What is a Chargeback and How Can It Ruin Your Business?

We’ve all been there—checking over your monthly statement and finding a purchase was made twice. You scour your receipts, desperately trying to find evidence of the blunder. With no luck, you call your credit card company, and in minutes they confirm the error and ensure the money will be transferred back into your account within a few business days. You breathe a sigh of relief at how quickly and seamlessly the mistake was rectified. 

As a consumer, the ability to pick up the phone and call a credit card representative to dispute a charge is a wonderful safety net. However, for a business owner, it can be a nightmare. 

A chargeback is a refund made by the customer’s bank or credit card company instead of the business in which the transaction was made. In most cases, refunds are processed by the bank in situations of fraud. However, some customers who are unhappy with the service or the product they’ve purchased may dispute the charge without the business’ knowledge, leading to some potential consequences for the merchant. 

Chargeback fees. Each time a business suffers a chargeback, they not only lose the revenue they made from the sale, but they are also hit with a fee, ranging from anywhere between $20 to $50 dollars per chargeback. In most cases, the item is not returned to the merchant, so in addition to these outrageous fees, they miss out on the opportunity to resell the merchandise, taking a huge loss. 

Excessive chargebacks. If a business continues to receive chargebacks, especially exceeding VISA’s and Mastercard’s threshold (which are the same for all business types), not only will the merchant face excessive fees levied against them, but they may find themselves in an account review with their credit card processor, leading to a reserve being placed on their account, or worse—account termination.

Being terminated by a processor not only significantly disrupts business but could result in landing on the notorious Match List, an archive of businesses whose processing accounts have been terminated and which all processors constantly review to determine who they may want to terminate and/or deny new accounts. Being placed on such a list is obviously detrimental to finding a new processor and is incredibly difficult to be expunged from, in some cases even taking close to seven years for complete removal. 

Despite the difficulties of avoiding inevitable chargebacks, there are some effective tips merchants should keep in mind to avoid unnecessary fees as well as a potential business review from their current processor. 

Be Accountable and Available

Have a clear and dedicated customer service process in-place, keep your business phone number visible and up to date, and be sure that your customers can easily get in touch with you. Have your customer service inbox monitored regularly for any issues so you can respond promptly and move to rectify any customer issues directly. Also, work with your current credit card processor to confirm the merchant information provided to the cardholder (known as the “descriptor”) is correct and contains contact information so when charges appear on a customer’s credit card statement, they can easily contact you. Confirming this information is in the descriptor may result in fewer chargebacks for the company as a whole, avoiding reviews, fees, and most importantly, reducing negative customer experiences.

Secure more than one processor.  If a business is categorized as high-risk due to the type of industry or an elevated number of chargebacks, one solution to explore is having processing accounts with multiple processors. Distributing transactions across a variety of accounts will help ensure the business does not exceed stringent chargeback thresholds set by the credit card processors and provide security if a processor determines they do not like an account and want to terminate the relationship. 

Consult a chargeback mitigation company. There are a variety of programs merchants who need support in managing their chargeback volume can subscribe to. Programs can be involved prior to acceptance of a transactions (looking for fraudulent cards, etc.) or can be involved after the transaction is complete, supporting a merchant with dispute resolution and helping to fight chargebacks. These post-transaction support solutions give the business time to reach out to customers and provide a full refund before the credit card company gets involved. This alleviates high chargeback ratios and thus the chance of a business review or termination. 

All in all, chargebacks are an inevitable part of running a business when credit cards are used to accept payment, no matter how hard you work. Understanding how credit card processors work is key to avoiding any future mishaps, reviews, and unreasonable fees.