Chargebacks are a nuisance. As a business owner, you should be ready to fight them. This is especially important if your business accepts CNP transactions. CNP stands for Card Not Present and describes transactions made with a payment card online (for instance, on your website). Online transactions have a higher frequency of ending up as chargebacks from customers. No wonder, as it is harder to verify whether it is the customer who authorized the charges in question or not. After all, the customer’s physical presence is not payment verification, like during card usage in brick-and-mortar businesses.
As a business, you are 100% responsible for any possible online fraud. This is a condition specified in merchant account agreements. While the chargeback battle is challenging for everyone involved, companies are especially affected and always at a disadvantage. The problem is that, as a merchant (company), you are bound to suffer the consequences no matter if there is an actual fraudulent transaction or if your customer is trying to steal from you. Whatever the reason for incoming chargebacks, you better be prepared. “Why?” You may ask. Let’s find out, shall we?
1. It’s just human
Every step of the chargeback process involves human decisions, making it subjective. How regulations are understood, the steps taken, the conclusions made, and the outcome of the process are all derived from human beings. What do we know about our species? We make mistakes, we act on our emotions, and our choices can be affected by various factors. Therefore, if you are on the losing side of a chargeback battle, the human aspect of this process is probably against you.
2. An ancient mechanism
Did you know that the chargeback consumer protection mechanism was birthed in the era before the internet was even around? You would expect it to be constantly re-aligned to stay up-to-date, but sadly, the truth is far from that. The chargeback regulations remained similar for decades and up until today. These same regulations fail to adequately cover modern-day threats and developments in the latest technologies, making the entire process surprisingly outdated.
3. Is the customer always right?
A bank is a business similar to yours. Naturally, a cardholder is the bank’s priority as he is their customer, and his interests are the bank’s prime focus. Merchants like your company are unimportant to banks and not worth the risk of losing a valued customer over. Given such circumstances, banks are more likely to proceed with chargebacks without giving it a second thought or acting conscientiously.
Is it not simpler and faster to file a chargeback rather than trying to convince the cardholder in the no-guarantee action of dealing with your company directly? If a chargeback process is initiated, you as a business automatically assume the worst position – guilty until proven innocent.
4. Goodbye time, so long resources
As you understand, dealing with chargebacks is not a walk in the park. You need to develop solid prevention strategies to dispute illegitimate chargebacks – both actions take valuable time and money. For a business, these are two of the most crucial and scarce resources. Having less of both may set you back significantly. Due to this, you should accept that chargebacks may be yet another cost to your business. I know, as if you had insufficient costs already, right?
Now if you think you may be done with a chargeback claim in a week or so, I hate to bring you more bad news. The length of a chargeback process can range from a month to half a year! It depends, of course, on why the chargeback was filed in the first place, which banks you are dealing with, and what is the level of complexity in fighting off the chargeback. Be warned that it is entirely possible for a company to lose thousands of dollars monthly in chargeback fees alone, given consistent sales and numerous chargeback claims.
5. “Woah! What just happened?”
Suddenly, you realize a withdrawal of money just happened from your merchant account. Once the decision is taken to proceed with a chargeback life cycle, the cardholder (your customer) is given a provisional refund of the disputed purchase. The account of the merchant (you), at this time, gets debited for the amount of the transaction in question, plus any applicable fees, of course. This means that chargebacks can catch you off guard.
There is nothing good in that because it can cause unexpected financial damages along with possible issues with your cash flow. You may also want to consider that the customer’s bank can hold remittance from you for several months if they need to cover any fraud.
6. Fees = money you will never see
Once chargeback fees are applied by your bank when the process is initiated (an action done automatically, as you have just read), you can kiss the fee money goodbye. Sure, you can fight the chargeback, and you should if it is unfair! Whether you win the fight and get the original transaction amount back or not, however, you will never be able to recover the fees. They cover the administrative costs associated with the chargeback process. Those costs have been applied and will exist no matter what. Thus, the damage is permanent if it happens – one more reason to try and avoid a chargeback from the start!
7. The more transactions the (less) merrier
Consider the following – an individual disputed transaction equals a single chargeback. What does this mean? You guessed it! If your customer disputes several charges with your company, you face multiple potential chargebacks respectively. In turn, the more chargebacks against your company, the closer you get to being a high-risk, unreliable merchant, and the more fees you pay and time you waste. So be watchful not to upset your customer so much that his threat of a single chargeback escalates to: “I wish I never dealt with your company at all, so give me all the money I have ever spent!”
8. Reason codes – a language of the bank
Each chargeback has something called a ‘reason code.’ This categorizes the chargeback according to the grounds of it being filed. Depending on the cardholder’s claims, your customer’s bank assigns this code and presents it to you. It may portray reality, or it may not. Naturally, if it is unclear what the trigger for the chargeback is for either you as a merchant or the customer’s bank, incorrect or insufficient actions may be taken from either side.
Do not rely solely on the reason code. It is not hard for a customer to deceive their bank and convince them to initiate friendly fraud chargebacks. Remember, the bank is on your customer’s side anyways.
