When a credit card sale is processed on behalf of a merchant to a customer that does not guarantee that money for the transaction will remain in the merchant’s bank account․
The customer may dispute the transaction with their bank‚ and a chargeback occurs․ Chargebacks‚ which were created to protect consumers from fraud and unauthorized payments‚ can be costly and burdensome for companies affected by them․
The financial cost of chargebacks to merchants can be more than the price of the product‚ to include loss of the merchandise or service‚ the price of the product‚ payment processing fees‚ shipping costs‚ and the cost to the merchant in transaction fees per dispute․ Frequent chargebacks risk a merchant’s payment processing relationship․
Teaching businesses about the causes of chargebacks and how to avoid them can help preserve revenue and increase profitability in the long run․
What Is a Chargeback?
Chargeback is the reversal of a transaction‚ in particular where the customer goes to the bank that issued his or her credit or debit card to dispute the transaction‚ rather than asking its merchant for a standard refund․
There are many legitimate reasons for consumers to dispute a payment‚ for example‚ being billed without consent‚ not receiving the product/service, and believing it is not the same as it was described when purchasing it․
Chargebacks can also be the result of confusion on the part of a customer who may not recognize a merchant name and forget about making the purchase․ In other cases‚ the customer may choose to dispute a legitimate transaction rather than contact the merchant to request a refund․
Regardless of this‚ the merchant must spend time‚ effort, and possibly money dealing with the dispute․
How much does a chargeback really cost?
The cost of a chargeback is often more than that of the original sale․
If a hypothetical e-commerce business sells a product for $100 and has already paid for the product‚ shipping‚ advertising‚ and payment processing‚ then a successful chargeback from the customer costs the business the $100 sale‚ the cost of the product‚ and all the costs to make and sell the product․
Additionally‚ the merchant’s payment processor may charge the merchant a supplemental dispute fee․ Regardless of whether the merchant wins or loses the dispute‚ employees may spend time locating receipts‚ shipping information‚ other documentation‚ and delivering it to the processor․
Thus‚ a $100 chargeback can cost the business much more than $100 in the end․
Though they may be a small expense when a company only has a few disputes‚ the recurring chargebacks may be a meaningful profitability issue when a company processes thousands of transactions․
Why Chargebacks Happen
Fraud is a common cause of chargebacks‚ especially in e-commerce, where merchants do not have physical access to the consumer’s card and card-not-present transactions are more vulnerable to stolen payment information․
However‚ this is only part of the problem․
Customer service issues can be a factor as well․ Customers unhappy with the difficulty in receiving their refund, canceling an order‚ or reaching and speaking to someone about a wrong order may file a chargeback․
Another example is shipping disputes‚ where customers may initiate chargebacks assuming the goods were not delivered when the merchant shipped the order for the goods․
Confusing descriptions can also cause problems‚ as customers might think that a transaction was fraudulent if the name on their credit card statement is considerably different from the name they were expecting to see․
Another challenge for subscription businesses is the fact that consumers sometimes forget about subscriptions and may not understand the cancellation policy․ When charges appear on their bill‚ they may dispute the charge rather than reach out to the subscription company․
This shows that fraud detection must be complemented with communication with the customer and a consideration of the purchasing experience․
How Chargebacks Reduce Profitability
A single chargeback transaction may incur a variety of costs‚ which can considerably reduce the organization’s profit margins․
Costs associated with acquiring customers and selling goods include advertising and marketing expenses‚ purchasing their own inventory‚ employment costs‚ shipping costs‚ and payment processing fees․ These expenses are often non-recoverable in the case of a chargeback․
This is especially important to businesses that operate with low margins․
If it made a $20 profit on a $100 sale‚ a $100 chargeback does not simply leave a $20 gap in the company’s books․ It might require the company to make several other successful sales before it breaks even on the affected sale․
The issue is compounded by a rising incidence of chargebacks‚ which may lead to added fees or monitoring when a dispute rate rises․ In serious cases‚ this may interfere with a merchant’s ability to accept cards for payment․
If these businesses allow credit card transactions to make up the majority of their revenue‚ maintaining a reasonable chargeback rate should be part of the overall profitability equation․
Customer service can be a first line of defense
One of the simplest ways to prevent avoidable chargebacks is providing customers with an easy way to contact the business․
However‚ the merchant must be given the chance to address the problem prior to the customer contacting their bank․ This is more likely with merchants who provide their contact details‚ responsive customer support‚ and reasonable refund policies․
For instance‚ if a customer receives the wrong order‚ sending them a quick replacement or a refund may be more expensive in the short run‚ but it is less expensive than the chargeback‚ which can also cost the merchant additional fees and require administrative resources to respond with evidence․
