Chargebacks from customers disputing credit card transactions are on the rise.
And, unfortunately, businesses often end up losing money as a result. When a customer disputes a charge, the money that had already been received is taken out of the company's merchant account and returned to the customer, with a processing fee of as much as $100 tacked on for the trouble.
The Federal Reserve Bank of Kansas City investigated the incidence of chargebacks and reported in January 2016 that 70-80% of disputes filed from 2013-2014 were decided in the consumer's favor — meaning, businesses frequently lost.
Chargebacks are costly, inconvenient, and, in many cases, preventable.
It's important to partner with your merchant services and payment solutions provider. Together, you can identify any potential weaknesses in your systems that could be opening the door to fraudulent activity.
And, while fraudulent transactions are a major cause of chargebacks, other types of chargebacks can be triggered by how you run your business and provide your services. Here are some recommendations to help minimize chargebacks in your business:
Educate Your Customers
Whether you've seen your chargeback ratio creep up over time, or you've experienced a sudden jump in disputed charges, there are steps you can take to address, reduce, and prevent future chargebacks.
Highlight your product or performance guarantee.
Online immigration service CitizenPath saw its chargebacks steadily rise, topping out at about 6% in 2015, says co-founder Russ Leimer. With an average sale of $80, chargebacks resulted in as much as $800 per month going up in smoke, plus an additional $30 processing fee per customer.
“Cardholders were going to great lengths to make up stories to avoid a charge," says Leimer, which was perplexing since the company has a liberal refund policy and likely wouldn't have fought the request, he explains. After some investigating, CitizenPath realized customers “simply didn't know the refund option was available to them," says Leimer. They initiated the credit card dispute assuming that was the only way to get their money back.
CitizenPath quickly made some changes, raising the visibility of its refund policy and shining a spotlight on its satisfaction guarantee. Disputed charges dropped by half immediately, says Leimer. In addition, promoting its “no risk" message had a positive impact on sales.
Manage consumer expectations.
Another tactic that turned the tide at CitizenPath was refining the company's message to ensure that customers understood exactly what they were paying for, and what they were not. That helped reduce the average number of monthly chargebacks to one or two.
Improve Your Internal Processes
While it's important to make sure your customers are fully informed about your products and any related guarantees, you also may want to review how you deliver your product or perform your service.
Document the entire service delivery process.
Bryan Clayton, CEO of GreenPal, serves around 600 small businesses who use the platform to connect with customers in need of landscaping services. About 1-2% of GreenPal's transactions are reported as chargebacks, “either because the consumer is dishonest or they simply forgot that they had ordered (and received) service when they opened their credit card statement weeks later," explains Clayton.
Fortunately, GreenPal has developed a proactive process for efficiently gathering evidence of the service provided to be able to challenge any chargebacks that come through.
This documentation includes:
- Digital copies of the consumer's order confirmation
- Time-stamped photos of the customer's property before and after service was rendered
- Digital copies of work-completed email confirmations
Armed with this evidence of the customer having placed an order and received service, GreenPal is able to recover more than 75% of the chargeback funds from its credit card processor.
Make sure your company name matches what appears on statements.
Too many chargebacks occur simply because the customer didn't recognize the name of the business associated with a legitimate charge on their credit card statement. Had they known that “ABC Printing" and “Paul's Printing" were one and the same company, no dispute would have been filed in the first place.
Help Avoid Fraudulent Charges
With the variety of customer payment options available — from EMV smart/chip cards to digital wallets — it's critical for you and your merchant solutions provider to develop a strategy for reducing the incidence of chargebacks due to fraud.
Because chip — or EMV (Europay, MasterCard and Visa) — cards provide increased security against fraudulent transactions, merchants need to be upgrading their equipment and systems. By accepting chip cards, businesses are released from financial liability should a charge be fraudulent. The financial institution will be liable, not the merchant.
Always Respond Promptly
Many credit card processors allow for issues to be resolved by a certain deadline. Following up quickly with the customer and the processor increases the odds of a favorable resolution and ensures you don't lose money simply because you missed a deadline.
Chargebacks can really subtract from your bottom line. “Most small business owners don't go to the trouble of protecting themselves and just eat the cost. However, in the lawn and landscape business, every penny counts," says Clayton.