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Friday, January 24, 2014

Chargebacks: The short and long-term ramifications

By Luke Hartley

If you have been in business for any length of time, you are probably aware of the dreaded chargeback.  For those who are yet to encounter them, let us tell you what you are in store for.

What are chargebacks?

Chargebacks are basically a credit card refund.  If a customer purchases one of your goods or services with a credit card and becomes disenchanted with the order for any reason, he or she could file a chargeback.  A chargeback forces you to return the client’s money.  In fact, the funds can be automatically withdrawn from your account without your permission or even your knowledge.

Chargebacks can be filed for a variety of reasons.  The most common include:
Burden of proof rests with the business
Unauthorized chargebacks are fraudulent
  • Poor quality products or services.  The customer was led to believe he or she would receive a certain quality and their expectations were not met.
  • The customer service before or after the sale was subpar.
  • The product was shipped but never arrived at the customer’s doorstep (or it did arrive but the customer chose to engage in “friendly fraud.”)
  • The original transaction was not authorized.  The purchase was made fraudulently.

The short-term ramifications of chargebacks

Most business owners come to despise chargebacks – and rightly so.  While the chargeback was invented as a very necessary form of customer protection, the process gives very little thought to the merchant.  The entire chargeback process has a very negative effect on the business.

The original item that was sold probably won’t be returned to the company.  Therefore, the business loses both the original income and any future earning potential for that item.

The burden of proof for every chargeback lies with the merchant.  For example, if the client files a chargeback, claiming he or she never received the item, it is the merchant’s responsibility to prove otherwise.  This burden of proof is very time consuming and requires additional effort on the part of the business owner.

Each chargeback filed comes with a fee – anywhere from $20 to $100.  And each transaction requires a separate chargeback.  These fees can quickly add up.  For example, if the company received several different orders (different transactions) from the same stolen credit card, each individual purchase will come with a separate chargeback fee.

The long-term ramifications

It would be nice if merchants could simply pay the chargeback fee and wash their hands of the situation.  Unfortunately, it isn’t that simple. 

If the merchant chooses to fight the chargeback, he or she will have additional hoops to jump through – dragging the process on even longer.  Chargebacks can leave a business in limbo for up to six months.  That is a long time for your funds to be tied up. 

Even worse, taking a chargeback all the way to arbitration could mean an additional $250 fee.  According to Wikipedia, only 21% of chargebacks lodged globally are decided in favor of the merchant.

The merchant processor keeps track of how many chargebacks are filed each month.  If the cost of chargebacks exceeds 1% of total sales, the processor could slap the business with a $5,000.  If, after an arbitrary amount of time, chargebacks aren’t brought back within a reasonable range, the processor will fine the business again – this time $10,000! 

If it is impossible for the business to reign in their chargebacks and they skyrocket above 2-3% of sales, the processor can simply terminate the account.  Once the merchant account has been ended, it will be very difficult to get another.  This means the business will either have to stop accepting credit cards as a form of payment or go out of business.

What can be done about chargebacks?

Most chargebacks result from one of two things – faulty customer service or fraud.  In order to reduce the risk of chargebacks it is essential to focus on top-notch customer service.  It is also valuable to be vigilant about detecting and preventing fraud. Visa offers a 12-point list of potential fraud indicators.  They also share valuable tips regarding tools that can help prevent fraudulent transactions.

Fraud detection and prevention is only half the battle.  You must also focus on customer service.  This article has tips for improving customer service to prevent chargebacks. As a business owner, have you encountered a chargeback?  Tell us about your experience in the comment section below.


About the author: Luke Hartley is a business consultant.  Right now, he is working with Chargebacks911. The chargeback process is difficult to understand and navigate.  Luke knows the first – and most important – step in the chargeback process is raising awareness.  

Image license:  Nick Papakyriasis, CC BY-SA-NC 2.0