A chargeback can be one of the worst things for any business that accepts credit cards to experience. A chargeback will entail the customer getting money back from a transaction by reversing a credit card transfer. Such concerns have become common in many situations, particularly for online purchases.
You must be cautious when looking at how chargebacks happen. You can do a few things to prevent these and ensure your business will stay protected and at reduced risk.
Why Do These Chargebacks Happen?
A chargeback can be extremely inconvenient, as you will be charged a specific total for each chargeback that occurs. That charge is set by a merchant service provider, which can be a concern depending on the value of the chargeback. The chargeback fee could be worth more than the value of the transaction being reversed.
There are many good reasons why these chargebacks can occur:
- There could be a technical error on your end. You might bill someone twice, or you might have accepted payment through an expired card. A billing descriptor may not provide enough info on a transaction, keeping the process from being as easy to read.
- The issuing bank might struggle to receive a payment. This problem is an issue on the bank’s part, although it is not as common as retailer-based errors.
- A customer might not be happy with an order. Someone will request a chargeback due to a product not being delivered or that customer feeling the product or service was of poor quality.
- A product might not have been delivered to the customer. The customer will demand a chargeback if the product ends up being unavailable or it becomes impossible to safely and accurately send the item out to someone.
- Friendly fraud is a common worry, as a customer might ask for a chargeback even if that person received a product or service and is satisfied with everything. Friendly fraud can occur from buyer’s remorse or a general misunderstanding. Either way, the customer might not have a legitimate reason for why one is asking for a chargeback.
- Criminal fraud is a common cause of chargebacks. People may ask for chargebacks if there were victims of identity theft, someone taking over an account, or affiliate fraud.
One consequence of excess chargebacks will entail a merchant account applying higher fees on your transactions. A bank or account provider will interpret your business as a high-risk one. High-risk companies will spend more on these fees due to the unpredictable nature of the business. You could spend twice as much on merchant account fees as a high-risk business than if you were another type of company with a reduced risk.
Suspension of Your Merchant Account
Excess chargebacks will cause you to lose access to your merchant account. You may not have the ability to collect credit card payments if your chargeback ratio is too high.
A merchant service provider can review your chargeback ratio to see if your account needs to be suspended. A chargeback ratio is the measure of how many chargebacks you get versus the total number of transactions you complete. You could be suspended if your ratio goes over 1 percent.
You will lose money in chargeback fees for each chargeback you incur. You could experience significant losses if you get too many chargebacks. An average chargeback fee will be worth about $20, for example. The fee could be worth more than the value of the purchase being charged back, which can be extremely inconvenient for many businesses.
You May Require Rolling Reserves
A merchant service provider may require rolling reserves if you express a substantial risk. Rolling reserves entail a bank putting a percentage of your transaction volume aside. The bank will collect these funds and use them to cover possible losses from chargebacks. The bank will release whatever funds in your rolling reserves aren’t used for chargebacks, although the timeframe for when the bank will do that will vary.
You could also be placed on the MATCH list if you have too many chargebacks. The Member Alert To Control High-Risk Merchants list tells acquiring banks not to do business with you. Your risk will be too significant at this point.
You could be stuck on the MATCH list for up to five years in some situations. It may be next to impossible for you to access a new merchant account due to this point.
How Can You Prevent These Chargebacks?
The risk of having too many chargebacks is significant, as you could lose your ability to manage transactions if you have enough. But you can prevent these chargebacks from being a problem if you follow a few steps:
- Use an Address Verification Service or AVS process for online transactions. The AVS system entails that you can confirm a card based on the address listed on that card and the ordering or shipping address the customer will utilize for a purchase.
- Geolocation can also work for online orders. You can review the customer’s ordering address versus where the customer is ordering from at the time. The process reduces the risk of fraud.
- Biometrics can work in physical locations. You can use biometrics systems to confirm the identity of whoever purchased something.
- CVV verification also confirms the person who has a card for a purchase is the right one. The process reviews the three or four-digit card verification value on the card.
- Provide quality customer service to all your employees. Let them know about the terms for each purchase and how the shipping process works. Respond to your customers’ needs as necessary, especially if they have problems with their orders.
Excess chargebacks can be a substantial worry. You could lose more money than you can afford due to chargebacks. You could even lose your ability to process credit card transactions. But you can protect yourself by using various efforts to reduce your risk and to prevent chargebacks.