A chargeback occurs when one of your customers disputes your company’s charge to their card with their credit card company.
Customers sometimes initiate chargebacks when they are dissatisfied with a product or service and don’t feel you’ve handled the situation fairly.
Other times chargebacks are the result of a billing mistake on the merchant’s end, a customer not being able to identify a purchase on their monthly statement, or an attempt to commit fraud.
In any case, chargebacks can cost you big money in reversed sales and chargeback fees from the credit card processor.
If you experience too many chargebacks, you could even face penalties, fines, and a termination of the credit card processing relationship.
To prevent chargebacks from damaging your bottom line and your ability to accept credit cards, it’s important to know about chargeback laws and rules, ecommerce chargebacks, fraud prevention, and chargeback protection.
Credit Card Chargeback Laws and Rules
Consumers have the right to dispute charges with their card issuer under the Fair Credit Billing Act, a federal consumer protection law.
If a customer files a chargeback request, the burden will be on you to prove that the charge is legitimate and should not be refunded.
Credit card chargeback rules vary by card network (e.g., Visa, MasterCard, American Express) and by reason code (the reason for the dispute).
The credit card chargeback time limit for consumers depends on the chargeback reason and card network and ranges from 60 to 120 days in most cases.
Once a consumer requests a chargeback, merchants usually have 45 days to file for representment – the process of fighting a chargeback.
It’s worth fighting a chargeback to force the bank to more carefully analyze the customer’s chargeback request and ensure that the customer has followed the proper procedures, like contacting the merchant first for dispute resolution–
Many customers skip this crucial step!
Ecommerce chargebacks can occur when a customer says they didn’t receive their order or when they believe an item was misrepresented online.
They can also occur when dishonest customers commit “friendly fraud” and claim one of these problems when they did in fact receive the merchandise.
Chargeback.com, a company that helps businesses prevent and manage chargebacks, found that businesses would likely experience $6.7 billion in ecommerce fraud losses in 2016.
And according to the LexisNexis 2016 True Cost of Fraud study, 28% of ecommerce fraud is chargeback fraud– Nearly $1.9 billion in 2016 alone.
Fraud Prevention Tips
Besides so-called “friendly fraud,” fraudulent chargebacks can occur when a customer experiences identity theft.
Criminals may use stolen cards, fake cards containing stolen card information, or illegitimate accounts in a victim’s name in person or online.
When the legitimate cardholder reports unauthorized transactions to the card issuer, the cardholder doesn’t have to pay them.
Your company might get stuck absorbing the losses, but you can limit your liability by carefully following your payment processor’s rules for accepting credit card payments.
For card present transactions:
- Avoid keyed-in payments and use the dip or swipe method to process cards, depending on whether they have a chip or a magnetic stripe.
- Refuse to accept an expired card or a card that appears to have been altered.
- Do not rerun cards that are declined the first time.
- Call the credit card authorization center if your payment terminal instructs you to after running the card, or if the transaction seems suspicious.
- For card-not-present transactions:
- Ask for the card’s three-digit validation code on every order along with the name that appears on the credit card and the cardholder’s billing address and phone number.
- Require a signature upon delivery for online purchases above a certain dollar threshold.
- Use an address verification service for US addresses.
- Be wary of orders for a large number of the same item, especially expensive items.
Additional Chargeback Prevention Tips
- When a customer completes a purchase, encourage them to contact you first if they are dissatisfied in any way.
- Publish your return and refund policy on the customer’s receipt.
- Make sure that the way your business’s name shows up on the customer’s credit card bill matches the name the customer knows you by to reduce chargebacks due to unrecognized billing statement items.
- Keep complete records of all your sales, including tracking numbers for shipped merchandise and copies of all electronic communications with customers, in case you need to prove that a chargeback is illegitimate.
- Keep track of which customers have submitted chargebacks and be cautious about doing further business with them.
Chargeback Protection for Merchants
Chargeback insurance offers some coverage, but it does not eliminate chargeback fees, and does not prevent your company from exceeding a merchant payment processor’s allowed chargeback ratio.
A chargeback prevention service like one of these may be a better option for your business:
Fraud detection service Signifyd Guaranteed Payments combines machine learning with human intelligence to help businesses process more orders that might otherwise be falsely flagged as fraudulent.
Plus, it even reimburses businesses for chargebacks.
Riskified offers a service similar to Signifyd’s that focuses on protecting online retail businesses against card-not-present fraud and chargebacks.
Clearsale is another company that can help to limit your chargeback losses by flagging suspiscious transactions in real time.
Verifi, a chargeback prevention and dispute management company, can help business owners reduce chargebacks through its Cardholder Dispute Resolution Network.
This services helps to prevent both fraudulent and nonfraudulent chargebacks by up to 40% by redirecting customer disputes from the card issuer to you, the merchant.
If you process payments using Square, they will cover chargebacks of up to $250 total per month.
The Bottom Line
While the chargeback process offers consumers protection against problematic credit card transactions, merchants have rights when it comes to credit card chargebacks, too.
These rights depend on the card network’s chargeback rules and the reason for the chargeback.
Verifi states that for every $100 in chargebacks, the true cost to your business is $308 in wasted time, fees, penalties, and lost goods or services.
Given these costs, the best solution to the threat of chargebacks is to prevent them from happening in the first place.
If taking steps on your own isn’t sufficiently limiting your chargebacks, you should sign up with a chargeback prevention service to protect your bottom line.
You don’t want to have to take out a business loan just to stay afloat because of chargeback losses when you could use those funds to grow your business.