What is a chargeback and how can I prevent it from eating my profits?

What is a chargeback and why should I care?

Chargebacks are automatic reversals of payments made to a merchant by a cardholder that occur when a customer disputes, whether honestly or dishonestly, a charge. The burden of proof of a legitimate transaction is on the merchant in order to get that funding back. Chargebacks were introduced in the Fair Credit Billing Act of 1974 as a way to protect consumers from fraudulent or unauthorized transactions.

That’s where you come in. If a fraudulent transaction is made at your business and the customer disputes it, you don’t get to keep that money. The credit card processor withdraws it from your account and credits your customer’s account. That makes sense, but it can be damaging to a small business.

Even more damaging are consumers who have found a way to use chargebacks to commit their own form of fraud. If a customer decides she’s unhappy with a purchase but doesn’t feel like returning to the store, if she forgot about the transaction, or if she decided she’d like some extra pocket money, she can file a chargeback with the bank, and as in the case of an actual unauthorized transaction, the money is withdrawn from your business’ account.

In the industry, this is called “cyber shoplifting” or “friendly fraud,” and it’s not uncommon. According to a CBS News Report, friendly fraud has risen 41% since 2011. In 2016, real chargeback fraud combined with friendly fraud were responsible for 71% of merchant losses to fraud, and that’s enough to put some businesses out of business.

How can I prevent chargebacks?

Pay attention

Now that you’re aware of the very real, very expensive problem created by chargebacks, stay alert. If you run an ecommerce site, be on the lookout for billing and shipping discrepancies, for instance. In a brick and mortar store, do your due diligence and ask to see the cardholder’s ID. As often as possible, you should capture signatures on both receipts and invoices or contracts. The more proof you have regarding the cardholder’s participation in the process, the more protection you have.

chip reader

Use the chip

If you have the capability to insert a chip into your card reader, do it. Otherwise, chargebacks are automatic. If you’ve opted not to equip your business with chip machines yet, it may not matter how many signatures you get because you’re automatically assuming chargeback risk.

Break the codes

Customers must submit a reason for each chargeback, and these correspond with codes. If you receive a chargeback, do some research and find out what the customer’s reason was. You may be able to identify internal problem areas that you can repair to prevent future issues.

Choose your processor wisely

Some payment processing firms provide added support and protection for merchants, and most will offer advice and guidance on optimizing your business’ payment security. Be sure that the payment processor you choose offers you the resources you need to avoid chargeback fraud.

If you suddenly have a creeping sense of panic regarding your business’ vulnerability to chargebacks, that’s probably healthy. But there’s no need to let it ruin your day. Contact the experts at Precision Payment Systems to learn more about chargeback fraud and how your payment processor can help you prevent it.