A Lesson For Business Owners: Understanding Chargebacks

Once you’ve been around the block of the business world, you’ll eventually come up against something quite unpleasant: the dreaded chargeback.

If you haven’t already experienced one, let us tell you what is in store.  If a chargeback has already come knocking, join us in a bit of well-deserved grumbling.

Tell Me What a Chargeback Is

A chargeback is basically a credit refund.  The bank has the power to take funds from your account and refund them to the disgruntled cardholder.

When credit cards immerged on the scene years and years ago, people were uncertain about the process.  To their limited thinking, a credit card transaction was incredibly risky.  The powers that be got their heads together and came up with the chargeback; a way for cardholders to dispute a charge.

The chargeback was designed to give cardholders an escape route and encourage some trust in the concept.  If something went wrong, cardholders could get their hard earned money back.

Since then, chargebacks have morphed from the honest backup strategy to the lazy man’s go-to plan.  Now, more and more customers are simply filing a chargeback instead of venturing down traditional roads like product returns or exchanges.  Plus, the increase of fraud – both real and “friendly” – has driven the prevalence of chargebacks way up.

Why Do Customers File Chargebacks?

There are a variety of reasons why customers file chargebacks.  Some of the most popular are:

  • The product never arrived.  It got lost in space.
  • The product arrived, but it isnt what the customer wanted or expected. 
  • Customer service was faulty and attempts at a return failed.
  • The credit card was (accidentally or intentionally) charged twice.
  • A recurring subscription wasnt terminated in a timely fashion.
  • The customer decided to engage in a bit of friendly fraud and claim the product was missing, damaged or otherwise unsatisfactory when in reality, it was just fine.
  • Real fraud happened.  The credit card number was stolen or used without permission.

The Effect Chargebacks Have on the Bottom Line

When a product is returned, it is pretty terrible.  The business owner loses out on a potential sale.  However, a chargeback is even worse.

The business probably won’t receive the original product in question.  That means the original profit is forfeited and any future profit is nonexistent.

But more importantly, there are big financial blows and long-term ramifications.  For each chargeback filed, the business can expect to pay a fee between $25 and $75.

If there are too many chargebacks in a given month, the credit card processor will get angry about the inconvenience and lash out at the business owner.  If chargebacks soar beyond a whopping one percent of total sales, the merchant will have to pay a fine of $5,000.  If, in the next two months, the amount of chargebacks doesn’t decrease, the business will be hit again; this time, with a $10,000 fee.

It gets worse.  If chargebacks go beyond 2-3% of total sales, the processor can simply terminate the merchant account.  Guess what happens next.  You got it.  No more business.  It is nearly impossible to get another merchant account.  And it definitely is impossible to function without the ability to process credit card charges.

What Do Business Owners Need to Do?

There are three main things a business owner needs to do regarding chargebacks.

1. Prevent Fraud

Fraud is the biggest instigator of chargebacks.  If you can detect fraudulent transactions and stop them from going through, you can make a huge dent in the number of chargebacks filed.  There are several different ways to detect and prevent fraud.

Check with the credit card companies.  They have several different tools that will help you to block criminals and their harmful activity.  Also, work with the credit card processor.  There are things they can do to make your life easier too.

2. Improve Customer Service

The second leading cause of chargebacks is faulty customer service.  When it comes to customer service, the most important thing to do is make sure you only provide the best products and services.  Customers won’t fight you if they are happy with their purchase.

Take a good look at your policies.  Is everything easy to understand?  Can customers find the information?  What about your contact information.  Can customers get ahold of you if they need to?

Provide excellent customer service, meet the needs of your shoppers, help them when they are dissatisfied and you can hang on to your hard earned money.

3. Get Some Help

If chargebacks start getting out of hand, you need to get some help.  Over half of all online companies go out of business because of chargebacks and the fees associate with them.  Don’t be like all the others.  Grab a life preserver before the ship sinks.

There are companies that fight chargebacks on behalf of the business owner.  They can help you detect fraud, improve customer service, and manage chargebacks efficiently.  A little help goes a long ways; you’ll be surprised at how much you can save.

If you are just joining the business world, you probably have an unpleasant experience ahead of you.  If you’re an old veteran of the business world, you totally understand what these new startups are in for.  New or old, experienced or novice, we are all in the same boat together.  Chargebacks might be a burden, but they aren’t impossible to deal with.

Ted Lamphere is a freelance writer with years of business experience.  He is working with a client to educate business owners about the possible ways to increase profits and prevent chargeback fraud.  Chargebacks911 can help businesses manage chargebacks, keep customers happy and maintain a healthy business.  Contact him on Google+ or Twitter if you want to learn more.

Categorized as Business

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