How Businesses Can Die a Slow Death: One Chargeback at a Time
Payments //February 11
With the convergence of the digital era, mobile revolution and sharing economy, a successful business must deliver not only a mobile first experience, it must also offer a frictionless payment experience that accepts online payments, usually debit or credit cards. Yet, on a yearly basis, businesses lose billions from chargebacks and fraud proving that accepting online payments brings a certain amount of risk.
So how does a business accept online payments and mitigate the risk of chargebacks?
First, we need to explain what a chargeback is and how it works.
What is a chargeback?: A customer makes an online transaction then later disputes the charge with their credit card company. The dispute will fall into either one of two categories:
1) “Non Fraudulent” Chargeback – the cardholder acknowledges they engaged in a transaction yet is unhappy or dissatisfied with the experience and is attempting to be refunded, or 2) “Fraudulent” Chargeback – the cardholder was a true victim of fraud (and rightfully) worked with their credit card issuer to get their money back, or the cardholder is trying to scheme their way out of paying by claiming they were a victim of fraud.
In either case, the merchant (aka… the business) is still responsible and must address the chargeback claim.
How does a chargeback work?: Once a cardholder files a chargeback claim with their credit card issuer, the amount of the transaction is credited back to the cardholder, and in most cases, the merchant is debited for the amount along with a chargeback fee. The fee will vary yet averages $20 per claim.
As a business owner, you are probably thinking… one chargeback doesn’t sound too bad. Yet, it can quickly add up and impact the bottom line of any growing business. Depending on annual sales volume and the number of chargeback claims, a business could easily lose thousands of dollars each month in chargeback fees alone.
And it could get worse from there. In the eyes of the Card Associations which govern chargeback regulations, the Card Not Present (CNP) merchant is considered guilty until proven innocent and the burden of proof is on the merchant.
If the merchant loses the chargeback, they may also be responsible for any extra fees associated with fighting the chargeback – even if the customer benefited from the disputed transaction. Finally, the credit card issuer may also penalize a merchant if a certain threshold of chargebacks is reached.
So, for your business, the best way to fight a chargeback is to prevent it from occurring in the first place.
How to prevent chargebacks: Taking time to implement best practices for chargebacks is the most important step to preventing them.
- Implement the proper policies: For any business, take the time to inform your customer of the cancellation policy, return policy and/or refund policy. Each policy should be extremely clear and cover all use cases.
- Know your customer: Identify opportunities to validate the legitimacy of each customer and more importantly, tell your customers up front what you are doing and what information you will require. Generally, fraudsters are looking for an easy opportunity.
By conveying to a fraudster that your business is fully engaged and has a thorough process, they are less likely to target your business.
- Track transaction activity: Be suspicious and curious of all customers and transactional activity and implement tracking to look for specific activity known to be fraudulent.
- Communicate with your customers: Engage with your customers via email or phone regularly to look for clues that suggest something isn’t quite right. For example, look for unusual email addresses where the customer name and email do not match, or the email sequence or domain does not make sense (e.g., email@example.com).
- Documentation is your friend: Be prepared to document all customers and their respective transactions. With the chargeback claim process, it will be the merchant’s responsibility to prove that the claim is fraudulent. The card issuer or Card Associations will not rely on the merchant’s word.
- Be social: Use social media to investigate any chargeback claim, if possible.
- Rely on an expert payments partner: With best practices in place, your business is still susceptible to fraud or chargebacks. The next step is to partner with an expert in online payments that can offer a sophisticated payments platform with the proper risk and fraud protections in place, as well as provides customer support, specifically to dispute a chargeback.
- Provide A-list customer service. As mentioned, some customers will make a purchase and then later contact the merchant with a question about their order. If they receive poor customer service, the buyer may become frustrated and dispute the charge. by giving each customer a great experience, a merchant may be able to eliminate unnecessary chargebacks.
- Win by losing: If you issue a refund to avoid a dispute, always issue the refund in the same payment method of the original transaction.
Know your chargeback risk: Enterprise level businesses usually have a higher payment volume, which will more than likely increase the risk of chargebacks. Small businesses may not have high payment volume, yet they also may not have the bandwidth to manage the intricate chargeback dispute process. And if you are a sharing economy business, like a marketplace, then unfortunately, you have a very large target on your back.
By their very nature, a marketplace is at increased risk because they have to validate both sides of the transaction – the buyer and seller – by employing in-depth risk processes known as “KYC” (know your customer) and “AML” (anti-money laundering).
If the transaction is completed with unknown individuals, and does not properly onboard businesses and/or individuals, then the marketplace business may find themselves losing thousands, or even millions, in sophisticated fraudulent activity.
With the convergence of the sharing economy, mobile and payments, the risk of fraud and chargebacks will remain a major concern. Chargebacks aren’t going to magically disappear and will probably continue to grow. It’s important for your business to constantly be mindful of the inherent risk, implement best practices, arm your staff with knowledge and make sure you have a strong payment-processing partner. If your business is the next unicorn, then this might just be the multi-million dollar difference.
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