What are Credit Card Chargebacks?

A Chargeback is when a customer disputes a credit card transaction with their Credit Card provider.

Normally the card issuer will refund the amount to the cardholder and the money will be debited from the merchant’s account and held in limbo until the dispute is finalized. They will investigate whether the dispute is legitimate and, if so, who is responsible for paying back the money. If the merchant is not found responsible, the money will be credited back to the merchants account temporarily and the bank or cardholder will have a certain amount of time to respond. If the merchant is found responsible, the money will not be credited back, meaning you lose the money from the transaction unless you decide to take the dispute to small claims.

There are many reasons a consumer may issue a chargeback. For example, if they are unhappy with a service provided or if they claim a transaction is fraudulent.

What makes you at Risk for Chargebacks?

Any business that accepts credit cards is at risk of chargebacks. However, there are some transaction types that make you more prone to a chargeback. While in-person transactions are less likely to be fraudulent, online transactions are more likely to be fraudulent. One of the benefits of in-person transactions are the EMV-chip cards. This gives the in-person transaction added security over the online transaction.

Some industries can be more susceptible to chargebacks than others. For the travel industry there is added risk because consumers normally pay in advance. Another example are retailers that make dietary or nutrition programs or supplements that include medical or health claims are also at risk.

It is recommended that you should reviewing your company’s business model to protect yourself and your company against potential risk.

How Can You Avoid Chargebacks?

While there are no guarantees that a customer will not initiate a dispute against you, there are things you can do to help protect your business:

  1. Have a clear return policy: Clearly outlining your return policy to the consumer.
    • Display your return policy in your store (if you have one).
    • Highlight your return policy on your website.
    • Print your return policy on the customer’s receipt or invoice.

      These are some of the ways to help protect yourself in the event a customer disputes a charge because you would not provide a return.

      Also, document the customer has acknowledged the policy at the time of the transaction. If they have not acknowledged that they are aware of the policy, they can deny being aware of it. One option is to have the customer sign an agreement or initial the return policy on the receipt for in person transactions. For online customers have them check a box acknowledging the policy. You can also print it on your receipt; just make sure to save the signed copies for documentation.
  2. Increase security of credit card transactions: Updating your credit card terminals to include the EMV chip card reader can help prevent fraudulent transactions. For online credit card transactions, require the consumer to enter the CVV number, also their billing zip code. These 2 additional pieces of information will make it more difficult for stolen information to get through.
    • Have the customers verify if the billing and shipping addresses are the same: Fraudulent transactions are more likely to have different billing and shipping addresses even though having two different addresses is not always a sign of fraud. Include validation of both addresses, especially if different.
  3. Inspect the product before you sell it: Inspect or test a product with the customer before you sell it to reduce the chances of a chargeback due to product defects. This is even more important if you don’t accept returns.
  4. Pay attention, look for red flags: For an example; Unusually high-value transactions, anything unusual to you might indicate a fraudulent transaction.
    • Trust your instincts: If you are concerned about a transaction and feel it might be risky, deny or suspend it until you can verify it. You can always call your processor to see if they are able to help you validate the transaction.

How to Handle a Chargeback

With all the above steps in place, you still might occasionally have to deal with chargebacks. When a customer issues a chargeback, you the merchant will be notified by the processor that an investigation is being conducted. Once the dispute has been initiated, you will have ten business days to respond. After the 10 days you will automatically lose the dispute.

Depending on how much time has gone by between when the dispute is initiated and you receive the notification, you will end up with less than the 10 days to respond. Be sure to monitor your bank deposits against your POS reports. This should help you notice any discrepancies and point to a possible chargeback being issued.

Check with your processor, they may have options available to help you monitor chargeback notices electronically. Such as Dispute Manager portal that is offered by Gravity and ChargeItPro that allows merchants to review and respond to chargebacks even before they receive a notice in the mail.

Note: If a disputed transaction is found to be fraudulent, the merchant will normally be responsible for refunding the money. If you have a small business with a small cash flow available in the bank, this can be an issue if it’s for a large sum of money. This makes it very important watch for any warning signs and have in place as many precautions as possible to avoid risk.