Personal Finances

How to Avoid Credit Card Chargebacks

We’ve all heard the famous quote, “In business, nothing is certain but death, taxes…and chargebacks.”

Ok, I may have tweaked it, but you get the point.

If you’re a business owner and haven’t already dealt with credit card chargebacks, you undoubtedly will.

According to research, the number of chargeback cases is on the rise. As a result, online merchants are estimated to lose more than $20 billion to fraudulent claims in 2021.

Chargebacks are a frustrating cost of doing business and can be a huge problem for business owners. So, whether you’re struggling to prevent them altogether or aren’t even familiar with the term yet, I’ve got you covered.

Keep reading to find out what chargebacks are and the steps you can take to protect your business against them.

What Are Credit Card Chargebacks?

A credit card chargeback occurs when a customer files a dispute against a charge on their credit card. They do this through their bank or financial institution rather than through the business where they made the purchase.

If this dispute is successful, the bank reverses the charge, and thus a “chargeback” is born.

Chargebacks emerged in 1974 with the Fair Credit Billing Act. This federal law was designed to protect consumers from fraudulent credit card charges like services unrendered.

While chargebacks may be helpful for the customer in the case of a dishonest merchant, fraudulent disputes happen all too often. They can be detrimental for businesses when no fraud has occurred on their part.

However, chargebacks can happen for several valid reasons as well.

These reasons can include double-billing mistakes or the customer’s dissatisfaction with the product. They can also happen by mistake when the customer doesn’t recognize a charge on their bank statement.

Why Should You Avoid Credit Card Chargebacks?

Chargebacks can be a major headache for business owners. 

Resolving a chargeback is an arduous process, taking up to several months. You’ll be required to go through an appeals process to prove that you indeed rendered your goods or services.

The most common reason for avoiding credit card chargebacks is cost, as the merchant incurs fees for each dispute.

Firstly, the money the customer initially paid for your good or service will be lost, as with the product. Then, are the fees charged by the merchant services vendor to resolve the issue, which may include:

  • Chargeback fees
  • Processing fees
  • Investigation fees
  • Costs of labor
  • Redistribution fees

Even if you win a dispute, you won’t recuperate these fees as they cover the time and resources spent by the people in the investigation process.

Moreover, chargebacks could even cost you your business reputation. As a merchant, your business credit rating is based on a ratio. This ratio weighs the number of chargebacks with the number of overall transactions.

If your chargebacks exceed more than 1% of sales, you may receive a low business rating. Repercussions for this may include account suspension and even deactivation. 

Steps to Reduce Credit Card Chargebacks

The process for a customer to dispute a charge is easy, and the odds of the merchant winning are slim. Therefore, your best defense is a good offense. Make every effort to minimize chargebacks before they happen.

While no business can prevent credit card chargebacks completely, you can significantly reduce their rate of occurrence by taking the following steps.

Have a Crystal Clear Return Policy

Often the best solutions are simple.

One of the easiest ways to avoid a chargeback is to make sure your return policy is as straightforward as it can be. Customers will file chargebacks if they believe it’s the easiest option.

Your return policy should be comprehensive, covering any situation that may arise. That way, there is no room for doubt. The customer may even see that the return process is quite simple and can reach out to you first.

Processing a return is the desired outcome, as they’re easier to deal with than chargebacks, and the returned item can be resold.

Provide Excellent Customer Service

Make your customer’s satisfaction a priority.

Train your staff on best customer service practices as they are an extension of you and your brand. Since your employees will handle transactions just the same, you should educate them to avoid chargebacks too.

Communicate with the customer. Clear communication can solve many misunderstandings and can even de-escalate the situation.

Make it easy for the customer to get in touch with you to ask questions. If the customer can contact you quickly by phone or email, it’ll lessen the chance that they’ll take things a step further.

Excellent customer service is a win-win for all parties involved. Not only will it minimize the chance of a chargeback, but it also creates happy, repeat customers.

Operate With Transparency

Transparency is the key to success.

Be sure to post accurate and detailed descriptions of your products online. After all, the customer can’t see the item in person and must rely solely on these elements.

Your photos should be clear with detailed descriptions that genuinely reflect the good or service. If the image is obscure or the description inaccurate, there’s a good chance a chargeback will occur.

Nobody wants to feel like they’ve been deceived. 

Transparency should also apply to your billing and shipping process. Let the customer know how long each step of the process will take and when they should expect their item. Update them about any delays along the way.

Taking these steps will improve the reputation of your brand and build trust within your customer base.

Keep Records of All Business Transactions

As a business owner, you should keep detailed records of all your transactions to avoid fraudulent chargebacks.

Unscrupulous customers can claim they never received an item or fail to pay. If you can’t provide a transaction record, you will easily lose your case with insufficient proof.

With the number of these cases rising, keeping a record of your sales is a powerful weapon to defend yourself against fraud. You may not even realize how much money you’re losing through chargebacks.

If you’d like to find out more, there are services available that can help shed light on these figures and the importance of taking action.

Be a Smart Business Owner and Avoid Chargebacks

Credit card chargebacks are an unavoidable aspect of running a business. That’s why it’s crucial to be proactive in reducing them. Follow the steps I’ve outlined above to develop your strategy against unnecessary chargebacks.

Your business (and pocketbook) will thank you.

If you found this article helpful, there’s plenty more where that came from. Check out our blog’s business & marketing section to stay up to date on the stuff that matters most.


About Author