Do you experience chargebacks from time to time? You are not alone.
Globally, chargebacks account for 261 million transactions, totaling $33.79 billion in value.
What’s more, the chargeback volume is growing rapidly. By 2028, chargeback transactions are expected to reach 324 million, with a total value of $41.69 billion.
This article sheds light on the nuisance of chargebacks—how they happen and the damage they cause. We’ll also share practical tips on how to avoid and handle chargebacks.
Read on to learn how to minimize the risk of incurring chargebacks in your business accounting.
What Is a Chargeback?
A chargeback is basically a transaction reversal. It can be initiated by a customer or a financial institution.
This is how a typical chargeback happens.
First, a customer pays for goods or services. However, the funds, for whatever reason, are later taken from your merchant account and returned to the customer.
With some payment systems, the funds are held or locked indefinitely, prompting a dispute. Depending on how the disputed payment is resolved, the money may either remain in your account or be refunded to the customer.
And don’t get it wrong: a chargeback is not the same as a refund.
With a refund, it’s you (the seller) who voluntarily returns money to the customer. Perhaps the customer made the wrong purchase or wants to return what they bought. In such cases, you offer them a refund.
Chargebacks, on the other hand, are out of your control. Your merchant account is debited out of the blue—without consent and sometimes without explanation.
Common Reasons Chargebacks Happen
Why do chargebacks happen? The reasons for chargebacks can range from innocent mistakes to malicious extortion.
In this section, we’ve rounded up six of the most common causes of chargebacks.
Malicious Fraud
Malice is often the first thing that comes to mind for most entrepreneurs when they encounter chargebacks.
Some customers chargeback payments with the intention of retaining the transaction amount and the items they purchased. It’s not very common, but it does happen.
This type of chargeback can also happen as part of a larger fraud operation. For instance, when someone uses a stolen card or credentials to make purchases.
Upon realizing the theft, the card issuer can charge back any unauthorized transactions.
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Friendly Fraud
Friendly fraud, or first-party fraud, happens when a customer disputes a legitimate transaction on their account.
This type of chargeback usually stems from honest mistakes.
Maybe the customer forgot about the purchase or doesn’t recognize the bill. In some cases, a loved one may have made the purchase without their knowledge or consent.
To the account holder, such transactions can seem bogus or even fraudulent. So, they wind up initiating a chargeback.
Although friendly chargebacks are often accidental, they are quite prevalent. According to Mastercard, friendly fraud accounts for 70% of all credit card fraud.
Merchant Error
Mistakes in the billing process can lead to a chargeback.
We’re talking errors such as:
- Inaccurate figures in payment requests
- Scarcely detailed invoices and receipts
- Unclear billing descriptions
- Sending bills to the wrong people
- Vague payment, returns, and cashback policies
Customer Dissatisfaction
If a customer is not happy with their purchase, they can initiate a chargeback. Customer dissatisfaction stems from any number of reasons, including:
- Poor product/service quality
- Unfair pricing
- Product/service misrepresentation
- Delivery issues (delays, undelivered goods, goods damaged in transit, etc.)
- Poor customer experience
- Buyer’s remorse
Some customers express dissatisfaction through a chargeback. They may view demanding their money back as the most straightforward way to remedy their dissatisfaction.
Issues with the Payment Processor
Payment processors sometimes go haywire and flag legitimate transactions.
Such glitches are common among digital payments, especially mobile and digital wallets. Usually, it’s an issue with the authorization protocols or anti-fraud bots acting up.
Unintentional Chargeback
Some customers request chargebacks without even knowing it. That’s because chargeback sounds a lot like a refund to a customer unfamiliar with the term.
So, instead of requesting a refund from the merchant, some customers initiate a chargeback. Most customers (84%) turn to their bank to settle payment disputes.
The customer may also charge back the wrong transaction. It’s also possible they would unwittingly open a payment dispute when they intended to do something else.
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The Hidden Costs of Chargebacks
Chargebacks are bad for business. Whether done maliciously or unintentionally, a chargeback is a costly affair. And it’s always the merchant that bears the brunt of chargebacks.
But just how costly are chargebacks?
Chargebacks can negatively impact your small business in the following ways.
Monetary Losses
A chargeback takes money from your account.
Imagine if someone purchased a product from your business and later attempted to charge it back without returning the item. That would mean losing not just the sale but the product as well.
And that’s not all. You also incur processing fees. Chargeback fees range from $15 to $100, depending on the amount and the payment processor.
Losing money like this can put a heavy strain on your working capital and earnings. Even a single chargeback can put a huge dent in your bottom line.
