As a legitimate business in the 21st century you have to be able to accept credit cards. There are no if, ands or buts about it. It is just what consumers expect these days. Accepting credit cards can help you increase your customer base by adding convenience for them and lending a professional image to your business. Credit card sales can also increase your average ticket and ultimately your overall sales revenue. Customers are more likely to spend larger amounts at a purchase when they choose to pay with credit as opposed to cash.
Unfortunately, there is a dark side to accepting credit cards too. The necessary evil, “Chargeback” is a four letter word and the bane of existence for most merchants. The chargeback guarantee was born as a benefit offered by card issuing banks and meant to protect their cardholders from fraudulent charges. But, nowadays the system is often taken advantage of.
Consumers take advantage of the chargeback system.
There are many things that can contribute to your chargeback ratio. There are legitimate chargebacks resulting from actual fraudulent activities like identity theft, stolen credit card numbers and counterfeit cards. But sometimes they come from a consumer who is experiencing buyer’s remorse and disputing a legitimate transaction. This is often referred to as friendly fraud. When you run a business chargebacks are just part of doing business and something that you are going to have to deal with, but it is always better to be proactive than sit and wait for them to come and try to deal with it after the fact. There is no way to completely avoid chargebacks, but it is definitely worth trying.
Chargebacks cost merchants a significant amount of money, to the tune of about $4.7 billion in 2015. It doesn’t just cost money, it takes a significant amount of time as well, and time is money. It can easily take two to three months (or even up to 6 months) to resolve a chargeback issue so you can see that this can be very time consuming for a merchant. When a card issuing bank notifies a merchant that a chargeback has been filed the merchant must try to prove that this was in fact a legitimate purchase. They must submit as much supporting documents they have to prove the customer intended to make the purchase. Most of the time the merchant is only given 10 days to provide a valid copy of the transaction receipt and any other supporting documentation. This can be very time consuming and costly, however, if these timelines are not met or the merchant fails to respond at all, the chargeback will be automatically granted to the cardholder. The payment for the transaction will be deducted from the merchant’s account and all fees involved with the process will be charged to the merchant. IF you cannot prove the purchase was legitimate the bank will deduct the entire amount of the transaction from your account as well as any fees for the process, which can amount to as much as $100, and you are still out your product . If, on the other hand, it is ruled that is was indeed a legitimate purchase the bank will not deduct the amount from the merchant account, BUT, they still can charge the merchant fees for processing. So, it still ends up costing precious time and money in the end. But that’s not all. Banks take the issue of chargebacks very seriously. Most acquiring banks only allow chargebacks to amount to 1% or less of the total transactions. If a merchant account tends to have a lot of chargebacks it can lead to the business being labeled as high risk and it could possibly lead to the closing of the merchant account. Or, worse even, in extreme conditions it can lead to your business being blacklisted by the card companies by being put on the MATCH list (Member Alert to Control High Risk), which means you won’t be able to get a merchant account at all. If you’re lucky enough to already be considered a “high risk” industry such as Tobacco/Head shops, adult industry or nutraceuticals than it is essential that you do everything you can to manage your chargeback ratio. While there are chargebacks that are the result of legitimate fraud it really only amounts to about 10% of the total chargebacks filed. Most of them are actually a result of either merchant error (20-40%) and friendly fraud(60-80%). This means that if a merchant puts their mind to it they can actually greatly reduce their Chargeback ratio.
One of the best ways to lower your chargeback incidence is to prevent the chargeback before it happens.
Many chargebacks result from merchandise not living up to the customer’s expectations. Make sure that you are providing honest descriptions of your product. There is no reason to oversell. Providing clear representation of a product means that the customer knows exactly what to expect and in the end the product will likely live up to that expectation.
While we are talking about clear communication, make sure the name that the customer sees on their credit card statement is a name that they recognize for your business. Too often companies have a corporate name that differs from the company name. When people see this odd name listed on their statement they automatically assume they didn’t buy anything from this company. You’ll have much less chance of a chargeback when the buyer knows exactly what to expect.
Another common reason for chargebacks has to do with recurring services or more accurately recurrent billing. Often times, a customer will forget they signed up for a recurring billing on a product or service and see the charge on their card and call the bank. As a merchant you can try to cut down on this forgetfulness by making sure that they have to sign or initial the agreement for recurring billing at the time of the first purchase. Then follow that up with a reminder notification that reminds them that their payment is coming up and gives them ample time to cancel.
There are easy steps you can take to help prevent Card-not-present fraud in e-commerce purchases. These same steps will also help you to fight a chargeback when needed. Always make sure that your POS system or shopping cart is setup to utilize fraud prevention tools. AVS will perform address verification on each transaction making sure that the address being entered matches the address on file with the card issuing bank for the card. Require entry of the CVV code on the back of the card. This helps to prove that the purchaser had the card in their possession at time of purchase and makes it more difficult for fraudsters to guess card numbers since they have to have all pieces of information in order to complete a purchase. These types of fraud prevention tools can be budgeted into your annual expenses, giving you more control over your losses and lowering your risk of surprise when you fill in that loss column on your year-end profits.
Train your staff to recognize possible “red flags”. Red flags are typically sales that are a bit out of the ordinary. Huge orders, orders that are much larger than your common ticket, large orders that are also accompanied by quicker or overnight shipping, sales where the billing address differs from the shipping address or is being sent to a foreign country. You may think that the time and effort will cost you too much but it is worth it in the long run considering the consequences and costs involved with numerous chargebacks. It costs a bit more money but it can’t hurt to have things shipped with a signed proof of delivery. It will protect you in the long run.
Prominently list your “satisfaction guaranteed” customer return policy. Make it easy for your customers to find your contact information, and include your phone number as well as your company email address. Make sure they know that you care about their happiness and that your customer service representatives will gladly, and courteously, help them with any problem they have.
You can also implement prevention software such as Verifi’s Cardholder Dispute Resolution Network. This service notifies the merchant of any customer’s attempt to file a chargeback and allows for time for the merchant to contact the customer to try to come up with a resolution before it turns into a chargeback. Remember, if they are unhappy they will find a way to get out of paying for the product one way or another. It is better to have a returned product from a happy-to-return customer than a chargeback, or many, with your acquiring bank.
If you take the time to implement these tactics into your everyday processes you can take a big bite out of your share of those chargeback billions. Bankcard Brokers’ ETA- Certified Payment Professionals can help you create a plan to reduce your chargeback incidence and provide you with a merchant account that will have features built in to help prevent chargebacks.