Chargebacks can be a feature that is beneficial to consumers or one that drains profits, depending on how you look at it. They offer buyers peace of mind, and recourse in the event of fraud or disputes with vendors. Chargebacks can be a source for sellers of anxiety, as they bring a bad reputation to credit card companies and cause them to lose money.
Definition of a Chargeback
Chargebacks are reversals of charges made after a purchase. 1 The seller returns a payment to the buyer. Chargebacks tend to be most common for credit card purchases. However, they are also increasingly being used for other forms of payment.
- Card purchases
- Payments made via payment services ( Square , PayPal and others).
- Electronic bank Drafts
Chargebacks provide consumer protection. Chargebacks offer consumer protection.
Note:
Chargebacks are only to be used in the last resort. Banks and payment service providers encourage consumers to try and resolve disputes and errors without resorting to a chargeback by contacting merchants, whether it’s an online retailer, a retail store, or a provider of services.
In the event that no agreement can be reached, consumers may use buyer protection programs or similar programs to gain more leverage over merchants.
Business Consequences
Chargebacks that are too frequent can cause serious problems for businesses.
Zero Revenue
You don’t receive payment when a chargeback hits the merchant account. You may have paid fees for the credit card transaction, but you end up with no revenue on the particular transaction. You may have lost inventory or time, even though you provided services or goods.
Bad Reputation
Everyone experiences chargebacks, but it’s important to avoid a bad reputation. Payment Networks might wonder if you are taking advantage of your customers or committing fraud if there are too many chargebacks. You may lose your merchant account, or have to deal higher reserves and longer holding times for your funds.
Cost
Chargebacks will likely result in penalties for your merchant account. This is in addition to the cost of any inventory or time spent in relation to the transaction. You also lose any costs related to fulfilling the order such as shipping fees.
Reverse Charges
Why can consumers reverse charges? Chargebacks are authorized by the Truth in Lending Act or credit card processing agreements. Chargebacks on credit cards are authorized under the Truth in Lending Act and credit card processing agreements.
Chargebacks on debit card are permitted under the Electronic Funds Transfer Act. Payment processors may have their own rules for debit and credit cards that allow chargebacks. These rules are more protective for consumers than federal laws. Visa and Mastercard debit cards offer zero liability policies. Federal law limits consumer losses to $50 when fraud is reported in 60 days 3.
Chargebacks are more complex when it comes to services such as PayPal, Google Wallet and others. These services may offer “buyer protection”, similar to credit card processing networks, because buyers would be less likely to use them. 4
These services allow consumers to request a refund through their bank , or payment service. The customer initiates the chargeback, not the merchant.
The payment networks and credit card networks are the ones that seem to most care for consumers. Chargebacks are often a result of:
- The customer has been charged multiple times.
- The customer does not recognize the charges.
- The goods received were not what was ordered.
- The goods were never delivered, although the charge was valid.
- The merchant did not process a refund.
- The goods are not of satisfactory quality.
Chargeback Process
Note:
Chargebacks begin with a complaint from a customer. The consumer notifies their bank of a problem regarding a transaction on their account. To simplify things, the term “bank” could refer to the consumer’s own bank, the bank that issued the card or the card network or payment service provider.
In most cases, consumers provide a written account of the incident and any supporting evidence. funds may be frozen on the merchant account, or credited back to the customer’s account depending on the circumstances.
The bank will then conduct an investigation, contacting all intermediaries and asking for information from the merchant who made the charge. The merchant can provide proof of the validity of the charge and, if applicable that they met their end in the deal.
Prevention is worth a Pound
Chargebacks are best avoided. Businesses are “guilty unless proven innocent” in this situation, and you don’t want to find yourself in that position. How can you stay out of trouble?
Communication
Customers do not like unpleasant surprises. Be upfront about any situation that could lead to an unhappy customer. Include pictures and a detailed description of your product or service.
Inform your customers as soon as you can if something goes wrong. Respond promptly to customers who call or email with questions or concerns. Chargebacks are used by customers who feel powerless. Don’t make them feel like that.
Keep Good Records
Make sure to close the case quickly if you receive a chargeback that is not justified. You should keep all proofs of orders, including invoices and shipping documents, confirmations and signatures. It is possible that customers will forget they purchased from you. Showing them proof can help to clear up the situation quickly.
Select Your Name Display Carefully
Can consumers recognize your company when they see the transactions on their account history? Check that the name on the bank statement matches the the consumer believes the company is. If you are selling coffee mugs then “Acme Mugs” might be a good choice, but “Acme Enteprises” may result in more chargebacks. If possible, include your phone number.
Use Caution
It’s easy to think that any sale is good, but this only applies if the sale is a legalsale.
Note:
Do not make it easy for thieves. When ordering with credit cards, you should require security codes and verification of address.
Take a moment to check the order and get in touch with the buyer if it seems suspicious. Use caution when shipping to a customer who is suddenly from abroad and places a large order. Be careful if someone wants to ship goods to an address other than the billing address of their credit card.
You’re dealing with more than just thieves who use credit cards.
Note:
A “friendly fraud” is another type of chargeback. This occurs when someone makes a genuine purchase, but then reverses the charges once they receive their goods. Some people do it because they think they will get away with doing so.
Keep good records to prevent friendly fraud. This will give you enough proof to fight a chargeback. Use any security tools in your merchant account that you have to collect as much information as possible about your customers.
