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Chargeback Protection Guide for a Small Business

As an online merchant, you should be well acquainted with chargebacks already. They are as inevitable and devastating as a Thanos snap, but can also sometimes be reversed. However, your best bet would be to try to prevent chargebacks as much as possible, as only 20% (or less) of chargebacks are resolved in the merchant’s favor. Well, it’s still better than the one out of 14 million chances the Avengers had — yet the situation is pretty complicated as is.

How to avoid chargebacks then? While there is no silver bullet, there are various chargeback solutions that help you minimize the number of chargebacks you face and the effort you need to devote to dealing with them. Read on to receive an end-to-end chargeback protection guide for a small business (with 12 actionable tips on how to mitigate chargeback risks).

Chargeback meaning

By definition, a chargeback is a reversal of funds transaction from a customer to a merchant. It is important to distinguish a chargeback from a refund or return. With the latter, the customer contacts the merchant directly and returns the merchandise of subpar quality (if that was the reason for dispute). With the former, the customer contacts his credit/debit card issuing bank to forcibly retrieve the funds from the merchant’s account.

Keep in mind that chargeback regulations are weighed heavily in customer’s favor, as they were instated as the means of protecting online customers from unscrupulous merchants offering sub-par products or services. Unfortunately, this does not account for the rising amount of chargeback fraud, when dishonest customers claim they received subpar merchandise (or did not receive it at all), and their banks solve the chargeback cases in their favor, punishing an honest merchant. This is called a friendly fraud, which currently accounts for more than 50% of all chargeback cases.

The biggest problem here is not the lump sum of chargebacks a merchant has to pay (though it might be significant), but the associated costs and risks. Every payment provider exacts a fee on every chargeback case, be it for $10 or for $50 grand ($10-$25 depending on a provider). This fee is usually not refunded even if a merchant wins the chargeback case, taking a toll on the merchant’s account. 

What is even more damaging, when the percentage of chargebacks (fraudulent or legitimate) exceeds a certain threshold (usually, 1% of all transactions), the payment provider places a merchant into the high-risk category, meaning you have to pay much larger fees on all your operations. 

Every chargeback has a reason code, which classifies its reason according to guidelines from Visa, Mastercard, AmEx, and every other card payment processor.

Chargeback causes and how to minimize them

All the chargeback cases fall under three broad categories:

  1. Honest human error or computer glitch
  2. Customer frustration
  3. Fraud 

We briefly cover every case below.

Human or computer error

The most benevolent reason for customer chargeback, this error can occur at any point of the customer journey. Incorrectly written down card number heard over the phone, tiredness of a sleepy clerk, a computer glitch on any of the steps of the journey — and you might charge the wrong card, for the wrong amount or charge it several times. Popular reasons include:

  • Overdue card expiration date
  • Duplicate billing by accident
  • The wrong amount billed
  • A refund approved but not performed
  • Banking error

How to prevent: Double-checking the spelling of every number or name сustomers do not enter themselves, checking the success of every refund, monitoring and logging all transactions.

Customer frustration

Let’s be real, sometimes manufacturers provide faulty goods, or items break during transportation, or a merchant knowingly sells sub-par quality merchandise. The customers have full right to request a perfectly legitimate chargeback in the following cases:

  • Items or services delivered are of bad quality
  • Items not delivered on time
  • Items not delivered at all
  • The customer tried to return an item unsuccessfully
  • The customer did not even authorize the transaction

How to prevent: Have clear and up-to-date refund and return policies in place, and follow them. Request confirmation on all deliveries and have two-factor verification for transactions. Yes, it adds an extra step, but it is well worth the effort, as it saves you a mountain of effort and nerves in the long run.

Fraud

Fraudulent chargebacks are a bad experience for merchants and customers alike. They can be divided into three major sections:

  • Customer chargeback —  when a customer claims he/she did not order an item, while actually doing so
  • Third-party chargeback — when a credit/debit card was stolen or its details were obtained illegitimately
  • Merchant chargeback — when a merchant initiates a transaction using the customer’s credit card details on file without actually having an order from a customer.

How to prevent: use an anti-fraud solution like Covery that evaluates every transaction, flags the suspicious ones, and helps reduce the numbers of chargeback fraud cases by at least 80%. Doing so provides chargeback insurance of sorts, as it simplifies the chargeback fighting process and minimizes the expenses.

Chargeback fighting process

Let’s briefly describe the chargeback procedure and what action you might take to resolve the dispute in your favor.

  1. Filing a request. A customer files a request to the card-issuing bank to initiate a chargeback dispute
  2. Assuming the reason. A bank always assumes the customer tells the truth until proven otherwise, reviews the information provided, and issues a reason code for the transaction
  3. Investigation. The issuing bank investigates all the circumstances of the disputed transaction. If the bank decides the claims are valid, it charges the merchant account for the sum and credits the customer’s account. Should the bank decide the claims to be not valid — it voids the dispute and takes no further action. However, this decision is not final and can be revoked.
  4. Processor assessment. The merchant’s payment processor assesses the claim. If it thinks the claim to be valid, it appends the chargeback fee and forwards the claim to the merchant. In another case, it voids the chargeback completely.
  5. Merchant review. Only now the merchant is informed of the chargeback dispute and has a chance to provide the evidence supporting his/her position. Please note you have a limited time window to do so, so keeping all the details of every transaction easily accessible is quite handy.
  6. Re-evaluation of the claim. The processor appends the information received from the merchant to the chargeback dispute details and forwards them back to the issuer bank.
  7. Final review. The issuer bank performs the final review of the chargeback claim, based on the information provided by the merchant and the payment processor. Should it decide to support the merchant, the funds are taken from the card holder’s account and credited to the merchant. Please note that the processor’s fee is non-refundable.

How to avoid chargebacks from becoming a huge issue then?

12 tips to avoid chargebacks

If you cannot prevent chargebacks in their entirety, maybe you can avoid their complications? Actually, you can do it, and here are 12 common-sense steps to doing so:

  1. Transparent communication with your customers
  2. Clear descriptions of every product or service
  3. Heroic customer service that walks an extra mile to solve every issue
  4. Set clear refund and return policies
  5. Double-check the expiration date of all credit/debit cards
  6. Confirm the transactions with non-EMV chip cards by digital signatures
  7. Have actual and up-to-date company contact information in place
  8. Have a transparent billing descriptor
  9. Keep in-depth records on all details of every transaction in your CRM
  10. Save all receipts for at least 3 years
  11. Fulfill your shipping expectations and promises
  12. Follow card processing best practices and protocols to the letter

Conclusions

We have outlined all the key aspects of chargeback protection. Hopefully, this guide will be of use to small businesses that want to prevent chargebacks as much as possible. However, when the inevitable comes, having reliable chargeback solutions in place — like Covery — can help you minimize the effort needed to resolve these disputes. Should you need any more assistance or information on how to avoid chargebacks with Covery — ask away, we are glad to help!