Any seller wishing to succeed in today’s environment must accept customers’ credit cards as payment for products and services. While doing so benefits both you as the retailer and the person purchasing from you, this more modern payment method does come with risks. Understanding chargebacks, one of the biggest of these perils, is important so that you can do your best to keep them to a minimum.

What is a chargeback?

A chargeback is when a consumer disputes a payment that has appeared on their credit card bill. The cardholder might dispute a charge for any number of reasons, including:

  • The purchased item is not as described or advertised.
  • The billing amount is incorrect or the customer does not recognize the merchant name.
  • The item did not arrive at the shipping address.
  • The customer believes they are a victim of identity theft.
  • So-called “friendly fraud” in which the customer intentionally makes a purchase using their own card but then later claims that they did not.

Regardless of the cause, chargebacks can be distressing, time-consuming, and costly to merchants.

What happens during a chargeback?

The series of events that occurs during a chargeback is always the same:

  • For whatever reason, the customer contacts the bank that issued their card to initiate the process.
  • The customer’s bank submits the chargeback to the acquiring bank.
  • The acquiring bank takes the disputed amount of money out of the merchant’s checking account and sends a written chargeback notice to the merchant.
  • The merchant either accepts or disputes the chargeback.
  • The acquiring bank sends a response back to the customer's bank if it deems the merchant’s dispute to be valid.
  • If the merchant’s dispute is valid, the card issuer reposts the transaction to the customer for billing. If invalid, the case is sent to Visa, Mastercard or Discover for arbitration.
  • The customer is informed of the decision and can appeal if the chargeback was deemed to be erroneous.

As you can see, the chargeback process is lengthy and multifaceted. Furthermore, it can be costly to you as a merchant. For one thing, you lose the proceeds of the sale since the customer gets to keep the product. Added to that, you must go through the cost and trouble to restock a similar item so that it is available for sale in the future. Then there’s the per-chargeback penalty fee. As you can see, it starts to become clear why sellers go to great lengths to avoid these forced refunds. To add insult to injury, the processing bank has the right to close your account if your chargebacks amount to more than one percent of your total sales transactions. If the worst should happen and your account is shut down, you risk being placed on the TMF (MATCH) blacklist, which could prevent you from getting a merchant account from another provider.

How merchant account providers protect themselves.

It is no secret that merchant account providers are in business to make a profit just as you are. In order to do so, they must ensure that the retailers with whom they deal have the best possible chance of paying what they owe on their account in full and in a timely fashion. Not surprisingly, a history of costly and time-consuming chargebacks does not make a merchant account provider happy. After all, they would be held financially responsible if you went out of business or for some other reason were unable to make good on your chargeback costs and other debts.

In order to minimize their stake, merchant account providers hire underwriters whose job it is to assess your level of risk. Certain businesses and companies in particular industries are statistically more likely to encounter a higher-than-average number of chargebacks as compared to their sales volume. These include the following:

  • Companies of questionable legality such as those in the drug paraphernalia, adult entertainment, gambling, e-cigarette, and sports betting sectors.
  • Merchants who do business internationally, especially if their headquarters are abroad and they sell to U.S. customers.
  • Businesses that sell big-ticket, high-priced items.
  • Companies in industries often perceived as subject to questionable sales practices.

If your operation falls into any of these categories, you may be required to sign up for a high-risk merchant account. Being placed in the high-risk merchant account status is not the end of the world for your business; however, it does usually mean that you will pay higher account and processing fees and be stuck in a longer contract. Most high-risk merchant account contracts last at least three years and have an automatic renewal clause and early termination fee. Be advised that as a safeguard against the possibility of a high-risk merchant going out of business, a provider may ask such a merchant set aside a rolling reserve from the proceeds of your sales to cover the costs of any chargebacks that may occur.

Keeping chargebacks to a minimum.

Even retailers with flawless business practices and gold-standard customer service experience the agony of chargebacks once in a while. They are virtually inevitable for any company that accepts credit card payments. However, there are several steps you can take to reduce the chances that your company will get on merchant account providers’ chargeback naughty list:

  • Learn how to spot red flags that point to identity theft and credit card fraud and train your staff.
  • Be sure that customers know the billing name that will appear on their credit card, particularly if it is different from your store name.
  • Post your refund and return policy prominently and clearly both in your store and on your website.
  • Address customer concerns immediately after they contact you to try to work out disputes between yourselves.
  • Keep records of all purchase dates, amounts, and customer authorization information in case you need to fight a chargeback. This diligence is especially helpful in cases of fraud or if a customer forgot that they made a legitimate purchase.

Unfortunately, chargebacks are a fact of life. Also not likely to change is the fact that merchant account providers are going to do all they can to protect themselves from being forced to incur their cost. All you can do as a business owner is to make it a point to minimize these reverse refunds whenever possible.

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