Practical Steps To Avoid Chargebacks

February 23, 2017 Payments
John Rampton
By John Rampton, Founder, Due
John Rampton
By John Rampton, Founder, Due

In the payment field, a Chargeback refers to the process when a customer disputes a credit card charge and after the transaction is investigated by the credit card company, the charge is then credited back to the customer. It usually involves an additional fee levied against the merchant. Chargebacks are on the rise for merchants that accept credit cards both online and in their stores.

Recently, The Wall Street Journal referenced data from The Strawhecker Group, a payments consulting firm. They conducted research that led to the discovery that number of chargebacks at small and medium-sized retailers increased by 15 percent between Q4 2014 and Q4 2015.

While 2016 statistics are not yet available, the consulting firm estimated that the number would be even larger based on the increased number of overall online and in-person credit card transactions.

Merchants want to accept credit cards at their business to take advantage of the additional revenue they can gain, but they clearly don’t want the financial burden of chargebacks that lead to greater fees (ranging between $15 and $100 per chargeback). Lost revenue on the goods and services are also a part of those chargebacks.

When we say merchant, we generally mean the “merchant of record”. Merchant of record is a payments term that describes who is financially liable for processing customer payments. The merchant of record can be the actual merchant, the platform the merchant is using to sell their goods or services, or an entirely different entity such as a payments processor.  

Chargebacks are one of the dangers associated with being the merchant of record. In the event of a chargeback, you’re the one that the bank goes to in order to recover funds. This can happen even though you might not be the one that actually incurred the chargeback.

The key to avoiding chargebacks as a platform business is to make sure you’re not the merchant of record. There are two ways to do this:

  • Adopt a “bring your own merchant account” model, where you require everybody who processes payments on your platform to have their own merchant account. This makes them the merchant of record, but it also tends to increase onboarding and payments friction on your site.
  • Work with a third party processor like WePay that moves the money for you, allowing transactions to occur seamlessly without making you the merchant of record. Instead WePay becomes the merchant of record, recovering funds from your merchants if they incur chargebacks.

There are some effective ways to avoid chargebacks so that accepting credit cards and contending with the growing costs associated with fraud isn’t a worry.

Here are five practical and proactive steps to minimize chargebacks:

  1. Clearly identify the company in the payment description and include a contact phone number. If there isn’t a clear payment descriptor, including the merchant name and any other identifying features, it leads to suspicion on the part of the customer and credit card company. The assumption is that the company is hiding something. For example, a customer may make a lot of credit charges and just not remember the transaction with the missing payment descriptor. Companies should make it easy for the consumer to recognize their brand and be transparent so the credit card company can see the chain of events.
  2. State all terms and conditions and consider a signed contract for certain transactions. It’s a good idea for online stores and sellers to state all their terms and conditions of doing business, including for all purchases. These should be prominently posted in many places on a website, and added to any forms or receipts. The terms and conditions should include policies related to refunds, exchanges, returns, and cancellations. In certain situations, a contract or agreement form may make good business sense for avoiding chargebacks. For example, it may state that a signature on the contract or agreement authorizes the business to bill a card for a certain amount on a specific date each month. This type of information then becomes valuable if there is a dispute and can be submitted to fight the chargeback.
  3. Develop a chargeback protocol to identify suspicious activity that could be the precursor to a chargeback. Businesses should focus on having the most secure payment processing system possible that includes Address Verification, two-step authorization, credit card security code request, and other features that might trigger an alert that there is suspicious activity. After all, if a credit card is stolen and charges are put on the card and the original owner then disputes those charges, there will be a chargeback. However, if fraud is blocked from occurring in the first place, then chargebacks are eliminated.
  4. Maintain accurate records for all transactions. Businesses typically can’t keep or store all the data for every customer and each transaction, but they can maintain information like a transaction date, the amount of the transaction, and any authorization data. This information is important for fighting a chargeback because a signed receipt or contract could be the difference between having a chargeback and having the credit card company side with the business. This can be valuable if the credit card holder is trying to get out of paying for something or just simply forgot they bought something.
  5. Have a specific strategy and timeframe for delivery and transaction posting. Control the process of delivering merchandise and posting transactions to credit card accounts in order to minimize chargebacks. For example, make sure goods and services are delivered before posting the card payment and retain all delivery notifications as proof.  This prevents any customers from claiming they never received items or services. By delivering the items before the customer sees the transaction on their credit card statement, the chances of them calling the credit card company to dispute the charge is minimized. Nevertheless, timing is everything, once delivery is certain, card transactions should be processed as promptly as possible because there is less time to forget transactions and raise the possibility of a chargeback.

These steps for avoiding chargebacks do not have high costs but they are likely to save future costs in the form of fees and lost revenue not to mention minimizing the time taken to deal with disputes.

These steps should also be part of a larger strategy designed to protect a business when accepting online payments as well as in-store payments. It is good practice for any merchant, merchant of record or platform business to encourage all these practices because they encourage clear communications, good business practice and lead to a better and cleaner experience for the end customer, the merchant or seller, the platform and the whole chain of credit card payments.


About the author

John Rampton

John Rampton, Founder, Due

John Rampton is an entrepreneur, investor, online marketing guru, and startup enthusiast. He is founder of the online payments company Due. John is best known as an entrepreneur and connector. He was recently named #2 on Top 50 Online Influencers in the World by Entrepreneur Magazine and a Blogging Expert by Time. He currently advises several companies in the SF Bay area.

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