Protecting your Business from Chargebacks

What are Chargebacks?

A chargeback occurs when a credit card holder files a dispute with their card issuing bank stating that they didn’t make a specific transaction that’s listed on their credit card statement. The bank then issues a refund to the cardholder, all the while the business that initially charged the card is held accountable on that transaction amount.

Chargebacks may appear similar to traditional refunds for the customer, but for the business they are completely different. Not only are the funds being forcibly taken from the business’s account but the cost for the goods will be lost as the customer has no requirement to return what was purchased. For a business owner, this can feel like theft and in many cases it is.

The process looks like this: the cardholder files a dispute by contacting the issuer who then reviews the disputed claim. If the claim is valid, which it usually is, then the card issuer refunds the cardholder for the transaction amount. The chargeback is passed onto the merchant who can attempt to prove that fraud wasn’t committed. This entire process skews in favour of the customer as only 18% of merchants win most disputes.

Is it theft from my business?

Chargebacks were created for legitimate reasons and business owners understand that fact. A thief may use a stolen credit card to make a fraudulent purchase from your store; the chargeback process exists to protect the original card holder. In this case of true fraud, the chargeback is requested and the cardholder is refunded the transaction amount and sent a new credit card with new numbers. 

But here’s where it gets murky…

Chargebacks can also result from a term called “friendly fraud.” This is where cardholders will dispute legitimate charges to their credit cards in order to avoid paying for the items in question. The cardholder may have forgotten they made the purchase or the card may have been used by a family member and the cardholder doesn’t recognize the transaction. Friendly fraud may occur for various reasons, but its intent may not be malevolent.

Unfortunately, deceitful people can take advantage of this entire process. This is called chargeback fraud and it occurs when the cardholder requests a chargeback claiming they didn’t make the purchase or receive the item that was sent out. They keep the item or services offered and want their money back from the business.

These people are stealing from merchants and it’s costing merchants a lot. According to Midigator chargebacks account for a loss of 4-5% in yearly revenue for businesses. For an ecommerce store that has an item stolen from them by the use of the chargeback process it can cost the merchant 2x the transactional value!

The true costs of chargebacks

All merchants will eventually experience a chargeback at some point and for some it can be quite a threat to their livelihoods if the chargebacks occur on a regular basis.

Each time a chargeback occurs the merchant’s account gets charged a chargeback fee which can range from $20 – $100. Not only that but if the customer later cancels the chargeback, the merchant will still have to pay that fee.

For many accounts if the monthly chargeback rates exceed a certain amount, then the merchant’s account can be subject to fines. It gets worse if the account continuously receives chargebacks as the acquiring bank may simply terminate the merchant’s account.

A terminated merchant account may ultimately lead to the business being placed on a MATCH List. Simply put the MATCH list is a database of businesses whose credit card processing abilities have been cut off. Acquiring banks use the list to screen merchant applicants for risk.

It continues to get worse if the merchant continues to receive regular chargebacks as the acquiring bank will label the merchant as being high-risk and burden the account with rolling reserves. Essentially, a rolling reserve is a type of cash reserve that is taken out of the merchant’s sales for a predetermined amount of time. It gets put in place to protect the bank from the high-risk merchant.

Along with rolling reserves this new merchant account comes with much higher fees for processing card payments. These fees can potentially be 2-5x higher. Some industries are predetermined as being high-risk; if you’re in tobacco, cannabis, travel or auto sales then you should expect your account to be subject to these higher fees.

Tips for winning chargeback disputes

First step is to understand the reason code for the chargeback. Each credit card company issues a code related to the nature of the chargeback. Do your research for the specific code that’s given as it’ll help guide your case against the dispute.

The key to building a good case is to have good record keeping prior to any of this occurring. Generally small businesses struggle with keeping organized records and it’s a reason for the poor win rate. For the business to win the case, they will need to submit evidence that proves the chargeback is illegitimate. Invoices, receipts, shipping & delivery information should all be kept organized as not to delay your case submission.

It’s also a good idea to reference a rebuttal letter template to help structure and organize the information you are submitting. You should include:

-Identifying information that matches your case such as reference numbers, case numbers, or dispute IDs. Along with your business information.

-Information regarding the specific dispute such as the chargeback reason code, any customer information you have on hand, and a description of the product or service in question.

-Show your evidence and explain your side of the argument.

Chargeback fraud can occur at any moment and as a merchant you have to be proactive about documentation and providing great communication to your clients regarding your products and services. At the end of the day you want your customers to feel secure with your business.

If you have any question, please feel free to send us a message. We love reading them!

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