If there is one issue that is most mis-understood by merchants today it is probably the issue about chargebacks. This post will cover what a chargeback is and how to protect one's business from them.
What is a Chargeback?
Definition: A chargeback is the return of funds to a consumer, forcibly initiated by the consumer's issuing bank. bank account, line of credit, or credit card.
In regards to those with a merchant account, a chargeback typically results when their customer refutes a charge and is found to be right by both the issuing and acquiring bank. The funds are returned to the customer and a chargeback fee is usually assessed (average fee is about $25).
Are chargebacks bad?
The simple answer to this question is yes. Besides the obvious (the loss of a sale and subsequent penalty charge), there can be many bad results and complications from having too many chargebacks. Most merchant providers have a certain threshold (average for most is 2%) on how many chargebacks a merchant can have per month. If their chargebacks supersede this threshold there can be dire consequences.
With most merchant providers, there is usually an initial 'spot check' that takes place where the bank will investigate why these chargebacks have taken place and many will give the merchant a break on the first time they exceed this threshold as long as their business type doesn't seem too risky. However, if they feel that the business is too risky (thus resulting in this high number of chargebacks) or have exceeded this threshold one too many times, the bank can shut down the account and possibly even list the merchant as TMF (terminated merchant file) for gross negligence. This 'MATCH' list is the worst possible thing to be on as it will be seen any other time the merchant applies for a merchant account. Most banks won't approve a merchant on the TMF list.
How can I as a merchant protect myself from chargebacks?
The chargeback system was put in place by the Federal Government and card associations to protect consumers from unscrupulous merchants. But how can a merchant protect him/herself from unscrupulous consumers? This has been a serious criticism about the current system and we have the answer for you. By following these three simple steps, you as a merchant will have the proper ammo to combat and refute a chargeback claim:
- Make sure to either swipe the card (always check ID!) or use the AVS (address verification system) when keying in.
- Get a signed receipt or invoice.
- Have documented proof that the product/service was delivered.
As long as these three steps have been taken, the merchant will be able to refute a chargeback with clarity and success. It is also important to have a good working relationship with your merchant provider and make sure there is a clear understanding about what your business sells and how they do it. Dealing with companies like Paypal for example can be a nightmare when it comes to chargebacks as their customer support doesn't allow for clear communication. With Papal many companies are automatically shut down before they even have a chance at refuting a claim. This is another reason why having a proper merchant account is important for any professional business.
Here are another few ways to protect against chargebacks:
- make sure your customer support/contact info is listed clearly on your website/receipt
- if you have a website, list all contact information clearly and provide both email and/or phone support
- make sure your DBA/Descriptor matches your business
- be very clear on pricing
- have a transparent refund/exchange policy
If the customer is given a simple way to contact the merchant about a disputed charge, 95% of the time they will try that before going through the chargeback process. It is not an easy process and requires much more effort on the consumer's part than with contacting the merchant for a refund.
Conclusion
Chargebacks are not fun for the consumer or merchant alike. They are time consuming and can be quite costly for the merchant. The best way to stay away from them is through sound customer support and business practice. If you are selling a high risk product, your chances of getting chargebacks can dramatically increase and there are certain high risk merchant account providers that specialize in these type of accounts. For the most part, however, your standard merchant can protect against chargeback claims by following the three easy steps listed above.
For any other questions regarding chargebacks or CC fraud protection please feel free to contact us. Our Trinity System has advanced anti-chargeback features and includes our personalized merchant account as well. We will do everything in our power to make sure you never have to face a chargeback issue.
