Chargebacks 101

What Every Business Owner Needs to Know

By Cassidy Roell, Sales Assistant, ChargeItPro

When I started working in merchant services, I had never heard the term “chargeback” before. I quickly learned that, if ignored, they can put even successful companies out of business.

I was interested in learning more about chargebacks, not only so I could do my job supporting our sales team as they try to serve our merchants and prospects, but also because I, too, am a small business owner. The more I learned, the more I realized just how important it is for small business owners to educate themselves or risk losing their business.

What Is a Chargeback?

A chargeback occurs when a consumer disputes a credit card transaction with their bank or credit card provider. When this happens, the card issuer typically refunds the amount to the cardholder while they investigate whether the dispute is legitimate and, if so, who is responsible for paying back the money. When this happens, the money will be immediately debited from the merchant’s account and held in limbo until the dispute is finalized. If you, the merchant, are not found responsible, the money will be credited back to your account temporarily and the bank or cardholder will have a certain amount of time to respond; if you are found responsible, you lose the money permanently unless you go through the small claims process to dispute the matter further.

There are many reasons a consumer may issue a chargeback. For example, the company I started sells intimate apparel, toys, oils, and other items, so I typically can’t accept returns for hygiene reasons. While I will occasionally issue refunds depending on the circumstances, consumers of the intimacy industry might have to get their banks involved if they have an issue with a product and don’t feel they should have to pay for it. A consumer might also issue a chargeback if they are unhappy with a service provided or if they claim a transaction is fraudulent.

Who Is at Risk for Chargebacks?

If your business accepts credit cards, then you are at risk of chargebacks, but there are certain factors that make you more or less prone. For instance, online transactions are more likely than in-person transactions to be fraudulent, especially since the introduction of EMV (aka “chip”) cards, which greatly improve 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 that make medical or health claims–like dietary or nutrition programs or supplements–are also at risk. Your company’s business model can also affect your risk of chargebacks. In order to protect yourself and your company, it’s worth doing some research into how various factors can increase your own risk.

How Can You Avoid Chargebacks?

While there are no guarantees that a customer will not initiate a dispute against you, there are things you can do to help protect your business:

    1. 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. Just be sure to document that the consumer acknowledged the policy at the time of the transaction, otherwise they can deny being aware of it. You can do this by having the customer sign an agreement in person or having online customers check a box acknowledging the policy. You can also print it on your receipt; just make sure to save the signed copies for documentation.
    2. Enhance the security of credit card transactions: If you haven’t already, updating your credit card terminals to accept EMV cards 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 because it is very difficult to dispute a chargeback if you ship merchandise to an address that is different from the one it is billed to; Fraudulent transactions are more likely to have different billing and shipping addresses even though having two different addresses is not always a sign of fraud.
    3. Inspect the product before you sell it: While it might slow down the transaction process, 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 on the grounds the product was defective. This is especially worth doing if you don’t accept returns.
    4. 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 that could be considered red flags. For instance, extraordinarily high-value transactions–those that immediately look unusual to you–might indicate a fraud, so you should hold off on processing it until you can investigate further. Recently, I encountered a merchant who almost went out of business after processing what turned out to be a fraudulent $20,000 transaction. The fact that this transaction was the same amount as the merchant’s average monthly revenue should have tipped the owner off that something was amiss.
    5. 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, the merchant, that an investigation is being conducted. Beginning from the time the dispute is initiated, you have ten business days to respond before you automatically lose the dispute. Keep in mind that it may take some time before you receive the notification, in which case you will have less time to respond. To avoid that, it’s important to monitor your bank deposits against your POS reports so you can notice any discrepancies that might indicate 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 and ChargeItPro offer clients an electronic Dispute Manager portal that allows them to review and respond to chargebacks even before they receive a notice in the mail.

It’s important to note that, if the transaction turns out to be fraudulent, the merchant is typically responsible for refunding the money. For small businesses with not a lot of extra cash in the bank, 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 stave off 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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