Have you ever made a purchase with your credit card and been so unhappy with the services or goods provided that you sought a refund, but the merchant refused? Enter the chargeback process.
Chargebacks refer to a process in which a customer initiates a credit card payment reversal after the merchant has charged them. The customer starts this process by opening a dispute with the credit card company (or bank). While this chargeback process is active, the funds are held in limbo until the bank decides.
If, after investigations, the bank finds the customer’s claims to be valid, they forcibly take money from the merchant’s account and return it to the customer’s account. This causes the merchant to lose revenue and profits they would have otherwise made from the sale.
Besides these losses, merchants incur numerous other costs with each chargeback a customer files.
Here are 5 Costs and Consequences of Chargebacks to Businesses
1. Lost Processing Fees
Merchants are charged a processing fee every time a customer files a chargeback. This fee usually ranges from $20-$100 per transaction, depending on the financial institution involved.
Even when a customer files a chargeback and then decides to cancel it later (like in the case where when an order arrives several days late after a customer has filed a non-delivery chargeback), the merchant is still required to pay processing fees.
This only means one thing: the more payment disputes your business receives, the higher the processing fees you’ll pay, and the more money you’ll lose in the long run.
2. Loss of Merchandise
Other than processing fees, you also stand to lose the goods you delivered or the services you rendered to your customers after they file chargebacks.
Since no U.S. law obligates them to return whatever they bought, many customers choose to keep the merchandise, leading to more losses for you. In many instances, customers want to avoid paying for the uncovered shipping fees.
3. Higher Bank Fees & Merchant Account Termination
Also, when you’re getting numerous chargeback cases every month, and your chargeback-to-transaction ratio goes beyond the standard acceptable threshold (which is around 1%), your bank may force you to obtain a high-risk merchant account.
Such an account comes with higher bank fees, which you must pay to continue doing business.
In worst cases, your bank may decide to terminate your merchant account, which means you won’t be able to accept credit card payments.
With your merchant account closed, your next course of action is to open a new account, which is also tricky considering your business’s bad reputation.
4. Loss of Customers
Another loss associated with chargebacks is the loss of customers. An honest customer who files a legitimate chargeback and loses the case will feel disappointed, which may change how they perceive your brand.
As a result, they may choose a different merchant the next time they want to make a purchase, and that’s how you’ll lose them for good.
5. Loss of Time and Resources
Lastly, the process of disputing an illegitimate chargeback can be long and time-consuming because you have to provide different documents and evidence requested by the payment provider.
This process causes you to waste valuable time and resources that you could have used to run or grow your business.
Now that you understand the impacts of chargebacks on your business, it’s a good idea also to learn what you can do to reduce the number of cases you get.
Here are 8 Strategies to Minimize and Prevent Chargebacks
1. Provide Outstanding Customer Service
This is one of the most effective ways to protect your business from chargebacks.
When you have a customer service team that’s available round the clock to help buyers with their problems, it gives them a positive shopping experience and encourages them to contact your business instead of calling their banks whenever they have an issue.
Today’s customers expect quick, helpful responses when they reach out to you with their problems. So, it’s important to answer their phone calls in three or fewer rings and promptly acknowledge their emails and social media messages. Be sure to clarify your SLAs and set the expectations appropriately in your communications and marketing.
Also, ensure that your phone, email, and social media contacts are prominently displayed on your order receipts, packaging, and website pages to make it easier for customers to contact you.
2. Communicate Better with Customers
Another simple way to reduce the number of chargebacks your business receives is by communicating better with your customers. Communicating better here means providing them with updates at all the critical stages of their order fulfillment process.
This communication includes providing them with the estimated dates of shipping and arrival, order tracking number, and delivery confirmation once their order has been successfully delivered to their preferred address.
It’s equally important to notify customers if their order delivery is delayed due to an unexpected problem. Most people will understand your situation if you tell them what’s going on clearly and early.
However, if you don’t communicate, they’ll assume the worst and file a non-delivery chargeback.
3. Provide Ongoing Training to Your Employees
Your employees, especially those handling customer service and transactions, must undergo continuous training to help your business avoid chargebacks.
For instance, you should train them how to verify customer signatures, verify customer shipping and billing addresses, recognize suspicious transactions, etc.
4. Provide Clear and Accurate Product Information to Customers
This is another key tip that can help you avoid “item not as described” chargebacks. Every product description and photo you use on your e-commerce website should reflect the real product/service you’re selling.
Using exaggerated descriptions and images to get shoppers to buy your products will only make them feel deceived and disappointed when they finally receive their order, so it’s better to keep your marketing authentic.
Be sure to answer commonly asked questions for each product, so their expectations are appropriately set.
5. Use a Business Name That Customers Can Easily Recognize
Other than using accurate product descriptions and real product images, you also need to ensure that your customers can recognize the billing descriptor appearing on their credit card statements.
To do so, you need to use a business name that they can recognize easily on all transactions. This will go a long way in reducing chargebacks resulting from unrecognized transactions on the customer’s credit card statement.
6. Make Requesting a Refund Easier for Customers
Allowing customers to return products they aren’t satisfied with and asking for a refund costs less time and resources than dealing with chargebacks.
It also helps you maintain good customer relationships, which means more purchases, sales revenue, and future profits.
So, how do you make your customers’ return and refund process easier? By:
- Providing multiple communication channels to enable them to reach you easily when they have a problem with their order.
- Having a clear return and refund policy on your website.
- Automate your return process to enable them to submit requests and track the progress online.
- Adding a Frequently Asked Questions page where customers can find ready answers to their questions.
7. Use Multiple Fraud-fighting Technologies
Combating chargebacks effectively also requires using more than one fraud-fighting technology in your business.
This strategy should include asking for Card Verification Value (CVV) codes when processing credit card payments, confirming customer shipping and billing addresses, using order validation tools, and so on.
8. Combat Friendly Fraud
Lastly, taking specific measures to prevent chargebacks from friendly fraud would be best. These include:
Screening Transactions for Fraud
Your in-house team can work alone or with a third-party fraud prevention agency to screen and block unusual transactions.
It would be best if you kept an eye on numerous small purchases from a single IP address within a short time, high-value purchases being made by a new buyer, transactions where billing and shipping addresses don’t match, and so on.
Keeping a Detailed Record of Your Transactions
You also need to keep as much transaction information as possible so you can have compelling evidence against friendly fraudsters.
These include the customer’s basic information, such as name and phone number, as well as more detailed records like transaction date and amount, customer’s delivery signature, customer’s IP address, and more.
Track Your Shipments
Lastly, you need to track all the packages you ship out to customers and provide them with a tracking number to enable them to track their orders personally.
And once the orders are delivered successfully, you should ask each person to sign before picking up their package and save a copy of the signed receipt.
Doing both of these things will help greatly discourage dishonest customers from claiming their items never arrived.
Final Thoughts on Chargebacks
It’s not possible to stop chargebacks completely, but you can significantly reduce the number of payment disputes you get by implementing these strategies.
Protecting your e-commerce business from chargebacks will save you lots of money in the long run and ensure that your business remains sustainable in the long term.