What is a chargeback?
A chargeback is a customer-initiated reversal of a credit card payment—or, in other words, a forced refund. When any cardholder sees a charge on his or her statement that does not appear to be a legitimate transaction, that cardholder has the right to request and receive a reversal of the payment through his or her issuing bank.
Chargebacks were first introduced in 1968 as a way to protect consumers from fraudulent charges, but they’ve since morphed into a major source of frustration for legitimate merchants. The most irritating thing about a chargeback is that it can be filed without the merchant’s involvement and you can only challenge a chargeback via a complex and uncertain appeals process.
If you’ve ever tried to fight a chargeback, then you understand how obnoxious the rebuttal process is. That’s why it’s best to have procedures in place to prevent against chargebacks in the first place. Below are some tips we’ve found to spare you the financial losses and headaches associated with chargebacks. Keep in mind that these measures won’t prevent dishonest customers from abusing the chargeback process, but they can help you protect your customers from fraud and avoid honest mistakes by confused customers.
Rule number one, though—and this should be obvious—is don’t scam your customers. If you’re trying to pull a fast one, then you’re going to experience chargebacks. In fact, shady business tactics are the reason that chargebacks exist. If you are actively deceiving your customers or operating in such a way that they cannot approach you regarding suspicious transactions, then the solution is obvious: operate transparently and focus on your customer service. But if you have tried to correct the problem and still can’t figure out how to cut down your chargeback rates, the tips below should be helpful to you.
Be on the lookout for fraudulent transactions
There’s only so much you can do to verify a customer’s identity, and if a cardholder’s information is compromised, it can be extremely difficult for you to tell whether the buyer is legitimate or not. But that doesn’t mean you shouldn’t try. By actively preventing scammers from purchasing products at your business, you can save yourself the frustration of future chargebacks while also earning the respect and trust of your customers. Merchant services provider Gotmerchant.com offers a helpful breakdown of ways you can identify and stop unauthorized online payments. The article’s key points are as follows:
- Watch for abnormal purchases
- Excessively large quantities, orders with duplicate items, orders with unrelated big-ticket items, large orders placed on rush delivery, orders placed with free email address providers (Hotmail, Yahoo!), orders shipped to the same address but paid for with multiple credit cards, multiple orders in a short time period, or different addresses for shipping and billing
- Require CVV2 codes for online purchases
- Use AVS (Address Verification Service) to cross-check the customer’s billing address with the information on file with that customer’s issuing bank
- Avoid international shipping altogether if possible, but if you must ship to foreign countries, understand that most transactions initiated from the following nations are fraudulent:
- Slovak Republic
Clearly describe who you are and what you’re selling
If a customer doesn’t recognize your product on a credit card statement, that customer is likely to assume that it was a fraudulent purchase. You should take every precaution available to ensure that your buyers are aware of what they are purchasing and how much it costs.
If you’re a retail merchant, for instance, you should ensure that the item’s name and price are clearly visible, that all displayed prices are current, and that your store’s location will appear correctly on a credit card statement.
If you’re an online merchant, you should provide multiple images and detailed descriptions for each product, a final confirmation page before and after checkout, and, if selling used items, a fair assessment of the item’s cosmetic and functional deficiencies. Perhaps even more so than traditional merchants, you should also be sure that your company’s name will appear correctly on a credit card statement, as the customer is more likely to remember a purchase at a physical location than one through a website.
Prevent shipping errors
If you ship products to your customers, then you may be at risk for “Item Not Received” chargebacks. In e-commerce transactions, you don’t meet the purchaser in person and they don’t meet you, so it can be difficult to prove that you sent the package or that they received it. As a result, you’ll want to not only ensure that your customer receives his or her purchase, but also that you receive irrefutable documentation that the package made it to the buyer safe and sound.
The best approach is to handle as much of the shipping as you can. The more control you have over the shipping process, the less of a chance there is for a shipment to get damaged or lost. This means you’ll want to pack products carefully, label fragile items, and document these steps to let the customer know what to expect. Provide realistic dates for shipment and delivery to prevent the recipient from panicking over a slow shipment.
Once the item is out of your hands, you should still keep tabs on the shipment using delivery tracking and verification. These services are often low-cost or free additions to the usual cost of shipping and will provide reliable documentation that your shipment was sent and received. The ability to follow an order online will reassure impatient customers, and a customer’s signature can be a valuable asset for you when contesting chargebacks.
Finally, you should consider insuring expensive shipments. The cost of shipping insurance typically includes tracking and delivery confirmation, and shipping insurance can help defray costs in the event that the item is damaged or lost in transit. Insurance on a damaged item allows you to recover costs, issue a faster refund to the customer, and prevent a chargeback before it can happen.
Follow face-to-face card swiping protocols
Just because a payment is made in a face-to-face environment doesn’t mean that it’s secure. Careless checkout policies can expose you and your customers to unnecessary risks, so you should always be sure to understand the correct procedures for a secure face-to-face payment. Wells Fargo has compiled a useful list of the following point-of-sale best practices:
- Examine the physical card, making sure to check the expiration date and whether the signature on the back matches the signature on the receipt
- Swipe cards through the machine and obtain a signature whenever possible
- Do not process a transaction if the authorization is declined
- Do not repeat a declined authorization request
- Ensure that the sales receipt is legible, both in terms of the language on the receipt and the visibility of the ink
- Enter each transaction only once
- Clearly disclose your return policy on the receipt, ideally in close proximity to the line where the customer signs
- Deposit all transactions in a timely fashion
- Respond to retrieval requests as quickly as possible
Unless a customer is genuinely out to abuse the system, it’s likely that he or she will first try to contact you to settle a disputed charge. For this reason, great customer service is your first line of defense against chargebacks.
The best option is to provide a customer service phone number for customers and ensure that you or someone qualified will answer any incoming calls. Short of that, there are plenty of other great options like email, contact forms, and social media. Even providing your business’s physical address can give customers a way to approach you before filing a chargeback.
If and when a customer does contact you to dispute a charge, be receptive. You don’t have to cave to demands or correct the problem that very second, but you should promptly respond with the steps you will take to investigate the issue. If the customer feels like you’re taking the issue seriously, he or she probably won’t charge the transaction back except as a last resort.
In cases where the customer genuinely deserves to receive a refund, be sure to process the refund as quickly as possible and then follow up to ensure that the customer receives the refund. Even in cases where the cardholder has already initiated a chargeback, you may still convince him or her to retract the claim by offering a swift, full refund. However, you should be sure that the customer retracts the chargeback before you issue the refund, just to make sure that you don’t lose the sale amount through both a chargeback and a refund.
Other Useful Resources:
Do you have any other tips for avoiding chargebacks? Let us know in the comment section below: