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What Is a Chargeback and How Can You Protect Your Business

How do chargebacks hurt your business?

When running a business, chargebacks are unfortunately unavoidable. In 2018, more than three out of one hundred transactions were considered to be incorrect and resulted in a chargeback in which the merchant could lose the revenue from those transactions. While this may not seem like a high number, the costs that are associated with chargebacks are higher than just revenue losses. Fees, loss of products, increased processing costs, and even merchant account termination are all potential consequences of chargebacks and can have a significant impact on your business’s finances. 

So, how can you protect your business from chargeback consequences? By understanding what chargebacks are, the chargeback process, and how to dispute transactions effectively, you can take control of any chargeback situation, to ensure your business stays safe.

What is a Chargeback?

A chargeback is a transaction reversal which is initiated by the customer after they were charged by a merchant. In comparison to a refund, a chargeback happens when the customer contacts their bank to file a dispute instead of contacting the merchant. The bank then forcibly removes the funds from the merchant’s account, thereby reversing the payment.

Why do customers file chargebacks?

The reasons and motivations that lead to a customer filing a chargeback can be put into three categories: merchant error, friendly fraud, and criminal fraud. 

Merchant error lead to 20% of chargeback cases. This can be because the merchant e.g. didn’t stop a recurring transaction even though the customer requested it. The merchant could’ve also entered the wrong shipping address or charged the customer too much. In these cases, a chargeback is not entirely necessary and it would often be easier if the customer reached out directly to your business. 

Merchant error aside, there are fraudulent reasons that lead to chargebacks. More than 70% of chargebacks are caused by “friendly” fraud. This type of chargeback describes a situation where a customer knowingly makes a purchase and then disputes the credit card charge, claiming an item was defective or never delivered, or that the charge was unauthorized. The customer might also file a chargeback because they simply forgot to return the product within the return limit but still want a refund. The friendly fraudster often feels like they’re taking the “easy way out”  by calling the bank instead of the merchant,.

The third reason for chargebacks is criminal fraud. This is when a fraudster steals a person’s credit card information to make purchases. The person then files for a chargeback after realizing.

What costs and consequences do merchants face with chargebacks?

The main players in the chargeback story have unequal levels of power: The merchant has everything to lose, the cardholder has everything to gain and banks and card networks are happiest when these inconveniences go away with as little trouble as possible. The bottom line is, many consumers are filing illegitimate chargebacks and banks don’t have the adequate resources to deal with all the false claims.

Unfortunately, as a merchant, you suffer the most when it comes to chargebacks. The direct result of a chargeback is financial loss. From a financial perspective, you not only lose the money, but also the product or service that you sold to the customer as they won’t return it. Chargeback disputes all take up a considerable amount of time as you need to provide documents and evidence to the payment provider. 

 From a financial perspective, you not only lose the money, but also the product or service that you sold to the customer as they won’t return it. Financial losses aside, chargebacks also have a negative impact on your bank and card network, and this can damage your credit reputation. Chargebacks can lead to you having to pay higher bank fees and in severe cases, card networks and credit card payment facilitators such as SumUp can revoke your ability to process cards.

How to shield your business from chargebacks

While you can’t make chargebacks disappear altogether, you can reduce your risk of chargebacks with a few tried-and-tested methods:

  • Use an easily recognizable business name on all transactions. Customers often suspect fraud when they don’t know who the transaction on their statement is from.

  • Make it easy for customers to request a refund. Refunds aren’t the goal, but they cost much less time, stress and money than chargebacks, and can help you maintain a positive relationship with your customers–meaning more possibilities for future revenue. You can do this by:

    • Having a clear refund policy in-store and online

    • Providing a contact number on billing statements

  • Provide high-quality customer service at all times. Excellent communication and a positive buying experience make the customer more likely to reach out to you in the event of an issue, instead of going to their bank.

  • You’ll also want to follow payment processing best practices. For example, EMV cards should always be dipped, not swiped. Magstripes are much easier to duplicate than credit card chips. 

To stop “friendly” fraudsters in their tracks, here are a few other important tips:

  • Get as much information from the customer as possible. When processing a credit card, make sure to get the Card Verification Value (CVV) number from the customer, and check that it matches the card you’re given. Record billing information and addresses—anything that can help prove you had a valid and authorized interaction.

  • Getting a CVV number is even more important for over-the-phone and card-not-present transactions, which have a significantly higher risk for fraud.

  • Track your shipments, and save copies of signed receipts for all delivered goods. If you do receive a friendly fraud complaint, this can help prove that the fraudster did, in fact, receive their goods.

How SumUp protects merchants from chargebacks

SumUp stands with his merchants throughout the chargeback process. While we always fight on the merchant’s behalf, the merchant will need to face the costs caused by the chargeback. In order to increase the chances of winning a chargeback dispute, it’s important that the merchant is cooperative and provides the information and documents that SumUp requests.

If you win the dispute, SumUp will reimburse the funds to your SumUp account, excluding a $10 chargeback fee from our payments provider (this fee is not from SumUp, but is required by our provider partners). Reimbursement occur within 60 days. If the dispute is lost, the chargeback will be applied to your bank account, with the added payment provider fee. 

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Anna Marie Allgaier