CHARGEBACKS CAN BE DEVASTATING TO A MERCHANT
All businesses that accept credit or debit cards as payment for their products or services will at some point experience chargebacks. A chargeback is a credit card payment reversal made by the bank at the request of the credit card customer. Chargebacks are a means of consumer protection from merchants that sell sub-par products or services, or perpetrators of criminal fraud. Instead of contacting the merchant for a refund, the consumer requests the bank to take money from the business’s account and return it to them. Chargeback losses are higher than just the lost sale; they can cost about 2.5 times the sale price. Merchants lose money on chargebacks by paying additional fees to the bank and payment processor, lost inventory if the customer does not return the product, and the cost of the sale returned to the customer.
The most common reasons for getting a chargeback
Friendly fraud
The buyer or a member of their family authorized the purchase but later decided to file a chargeback. This chargeback could result from numerous factors including buyer’s remorse, miscommunication, the customer does not recognize the charge on their statement, or poorly defined merchant policies.
Merchant Error
A customer receives the product but files a chargeback because it did not match the description on the merchant’s website, the item was damaged, the size wasn’t right, or it was the wrong color.
Unauthorized card use (criminal fraud)
A significant number of chargebacks stem from fraud perpetrators that compromise and individual’s sensitive financial information and use that bank account or payment card information to make fraudulent purchases. When customers find their credit cards have been compromised, their first course of action is to dispute the fraudulent transactions and shut down their credit card account.
What happens after a customer files a chargeback?
Most chargebacks follow the same cycle:
- A customer files a chargeback request with their issuing bank.
- The issuing bank reviews the chargeback request to determine if the claim falls within the filing time limits, includes the necessary documentation, and the reason for the request.
- The issuing bank investigates the cardholder’s chargeback claim and determines if the request has merit. If the claim is determined valid, the funds will be removed from your bank account and credited to the cardholder’s account.
- You (the merchant) are notified of the chargeback and can either accept the chargeback or not.
- If you dispute the chargeback, the customer’s bank will review the case and rule if it is valid or not.
- If you win, the disputed amount will be returned to your account; if you lose or accept the chargeback, the customer receives the funds.
How am I notified?
Often the merchant is not notified of the customer’s dispute of the charge until the bank debits their account for the amount in dispute. However, Blue Wave’s chargeback retention service monitors chargeback requests and enable real-time merchant alerts starting from the initial dispute. We let you know about chargebacks as soon as they happen with the bank or credit card issuer.
What to do if I receive a chargeback?
- Review the information about the chargeback from your bank and processor. Each chargeback notification will come with a reason code attached. These codes tell you exactly what type of chargeback it is.
- Review your records of the transaction. If you know that you have provided the product and service as described on your site and deliver within an acceptable time frame, you may have grounds to dispute the chargeback. Contact your payment processor to discuss the transaction.
- To fight a chargeback, you have to resubmit the charge to the bank through your payment processor within the timeframe allowed by the card network. This resubmission must also include the documentary evidence that shows why the transaction should be upheld as valid. Your payment processor will charge a chargeback fee for the resubmission.
Who is liable for a chargeback?
Chargebacks are between the customer, merchant, and issuing bank. As your payment processor, we can help facilitate the dispute process, but we are never liable for chargebacks. It is your responsibility to manage your customer cases.
High-Risk Merchants receive more chargebacks then the average merchant.
Credit card processors assign merchants to one of two categories: high risk or low (average) risk, based on many factors.
Off-site payment acceptance. Businesses, such as subscription services for magazines, online pharmaceuticals or vitamins, telemarketers, calling cards, or VOIPS typically accept debit or credit card payments over the phone or via a website. Debit and credit card sales that occur without a face-to-face interaction are more prone to fraud and customer misunderstandings, which lead to higher rates of chargebacks.
- Larger transactions size. Some businesses such as travel, hotels, ticketing agents, bail bonding services, typically have a large single transaction size. Large single fees pose more significant financial risks for the credit card processor. Large transactions are more likely to be charged back by customers when they are dissatisfied or unable to take advantage of the service offered.
- High chargeback rates. Some businesses such as restaurants, adult entertainment, dating services rely on customer tastes and feelings to conduct their business. Unrealistic expectations or perceptions that the business failed to deliver what they thought was promised could lead to unhappy customers, who are more likely to initiate chargebacks.
- Inconsistent revenue cycles. Some businesses, such as business or educational seminars, usually don’t process payments daily. They process a high volume of payments before a workshop or seminar and may process a low amount of payments at the seminar. This pattern of processing is seen as irregular and raises red flags for banks and payment processors.
How can Blue Wave help merchants prevent and fight against chargebacks?
Blue Wave’s chargeback retention service monitors chargeback requests and enables real-time merchant alerts starting from the initial dispute. We let you know about chargebacks as soon as they happen with the bank or credit card issuer. This real-time notice puts more control in your hands when resolving transaction disputes and chargebacks.
How long does it take to resolve a chargeback?
The chargeback process can take as long as six weeks or six months, depending on the circumstances.
Six ways to reduce chargebacks:
- Use a name to appear on credit card statements that customers recognize. Some customers initiate a chargeback because they don’t recognize the company’s name on their credit card statement. Use your product or website name so customers will recognize the charge on their credit card statement.
- Ensure that your terms and conditions are easy to find, and customers have a way to contact you. Prominently display the terms and conditions of your offer, so customers clearly understand what they are buying. Make sure your contact information, such as a phone number or email, is clearly displayed on your website so customers are able to contact you with questions or issues.
- Don’t automatically enroll customers in recurring payment plans. Some merchants offer a free trial of a product and obtain all of the customer’s information, then charge them for the product, and automatically enroll them in a recurring purchase plan. The free trial should be offered for a specific period at no charge, and the customer should be given the option to opt-in to the recurring payment plan or choose a one-time purchase.
- Don’t make false promises or claims. If you promise a lifetime membership or guarantee, you are opening yourself up to chargebacks. A lot can happen in a lifetime. Your company may decide to discontinue a product, or service or your product may not live up to the claims you have made.
- Make customers aware of your refund process. The most effective way to prevent a chargeback from a customer dissatisfied with a product or service is to establish an easy and efficient refund process.
- Review your customers and chargebacks regularly. Internally review your customer data, customer service inquiries, and monitor your chargeback activity. Consider discontinuing accounts with inactive customers, customers who file frequent complaints, or have repeated chargebacks.
The extensive array of services Blue Wave Merchant Solutions offers allows us to provide high-risk merchant clients with stable, effective, and affordable payment processing. Shouldn’t you be working with Blue Wave Merchant Solutions?
Click on the links for more detailed information about chargeback management and claims resolution from Visa.