Good customer service can therefore be seen as a customer retention strategy‚ and a chargeback reduction strategy․
Make Billing and Refund Policies Clear
Transparency can prevent many disputes from ever occurring․
Customers should know upfront what they are buying‚ at what price‚ when they will be charged‚ and the refund/cancellation policy; this is particularly important for organizations with subscription or recurring payments․
Product descriptions should reflect what the user is purchasing‚ shipping times should account for any delays‚ and return policies should be reasonably easy to find and understand․
Merchants can help reduce the appearance of fraud by ensuring that their descriptors (the name of the business shown on a customer’s card statement) are recognizable to their customers․
One of the best ways to keep your customers from disputing the transaction is to not let them be surprised after the purchase․
Keep Good Transaction Records
Documentation becomes extremely important in the event of a chargeback․
Businesses should document the transaction‚ including proof of shipping‚ tracking numbers‚ receipts‚ all communications with the customer, and documents related to the transaction․ Service businesses may also document completion of the service․
If a chargeback is initiated‚ the information provided by the merchant enables the business to reply․
Good records help to uncover trends․ If a particular reason is the source of complaints from several customers about being charged‚ this could indicate problems in shipping‚ customer communications‚ customer billing‚ and other steps of the purchasing process․
For merchants‚ information on disputes provides a way to identify specific business practices in need of improvement rather than treating each dispute as independent․
Use Fraud Prevention Without Hurting Good Customers
Fraud detection technology can identify potentially fraudulent sales transactions before the sale is finalized‚ but merchants need to avoid so much security friction that legitimate customers end up not buying․
On the one hand‚ the business is accepting every transaction‚ increasing the risk of fraud; on the other hand‚ an aggressive system may prevent valid customers from buying products and have too many false positives․
The goal is to find a trade-off between security and usability․
Merchants should work with their payment providers to understand what fraud prevention tools are available‚ and should monitor their payment systems for unusual transaction volume patterns․ Merchants should investigate whether a higher-than-normal chargeback and dispute rate is due to fraud or other issues rather than consider it a normal cost of doing business․
Monitor Chargebacks Over Time
Businesses need to know what their chargeback rates are and why the customers are charging back․
Moreover‚ it’s not just about how much money was lost․ Merchants should look out for patterns in why disputes are occurring․ For example‚ are certain products‚ locations‚ payment methods‚ or experiences generating more disputes?
For example‚ if disputes of non-receipt of goods increase, then this is a sign of a shipping problem․
If the dispute is that the customer does not recognize a card charge‚ then this may mean the merchant is using an unclear descriptor․ High subscription disputes mean that cancellation terms may be confusing․
This data could be utilized to create business intelligence around chargebacks․
The role of the payment processor
But more than just transferring a customer’s card payment to the merchant’s bank account‚ a merchant should know what chargeback tools‚ fraud protection capabilities‚ reporting tools‚ and customer support a payment processor can provide․
Early detection of suspicious patterns‚ as well as reporting in a clear and concise way‚ can allow merchants to resolve problems before they become a serious issue․ Reliable support can help a business understand a dispute and how to address the chargeback process․
Businesses should periodically evaluate their processor as they would any other major vendor. While processing rates are important, understanding pricing structures such as interchange plus vs tiered pricing can help merchants better evaluate their true processing costs. Fraud management, chargeback handling, pricing transparency, technology, and customer service also impact the overall value of a processor.
Final Thoughts
While a card transaction always leaves open the possibility of chargebacks‚ it does not mean merchants should ignore them․ Disputed transactions can be far more expensive than the original sale because they involve lost merchandise‚ lost processing fees‚ dispute fees‚ shipping costs‚ and employee time․
Prevention is the best approach: clear communication‚ responsive customer service‚ familiar identifiers on the bill‚ accurate descriptions‚ transactions that are well documented‚ and appropriate fraud protection could avoid many frivolous disputes․
Merchants should also regularly analyze their chargeback statistics‚ so they can identify weaknesses in the merchant’s operations that seem to be creating a pattern of disputes‚ from shipping through to customer service․
Simply put‚ chargebacks affect more than just the sale itself․ They can affect a business’s profits‚ their customers, and the payment processing business that is helping them operate․
The sooner a business understands why chargebacks are happening and does something to reduce them‚ the more likely they are to keep more of their profit and develop new growth opportunities.
Related Article:
- Best Payment Gateways for SaaS Founders in India
- How to Optimize Social Media Profiles to Attract and Retain Customers
- Hackers vs. Defenders: The Ongoing Battle for Digital Security
