PrintWhen customers ask their financial institutions to reverse charges made at a business, it can prove burdensome to the merchants. These chargebacks cannot be accurately predicted and the timing of settlement cannot be controlled. This can create issues with cash flow and overdrawn bank accounts, as well as other financial problems. But fortunately there are ways for small businesses to protect themselves against financial loss from chargebacks.
Customers initiate these forced refunds with their banks by filing a complaint for erroneous billing (e.g., duplicate billing), dissatisfaction with a product or a service, fraudulence (usually online), or identity theft. After a complaint is filed, the bank reverses the charges on the customer’s checking account, line of credit, or credit card.
If your business is unexpectedly hit by many chargebacks in a short period of time and the charges are immediately deducted, you could become severely cash strapped while you rush to locate documentation. On top of this, banks and other financial businesses such as PayPal often charge merchants a penalty or a processing fee per chargeback, to discourage bad business practices. Additionally, credit card companies such as Visa and MasterCard issue steep penalties to banks that continue to service merchants with frequent chargebacks and this penalty is usually passed on to the merchant involved. It is not uncommon for merchants that continue to frequently incur chargebacks to be charged in excess of $100 per chargeback. If chargeback frequency continues, the merchant’s bank may discontinue service altogether. You’ll also want to check if your bank requires a reserve to cover any future chargebacks. Some banks can demand a reserve as high as $5,000.
Although chargebacks cannot be completely avoided, you can take these important steps to reduce their occurrence:
- Make sure the business name you provide to financial institutions is a name customers recognize. A high percentage of chargebacks occur because customers do not recognize a business name next to the purchase on their credit card statements. Stay consistent with the name so customers will not think the item on their statement is fraudulent.
- Respond promptly to chargeback requests. You must respond within 12 days. Keep all sales drafts organized and handy for 180 days. After that period, move them to a safe and secure storage area where you can retrieve them quickly if needed.
- Swipe all credit and debit cards and compare the receipt signature with the signature on the back of the card. If you have to manually enter the card number, get an imprint as further proof the card and the cardholder were both present for the transaction.
- If a credit card is declined, do not continue to try to run the transaction. Instead, ask the customer for another form of payment.
- Obtain an authorization for the entire amount of the sale. Do not break the sale into several smaller amounts.
- If the purchase is made online or by phone rather than in person, use the Address Verification System to ensure the customer is providing you with the correct billing address.
- Provide your bank with a local or toll-free number that can be included on billing statements so customers can reach you directly if they have questions. This will prevent chargebacks in many cases.
- Be sure to use a shipper that will provide proof of delivery. For expensive items, require the shipping company to obtain the customer’s signature.
In addition, you can get chargeback insurance that reimburses the cost of a product or service and the loss of profit if a chargeback stems from a stolen or counterfeit credit card, signature mismatches, or post-purchase shipping address changes.
Some banks also offer sophisticated chargeback defense systems as part of their merchant services. These electronic dispute systems can allow you to manage chargebacks more efficiently and speed resolution. They also provide online reporting tools that will notify you quickly of chargeback and retrieval requests. If your bank does not offer such protection, consider moving to one that does. Without sophisticated systems to protect your business, exposure to chargebacks can be exceedingly detrimental to your business.
