Chargebacks are not friendly experiences for business owners. Sometimes, they may be your fault, while your customer may be wrong in other instances. In addition to the damages that they cause to your business’s finance, your reputation as a merchant is at stake.
Luckily, there are different strategies to minimize the fraud costs that come with these chargebacks. This article discusses important things about chargebacks and the different types to expect. Read along, as we also tell you how they can destroy your business, alongside ways to prevent this disaster.
What Are Chargebacks?
A chargeback is a process in which a person in possession of a card disputes transactions made through their credit or debit cards. Most times, this aims to recover outrageous charges or claim back refunds. An unsatisfied customer makes a chargeback dispute first by reporting to the bank.
A popular method by which consumers make such reports is their banking app and sometimes by mail. The consumers also have to provide evidence to back their claims. If the bank reviews the transaction and finds the claim to be valid, then the bank simply debits the merchant and credits the consumer.
Types
There are three main types of chargebacks: friendly fraud, merchant error, and criminal fraud.
Friendly Fraud: Sometimes, a chargeback is an error on the side of the consumer. This usually happens when a customer disputes a valid transaction, either knowingly or unknowingly. This contributes a big percentage of the total chargebacks (60% to 80%).
Merchant Error: This kind of chargeback is rare, as it contributes just a meager 10% to 20% of all chargebacks. This kind of chargeback is usually a fault of the merchant and could result from delivering a faulty or wrong product or not delivering the product at all.
Criminal Fraud: This only happens in a few cases where an impersonator or scammer uses someone else’s debit or credit card to make transactions. If any of your customers come up with this kind of chargeback, it is best that you avoid fighting back.
How Do Chargebacks Destroy Your Business?
▪ Inability to fight back subsequent fightbacks
This one thing can completely shut down your business prematurely. When you have a recurrent history of chargebacks considered excessive, this is one of the consequences. More significantly, the card network might end up suspending the merchant.
When this happens, the merchant loses the ability to dispute chargebacks that arise in the future. However, this ends when there is a significant reduction in the numbers against the merchant.
▪ Increased transaction fees
For each chargeback dispute against your business as a merchant, the card network charges your business a fee. In addition, all processing fees incur some fees as penalties. Moreover, a significant history of chargebacks eventually makes card networks categorize your business into high-risk MCC.
Unfavorable processors and acquirers usually trap merchants in the high-risk MCC (Merchant Category Code). These processors and acquirers have reputations for the relatively high fees they charge for all transactions.
▪ Restriction by card networks
A card network has a threshold for chargeback disputes against merchants. If the rate of chargebacks associated with a particular merchant stays above the threshold for too long, the network may suspend the merchant from accepting payments made by the network’s cards. Sometimes, the acquiring bank might go as far as shutting down the merchant’s account.
▪ Outrageous fines
As a merchant, when your business has too many chargeback disputes, you must enter monitoring programs. These monitoring programs subject merchants to high fines. These fines vary depending on the chargeback rate of the business. For Master and Visa Cards, fines fall within the range of $1,000 to $200,000.
Ways to Prevent Chargebacks
- Seek assistance from professionals.
- Ensure that all orders from consumers are clearly stated and understood.
- Make your refund policy clear.
- Minimize or, if possible, eliminate merchant errors.
- Ensure that you have easily accessible customer service. You would prefer a dissatisfied customer calls your customer service instead of calling the bank.
Final Words
Chargebacks are no good, and merchants must take proactive measures to curtail the crumbling effect they have on their businesses. As a merchant, you must pay attention to orders from customers and make sure you are not sending faulty products. More importantly, you can curtail the risk of these chargebacks if you have receptive customer service. That way, it becomes easier for customers to reach out to you instead of heading straight to the bank.