Delayed Payments
You can dispute a chargeback and win. But that takes time, which means the payment gets delayed. Reversing a chargeback can take days or even weeks.
Any unwanted delays in payments can potentially disrupt your cash flow.
Lost Time
As we mentioned, chargeback resolution takes time. That’s because there’s quite a lot that must be done.
On your end, you must explain the issue to the payment processor, provide evidence to support your case, and follow up on the resolution.
Doing all that consumes valuable time you could otherwise spend on more productive things.
Aversion to Some Forms of Payments
Some payment methods are more susceptible to chargebacks than others.
For example, no-card present transactions are more likely to be flagged. These are payments in which the customer’s physical card is not swiped or tapped in person.
Instead, payment details are provided in an alternative manner, such as online, over the phone, or by mail.
This may lead you to stop accepting payment forms that frequently incur chargebacks. However, that doesn’t mean your customers will be happy to lose that payment option.
Damaged Customer Relationships
Incurring chargebacks can erode your trust in customers.
So much so that you tighten your payment policies or restructure the business model in such a way that chargebacks are not a big issue.
That’s how you end up with a business that only takes cash or deliberately delays deliveries until payment is secure.
Best Practices to Prevent Chargebacks
You can’t really stop anyone from initiating a chargeback. However, there are measures you can take to reduce the likelihood of chargebacks.
Let’s discuss how to avoid chargebacks in business.
Prepare Clear Invoices
Send your customers clear invoices with detailed and accurate billing information. If a customer questions an invoice, they’ll likely dispute the payment too.
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Provide Accurate Product/Service Descriptions
Some customers will justify a chargeback by claiming they were misled into buying a product or service. That’s a valid and understandable reason to charge back a purchase.
It’s your job to prevent such cases by managing customer expectations.
For starters, offer accurate and detailed descriptions of what you’re selling. Ensure the customer knows exactly what they’re getting with each purchase.
Do so by using specific descriptions, visuals, disclaimers, and even demos. Avoid vague language and overpromising when describing your products/services.
Draw Up Strong Contracts
If you’re a contractor or freelancer, you can use contracts to protect yourself against chargebacks. Write legally binding agreements with strong policies against chargeback.
For example, you could include a non-refundable down payment or clauses that shift the chargeback burden to the client.
Set Clear and Simple Refund Policies
Steer customers away from requesting chargebacks by offering better money-back options. Provide an easy and flexible return or refund policy. Explain to your customers that they can always get their money back, no questions asked.
Be Accessible and Responsive
Respond promptly to customer queries, especially after they’ve just purchased your service or product. After-sales communication is essential in avoiding chargebacks.
Check whether the customer is satisfied with their purchase. If not, provide ways to fix any underlying issues or reverse the sale.
Analyze Your Chargebacks
Find out why customers are charging back their payments.
A high chargeback volume or frequency can point to critical business issues. Maybe your product/service quality is subpar, or you’re overselling your brand.
Or it might indicate something more sinister. Fraudsters may have found a loophole in your payment systems and are now busy extorting your business.
Analyzing chargebacks can help you identify and resolve the root cause of the problem.
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What to Do if You Get a Chargeback
Even with strong prevention measures, chargebacks can still happen. But how you handle the situation dictates the final outcome.
Here’s what you should do when hit with a chargeback:
1. Analyze the Chargeback
Learn everything you can about the chargeback. Find out why it happened, who initiated it, and the appeal guidelines (timeframe, requirements, channels, etc.).
2. Contact the Payment Processor
Contact the payment processor to discuss the next steps.
3. Gather Evidence
Gather all the compelling evidence related to the disputed payment. The evidence may include invoices, contracts, purchase orders, receipts, and transaction records.
4. Contact the Customer
If possible, reach out to the customer. Determine, firsthand, the reason for the chargeback and work out how to resolve the issue. Cooperation from both ends often speeds things up.
5. Submit a Chargeback Rebuttal
Refute the chargeback via the payment processor’s dispute resolution apparatus. Follow the due process, which may include submitting sale/payment documents.
6. Await the Verdict
Allow the payment processor enough time to review the case and reach a decision. The payment processor will inform you of the processing time.
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First Steps to Avoiding Chargebacks
- Send out clear, professional-looking invoices with detailed billing descriptions.
- Avoid billing errors.
- Understand and manage customer expectations.
- Stay in touch with customers after they’ve made a purchase.
- Provide return or refund options, such as a money-back guarantee and trial periods.
- Leverage digital billing, invoicing, and payment tools.
- Act on chargebacks and payment disputes as soon as they happen.
