Chargebacks: What They Are and How to Avoid Them

January 13, 2020
WHERK Blog: Chargebacks

Cash will always be king, but credit cards are the ace for millions of Americans across the country. In fact, more than 70% of American households have at least one general credit card. Despite the credit card’s place in today’s society, the widespread popularity of “charging it” is actually a relatively new phenomenon. Retailers in the 1970s were hesitant to accept credit cards. Consumers balked at embracing them out of fear of being on the hook for unauthorized charges. But that all changed with the Fair Credit Billing Act (FCBA) of 1974.

This amendment to the Truth in Lending Act instilled consumer confidence.  It provided protection from unfair billing practices and identity theft. FCBA was also responsible for the creation of what we now call a “chargeback.” As a small business owner, you might have heard the term before, but you might not be sure how to handle them. Read on to learn more about what a chargeback means for your business and how to avoid them.

What is a chargeback?

Before we get too deep into this, let’s start with the basics. The easiest way to describe a chargeback is by saying it’s when the bank reverses a credit card charge. Now, these reversals don’t just happen on a whim. What prompts a chargeback is when an unhappy customer asks the bank for a refund. As opposed to getting it from the business. After an investigation, the bank will remove funds from the business if it feels the customer’s complaint is valid and there was either a billing error or the merchant acted dishonestly.

What does a chargeback mean for your business?

First, it’s important that you realize the customer isn’t always right when it comes to chargebacks. Unless there has been identity theft or fraud, the proper protocol is for the customer to go to the business with their displeasure first. This gives the business owner or management the chance to discuss the situation and either issue or deny a refund. Only after that discussion takes place should a customer contact the bank about a chargeback.

But that doesn’t always happen. Unfortunately, consumers file chargebacks for the wrong reason all the time. Including wanting to avoid restocking fees, when they regret the purchase, or sometimes when they just want something for free. The good news is the merchant receives notice of the chargeback and can respond. In this period, you’re able to provide any documentation you may have that disputes the claims of the customer. Once the bank has heard both sides of the story, they then make their ruling.

Regardless of the outcome, businesses hit with chargebacks are also responsible for a fee that could soar as high as $100. That means that you could be out that dollar amount, plus the sunk cost of the lost goods or services. If a business receives excessive chargebacks, it could be subject to hefty fines—or worse, a bank could actually terminate its relationship with the merchant.  

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How to avoid chargebacks hitting your business

Ultimately, the best way to slow the onset of chargebacks is to run a quality business with goods or services that customers respect and admire. Nevertheless, there are some other operational things you can do to avoid them or help your own cause.

First and foremost, keep good records of all of your customer transactions, including the dates, amounts and authorization information. These details can come in handy when you’re disputing a chargeback. If you take customers’ credit cards at the point-of-sale, be vigilant about potential signs of fraud. Always look at the card closely, including its expiration date, and don’t be afraid to verify signatures to help prevent charges as a result of identity theft. For online sales, mismatching billing and shipping addresses can be another sign of fraud—making a call to confirm the authenticity of the order is one way to skirt a scam.

Some small businesses have also resorted to getting everything in writing in contract form so that both customers and merchants sign a document that precisely spells out services provided and at what cost. This is another valuable record to keep on file.

Lastly, you must recognize the value of good customer service. No matter how fantastic your products are, there are always going to be customers who come to you dissatisfied and seeking a refund. As a small business owner, it’s in your best interest to be open-minded to their opinion as it could help save a customer and avoid a chargeback fee.