If you’re a business owner, one of the largest challenges related to processing payments is a chargeback. What is a chargeback? A chargeback occurs when a cardholder disputes a transaction with their card provider. This can happen for a variety of reasons, including fraud, consumer mistakes, product quality issues, and more.
When a chargeback occurs, a business owner can lose money from the transaction and risk losing their merchant account with their payment processor. Merchant account providers view chargebacks as evidence of fraudulent business practices and consider closing accounts with high chargeback rates.
In this blog, we’re going to explore all you need to know about chargebacks. We’ll uncover why chargebacks happen and how you can protect your business. Let’s get started!
Why Do Chargebacks Happen?
Chargebacks happen for various reasons – and some are much more sinister than others! Let’s explore some of the most common reasons chargebacks occur in businesses within the United States:
- Credit Card Fraud: Unsurprisingly, many chargeback requests are legitimate. If someone’s credit card is stolen and the thief uses the card to process transactions, the cardholder will likely file a chargeback to request the stolen money. Likewise, if a business fraudulently charges a credit card, the cardholder can file a chargeback.
- Customer Fraud/Friendly Fraud: In some cases, a customer may make a purchase and then request a chargeback to recuperate their money. This is a common type of fraud that can leave a merchant out of money while the customer receives a refund and the product. While the name suggests ‘friendly fraud’ is harmless, it’s not – and it can cause severe damage to your company’s finances.
- Unclear Product Descriptions and Policies: If you don’t clearly state product descriptions, shipping policies, return policies, and other core details, a customer may have a right to request a chargeback. You need to make sure your product descriptions and policies are accurate.
- Mistakes: Sometimes, a customer can make a mistake and file a chargeback. This typically occurs when a customer doesn’t recognize your business’s name on their transaction history and believes their credit card number has been stolen.
What are the Risks Associated with Chargebacks?
Chargebacks can hurt your business in numerous ways. Let’s explore some of the risks associated with chargebacks:
- Lost Money: If someone successfully files a chargeback against you, then your business will lose the money from the transaction (even if the customer still has the product).
- Frozen Money: If a chargeback dispute happens, it may result in money being held (even if you eventually win the chargeback dispute). Delaying your ability to access the money from the transaction can impact your business.
- Lost Merchant Accounts: If you have too many chargebacks, your merchant account provider may decide to sever ties with your business. They will not want to be associated with a company that is either fraudulent or incorporates poor payment processing security measures.
- Higher Transaction Processing Rates: Lastly, if you lose your agreement with your credit card processor, you may be forced to partner with payment processing companies that specialize in ‘high risk’ clients. This can result in higher transaction fees, which will hurt your bottom line.
How to Reduce Your Business’s Chances of a Chargeback
If you want to reduce your chances of receiving a chargeback request, it’s critical to incorporate a few measures. Below, let’s explore five simple steps you can take to reduce the risks of a chargeback:
- Use Your Trading Name: Some business owners make the mistake of using a holding company name on their merchant account. If you don’t use your trading name, a customer may not recognize your charge on their statement and file a chargeback.
- Use Your Payment Processors Tools: Many payment processing companies provide security tools to their clients, such as multi-factor authentication, zip code authentication, and more. Use these tools to reduce online fraud.
- Check ID or Signature on Cards: Always check ID or signature on a card, especially if you suspect that the person is using the card fraudulently.
- Run an Honest Business: Using honest product descriptions and policies can help you reduce the chances of unhappy customers – which can lower your chargeback frequency.
- Keep Documentation: Make sure to keep records of payments, sales, and other key figures – you may need this during a chargeback dispute.
If you don’t use any of the above tips, it’s critical to start protecting your merchant account. You don’t want a lack of action to result in lost revenue or a lost merchant account.
Frankly, it can be difficult to contest a chargeback once a customer has submitted it. Credit card companies are very friendly to their users – which means that you’ll have to provide significant evidence that the chargeback was fraudulent. Make sure to save any payment documentation or communication with the customer; it may become useful.
Explore the Top POS Providers at POS USA
If you’re reading about chargebacks, there’s a good chance that you own a business. Choosing the correct POS provider can help you reduce your risk of fraudulent transactions and chargebacks. If you’re ready to explore the top POS companies in the country, check out our online review database for in-depth analyses of the best POS and payment processing providers!