9. Your ruined reputation
A filed chargeback will always implicate your company’s wrongdoing, not your customer’s. Your company automatically bears the guilt towards its consumer even if you have not done anything wrong. No questions asked. Due to this assumed guilt, your reputation may take a hit. Banks can become even less cooperative and, with the knowledge that chargebacks have been filed against your company before, they can act with even less due diligence. In other words, do not be surprised to see even more chargebacks in the future – ones with even fewer chances for dispute.
10. Adding up the total losses
So, let’s say things are bad. The bank determines there is not enough proof to back up the transaction. If you sit down and calculate the value of your overall possible losses from a chargeback before you even try to dispute it, you will be stunned. Let’s take a look together. You lose:
- The full value of the transaction;
- The value of the merchandise (if any);
- The chargeback fee ($20 – $100 per transaction) and;
- Any shipment costs (can range up to $100).
The size of the chargeback fee will depend on various factors. Your bank, the customer’s bank, and the processor involved in the chargeback process all have a say. It is also affected by the type of goods or services you sell, and not only. If you are seen as a high-risk merchant, your fee will surely be in the higher range. An example, perhaps?
Imagine John, a passionate owner of an online delivery company, who delivers goods worth $60 to one of his customers for the price tag of $100. If a chargeback battle is lost by John for this particular order, John loses the $100 that his customer paid, the $60 real value of the goods, the chargeback fee of, let’s assume, $50, and his delivery cost of $10. Overall, the chargeback would cost John a total of $220, not to mention the time he may have spent on dealing with it. That’s 367% of the real value of the goods lost!
11. Chargebacks across borders?
If your company is international and you provide your services or deliver your goods to multiple countries worldwide, chargebacks are even worse news for you. Communication internationally can be tricky and costly. Therefore, the chargeback process may have amplified rates. Regulations may also differ between banks internationally, causing increased costs for syncing up the process. Do you plan on going international? Then you better have a great chargeback prevention mechanism and quick reactions to customer complaints.
12. Time to fight for your money!
Representment, or chargeback reversal, is the process a merchant undergoes to attempt the recovery of the money he lost due to an unfair chargeback. It is a good thing that the process exists, giving you a chance to fix your reputation and get your money, yet it is no easy process. Plus, remember that your time is also money, and this process requires more time. To dispute a chargeback you need to submit documentation according to representment requirements – for instance, e-mail communications or a signed receipt of delivery. Why can it be complicated?
- You may have difficulties staying up-to-date with the ever-changing regulations that are vital to know. Terminology can also differ between banks, making your case even more challenging.
- Engaging in representment means staying in the past, while to succeed in business, as in life, you should concentrate on the future.
- There are tight deadlines! You usually have 5-10 days to provide what is necessary.
- If you choose representment you are taking a further risk. If your attempt fails due to a wrong approach or insufficient actions, you will lose even more money and time.
13. Beware of the second chargeback!
If you submitted all the required materials to dispute the chargeback you considered unfair, your bank will pass it to the customer’s bank, and the latter will review it to make a decision. Assuming you played your cards right, you will probably win the battle and get your money back. Hurray! If that does happen though, do not be too fast to party. There is still the risk of the customer’s bank filing a second chargeback for that same transaction.
When does the nightmare end, right? Keep in mind, a second chargeback is filed if the customer’s bank has any reason to change the reason code or finds some new information that changes the circumstances. Second chargebacks prolong a story you thought was finished. Who sponsors this ongoing story? Why you, of course! So build an effective and convincing argument during representment to end it there and then.
14. Any last chance?
If you fail at representment, there is one last process you can use to get your money back from unfair chargebacks – arbitration. This process is handled by a responsible person at the relevant card network and has its fees, rules, and obligations (unsurprisingly). Cautiously consider whether this process is indeed something you cannot do without, as it is yet another way to extend the resolution of an issue of the past. Your best shot will always be doing your utmost to succeed at prevention or representment.
15. You are being monitored
As you can deduce so far, win or lose a chargeback battle, your tainted reputation is practically irreversible. Your bank will certainly keep track of how many chargebacks are issued against you, which will affect your risk status accordingly. Businesses with frequent and numerous chargebacks are entered into something called a chargeback monitoring program upon being labeled ‘high risk.’ No, it is not at all charitable and does require a fee from you which is ongoing. Do not count on grace periods either.
As if this was not enough, if you find your company in a chargeback monitoring program, you are subject to intermittently paying an additional fee for a mitigation program. The aim is, of course, for you to reduce your chargeback rates. If you do not, you can be punished by increased processing fees or a frozen merchant account altogether.
16. The death of a merchant
This is the worst – ending up in the Terminated Merchant File. Technically, this means you become blacklisted by acquiring banks. Try and recover from that. If your company gets most of its money from credit and debit card payments, you might as well forget you had a business. Face it, every business does nowadays, and if you still make most of your money from cash, it will not continue much longer. Sadly, accounts of merchants that become suspended in such a way are almost impossible to restore. Do not let this happen to your business
Think logically. The chargeback mechanism will not simply cease existing. It is there and, on the contrary, its usage is only increasing. Therefore, adapt to the lurking threat of possible chargebacks. Do not ignore the likelihood that your transactions may be charged back. Be prepared. Stay up-to-date with the news around this area. Work with a strong payment-processing partner. Most importantly, teach your customer service team everything they need to know about chargebacks and how to prevent them. Do you need support yourself? Let me know! I will arm you to the teeth for this one!
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