Credit card chargebacks can significantly handicap small and mid-sized businesses (SMBs).
The main difference between a chargeback and a refund is that the merchant deals with a refund while the credit card issuing bank deals with a chargeback. In the case of a refund, the customer contacts the merchant, and the merchant agrees to credit the customer's account. On the other hand, chargebacks happen when the credit card company gets involved, possibly in cases of fraud or disputed charges.
It's important to remember that credit card companies are working for their customers, not for merchants. Issuing banks will favor their customers and give them the benefit of the doubt. If a merchant has a problem with the bank's decision, they have no recourse other than costly arbitration.
Therefore, it's essential that you take steps to protect your business against costly chargebacks and guard your critical cash flow. How can you do that?
The best way to deal with chargebacks is to prevent them. And the first step in prevention is understanding why chargebacks happen.
As a merchant, you would hope your customers would come to you first if they have a problem with your products or services. But because credit card companies will do all they can to retain customers, they often take over initiating refunds. Sometimes, a cardholder will dispute a legitimate charge simply because they don't recognize the transaction. They prefer to let the credit card company do the legwork of seeking a refund rather than contacting the seller themselves. Other problems could be billing errors or suspicion of fraud.
Begin with prevention
There are two types of transactions: when the customer (with their card) is present or when the transaction occurs over the phone or online.
When the card is present, verify its legitimacy by asking for a license or other identification, especially if it looks suspicious or the credit card fails to swipe correctly. EMV is a payment system based on smart payment cards (cards with chips) and the terminals that can accept them. But it's important to realize the EMV technology is not cheap for the merchant, and it only protects against fraudulent credit cards and only when the card is present.
When the credit card is not present, be sure to collect all of the appropriate data, such as the three-digit security code and billing address. If you have several or high-value disputed chargebacks each month, you might consider investing in a fraud management tool such as IP Geolocation, Verified by Visa, or Mastercard Secure Code. You can even review suspicious transactions via Google Earth to validate that the buyer who initiates the transaction is not a crook. Work closely with your processing partner to devise a toolset that comes with a Return on Investment that makes sense for your business.
If you've done all you can to prevent chargebacks, now it's time to deal with the ones that happen.
Adhere to credit card issuer's instructions and respond promptly
Credit Card issuers have a strict protocol for dealing with chargebacks. Failure to adhere to their rules will make it even more difficult for your business to continue accepting their credit cards. Slow response and inadequate documentation will undoubtedly impact the outcome of your cases. A best practice is to assign one team member to check for and deal with chargebacks each day. That way, you will avoid cases falling through the cracks and being disqualified for missing deadlines.
When it comes to chargebacks, be proactive
Rather than waiting for chargebacks to disrupt your business, we recommend taking a proactive approach.