Are you new to the eCommerce business world or thinking about starting an online business or even contemplating expanding your existing business by opening an online store? If so, you must become familiar with the chargeback system for the simple reason that unchallenged chargebacks have the potential to significantly reduce your profits from online sales and can even threaten the future existence of your business.
In simple terms, a chargeback is a method consumers can use to reverse (nullify) credit card transactions they deem unlawful, such as charges incurred because of cyber theft or unauthorized use and dishonest merchants looking to take advantage of a consumer. If you have ever disputed a charge on your credit card statement or questioned a debit from your bank account, you may already be familiar with chargebacks.
The chargeback system was introduced to help consumers feel safe when making online payments. In 1968 the United States passed the federal “Truth in Lending Act” and the “Consumer Credit Act 1974” was enacted by the United Kingdom. Both of these laws were specifically designed to promote the informed and safe use of credit cards.
Chargebacks are very different from traditional refunds. Traditional refunds are made when a consumer contacts a merchant directly and funds are voluntarily returned to the consumer by the merchant. Chargebacks occur when a consumer goes directly to their bank or credit card company to report a fraudulent or disputed transaction. If the bank or credit card company believes the cardholder’s claim to be valid, they will demand that the merchant’s credit card provider make good the loss, which results in the funds being immediately removed from the merchant’s bank account and returned to the consumer’s bank or credit card account.
It’s not possible to avoid a few legitimate chargebacks; however, there has been a significant increase in friendly fraud and the chargeback system has become a favorite tool for cyber criminals.
Three Common Reasons for Chargebacks
The chargeback system exists for the safety of cardholders and the process is more inclined to protect the consumer than the merchant.
One common reason for chargebacks is consumer dissatisfaction with products or services purchased. For example, a merchant might create a tempting online description to easily sell products or services. But, when delivered, the consumer finds that the product or service is not as described or what they expected. The risk of chargebacks from dissatisfied consumers encourages merchants to focus on providing the best consumer experience and products or services possible.
On the rise is deliberate friendly fraud. When a consumer uses their credit card to make a purchase and then disputes the charge once the item arrives with the intention of getting merchandise for free, they have committed friendly fraud. A merchant’s only recourse may be to provide proof that the merchandise was received, so it’s important to keep good transaction records.
As mentioned above, cyber fraud is becoming increasingly popular. Prevention is a merchant’s best line of defense, and a great place to start is by having an e-Commerce website payment system with built-in fraud prevention and detection. With so much news about cyber-attacks and fraudulent credit card activity, most consumers don’t even give a second thought before filing a chargeback.
How Chargebacks Affect Merchants
Merchants need to take chargebacks seriously because they have the power to negatively affect a business’s bottom line and its eventual survival.
Left unchallenged, a merchant faces fee assessments of $100 or more for each chargeback filed. Often, these fees create a loss far greater than the initial product cost.
Additionally, if the number of chargebacks deemed valid exceeds a predefined threshold the merchant can be forced to obtain high risk merchant accounts which come at a higher cost. Or, merchant accounts can be frozen or terminated, leaving the merchant without a way to process credit card payments.
Steps to Help Avoid Chargebacks
- Provide quality products and services.
- Accurately advertise products and services.
- Have a knowledgeable support team to effectively defend against chargebacks.
- Provide great customer service.
- Have systems in place to prevent fraudulent credit card activity before it happens.
- Keep good transaction records.