What Are Chargebacks and How Do They Impact Your Business?

Online business owners have a significant threat to look forward to— chargebacks. Most high-risk merchants are unaware of chargebacks and their effects until they are struck with them, which makes them more susceptible to having a hindrance in the growth of their business.

No business likes disputing with customers; but these days, friendly fraud, bad customer service, and similar issues have introduced a hike in chargebacks. Customers do not co-operate with merchants to solve their issues and instead file a dispute, merchants rarely win chargeback disputes and thus end up losing a lot of money.

Every business owner needs to have a proper understanding of chargebacks and how do they work. You can save your business from fraud, improve customer satisfaction, and increase sales by taking appropriate steps against chargebacks. 

What is a Chargeback?

Chargebacks are a disputed transactions that occurs when customers file a dispute with their card issuing bank regarding a charge made on their card. When a customer wins the chargeback, he receives his money back from the merchant—this is meant to protect consumers from illegitimate or fraudulent transactions. However, some people abuse this power and initiate chargebacks even when there is no need.

As a result, many small businesses and industries lose millions each year; because of false chargebacks and fraudulent customers. Although the merchant can provide documents and evidence through their bank to challenge the chargeback, in most cases, the dispute is won by the consumer. 

Most common reasons for Chargebacks

Business owners should know why chargebacks occur so that they know how to prevent them.

Every so often, customers may file genuine chargeback disputes, but in most cases, it is usually scammers trying to swindle your money through these disputes. 

Here are some common reasons why customers file chargebacks with their card issuing company:

  • In cases of legitimate or friendly fraud
  • When customers are not satisfied with the delivery or return procedure of products
  • When customers are unhappy with the service or quality of purchased products
  • In cases of illegitimate, duplicate, or unauthorized transactions

Whether a chargeback claim is genuine or not, it can certainly cause many losses to your business. Most payment gateways and account providers charge a certain fee when your company faces a chargeback, which is why it is important that you keep every transaction a success and avoid customers filing chargebacks. 

Impact of Chargebacks on your business

Chargebacks have the power to ruin any big or small business over a certain time. When a business loses a chargeback dispute, it loses the transaction amount, potential profits, shipping and delivery fees, etc. On top of this, you have to pay a certain fee to your payment service provider to process the dispute on your behalf. 

When your chargeback ratio increases, then you need to pay a higher fee to your service provider. You can even lose your merchant account after your ratio exceeds the limit. The amount of money spent in this process is extortionate and sometimes even exceeds the original amount of the transaction, which is why chargebacks must be kept to a minimum or a company’s profits will suffer by a huge margin.

How to avoid Chargebacks?

A smart business will do everything in its power to avoid chargebacks from cutting into its revenue or sales. Here are some tips your business can follow to avoid the occurrence of chargebacks:

  1. Have clear business policies and good customer service

Your business policies and terms and conditions should be distinctly uploaded for customers to read before purchasing anything from your store. They should be clear regarding everything ranging from purchase, payment, shipping and delivery, returns, etc.

Additionally, you should partner with reliable shipping and delivery companies so that your products reach your customers fast and in proper condition. Your main focus should be on improving customer service and keeping them happy to avoid unnecessary chargeback claims. 

  • Partner with a trusted high-security payment service provider

High-risk merchants must use a secure payment service provider because online card-not-present transactions are the most common transactions which lead to chargeback claims. It is preferable if the payment service provider uses more than three fraud-prevention technologies. 

Friendly fraud and other illegitimate claims can be reduced if your service provider has multilayer security like email verification, chargeback prevention notifications, fingerprint technology, buyer purchase limits, card verification value (CVV), etc. PayPound is one of the most secure payment service provider trusted by many high-risk merchants. 

  • Offer high-quality products and hassle-free delivery

Many customers file chargebacks because they are not satisfied with the quality of products received or when they receive defective goods. Make sure that your online store has high-quality goods with proper product descriptions so that a customer knows what he’s purchasing.

  • Store detailed transaction and chargeback records

All prior transaction data must be stored, since it plays a big role in disputing and fighting back chargeback claims from customers. Integrate your POS with the payment service provider to gather all data related to sales and chargebacks for your business This way, you can analyse your customers’ trends and be aware about potential fraudsters. 

Moreover, you can work with chargeback management for real-time reports and notifications regarding chargebacks. The software will alert you in advance to minimize the chances of a chargeback.

Summing Up

Online businesses that oversee card-not-present transactions are vulnerable to chargeback claims that can cause huge losses. Some of these claims are legitimate, but the majority of the time, fraudsters and cybercriminals lodge unsubstantiated claims in order to regain money from the merchant’s account.

Often, these unethical disputes are won by the consumer and they get their money back, which is why businesses, especially high-risk merchants, need to do everything in their power to avert chargebacks. 

High-security payment gateways like PayPound are recommended for secure transactions, payment data storage, and chargeback management. We know that it is difficult, but not impossible for businesses to minimize the risk of chargebacks from customers. 

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