they can’t deny being aware of it. Do this by having the customer sign an agreement in person or check a box acknowledging the policy online at checkout. If you print the policy on your receipt, make sure to save a signed copy for documentation.

Enhance the Security of Credit Card Transactions

Using a secure point of sale (POS) that accepts EMV cards and contactless payments can help prevent fraudulent transactions, which typically result in chargebacks.

If you accept credit cards online, require consumers to enter the three- or four-digit CVV number as well as their billing zip code to make it more difficult for stolen information to get through.

You should have customers verify that the billing and shipping addresses are the same. As the seller, it is very difficult to dispute a chargeback if you shipped merchandise to an address different from the one it is billed to.

Inspect the Product Before You Sell It

While it might slow down the transaction, taking the time to inspect or test a product in front of a consumer before you sell it will reduce the chances of a chargeback due to a defective product. This is especially worth doing if you don’t accept returns.

Look for Red Flags

While it’s not always possible to spot a risky transaction when it happens, you should pay attention to certain types of transactions or consumer behaviors considered red flags.

For example, extraordinarily high-value transactions might indicate fraud, so you should hold off on processing them until you can investigate.

Trust Your Gut

If you think a transaction might be risky, deny it until you can gather the facts. If you haven’t already done so, you can use some of the tactics mentioned above to help verify the transaction is legitimate, or you can always call your processor to see if they might be able to help.


How to Handle a Chargeback

Even if you’ve taken all the right precautions, you still might have to deal with chargebacks from time to time.

If a consumer issues a chargeback, the processor will notify you that an investigation is being conducted. Beginning from the time the dispute is initiated, you have 10 business days to respond before you automatically lose the dispute. 

Keep in mind it may take some time before you receive the notification, in which case you will have less time to respond. 

You can monitor your bank deposits against your POS reports so you notice any discrepancies indicating a chargeback has been issued. You can also check with your processor to see if they have a way for you to monitor chargeback notices electronically.

For example, Gravity offers clients an electronic dispute manager portal allowing them to review and respond to chargebacks before they receive a notice in the mail.

If the transaction turns out to be fraudulent, the merchant is typically responsible for refunding the money. For small businesses, this can be difficult – especially if it’s for a large sum of money.

That’s why it’s important to pay attention to warning signs and take as many precautions as possible to lower risk. If you have questions or want to talk about other ways to protect your business, feel free to contact us at (866) 701-4700.

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