The right way to Keep away from Chargebacks and Defend Your Small Enterprise
By Susan Miller
A chargeback is a consumer protection tool that allows users to get their money back for fraudulent, unauthorized, or faulty goods. When chargebacks work as intended, they serve as an important consumer protection mechanism. But what if a customer abuses the system by filing a fake credit card dispute?
Before answering this question, let me explain what impact a chargeback can have on your business.
Effects of chargebacks
What do chargebacks mean for your company? You hit your bottom line. If a customer disputes a fee, you will lose both the product sold and the income from that sale. In addition, small businesses can be affected by:
- Chargeback fees. Each time a consumer files a chargeback, a fee may be charged. Even if the consumer cancels later, you as the merchant will have to pay the fees and administrative costs associated with the process.
- Excessive fines. If your monthly chargeback rate exceeds a set threshold, you may be charged excessive fines.
- Termination. If your chargeback rates stay above the acceptable threshold, your acquiring bank can simply terminate your merchant account. As soon as an account has been closed, it can be added to the MATCH list (Member Alert to Control High-Risk). This means that your business can be classified as high risk, which can lead to ramifications if you get a new merchant account.
Winning a chargeback does not mean you will regain your chargeback to transaction ratio. You will win back profits but not reduce the risk of a canceled merchant account.
What if your customer files a fake credit card dispute?
At first, don’t automatically assume that all chargebacks are valid. As a merchant, you have reasonable rights under the chargeback process that will allow you to dispute and recover the money. You should definitely refute chargebacks if you are certain that the transaction was legitimate, you have compelling evidence against the chargeback, and the amount is large enough to justify the work of providing evidence.
You need to be clear about the procedure and guidelines to follow after a chargeback. A full and timely response can go a long way in strengthening your position and help reduce the number of chargebacks that ultimately succeed against you.
Note the dates. Time is of the essence in disputes over credit card chargebacks. If you miss a deadline, you are likely to lose your chance to win.
After you’ve submitted your counter-argument to the bank, the chargeback dispute is no longer in your hands. It is now up to the bank that issues the credit card (such as Visa, MasterCard or American Express) to decide who wins or loses a dispute. But now you may be wondering if the bank’s decision is the final decision.
If you initially dispute a chargeback and the issuing bank sides dispute with the cardholder, you will likely receive a preliminary ruling or a second chargeback notice. This letter informs you that the bank initially sided with the cardholder and asks if you would like to initiate arbitration. You can choose to decline, which means the chargeback is maintained, or you can choose to arbitrate where the credit card company determines who wins the chargeback.
The arbitration with the credit card company is final. Once a decision has been made, there are no further remedies. A fee of several hundred dollars is typically charged for arbitration
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If you lose a chargeback …
I am often asked if a company can use a debt collection agency after losing a chargeback.
To answer this question, let’s look at the background of disputes. The federal government passed the Fair Credit Billing Act (FCBA) in 1974, an amendment to the Truth in Lending Act to protect consumers from unfair billing practices. The Truth in Lending Act gives consumers the legal right to dispute credit card fees when there is a billing error.
This law defines the responsibilities of the “card issuer” when cardholders submit disputes. However, the law says nothing about the role of the trader in this process. How merchants respond to credit card disputes is instead set out in the contractual agreement between the merchant and the payment processing company. Let’s look at that.
Most payment processing companies do not allow merchants to charge a consumer’s card directly after a chargeback. However, this does not prevent merchants from directly collecting payments from consumers. As with federal law, a review of multiple dealer agreements provides little answer as to whether a dealer can later attempt to collect from the consumer after losing a dispute.
The bottom line is that both federal law and dealer agreements are silent about whether or not a dealer can follow up on consumers to pay. Failure to pay a chargeback can be considered any other liability. This means you can go ahead as long as you can demonstrate that the debt is owed.
How to reduce chargebacks
Don’t be a victim of credit card fraud. According to ClearSale, stolen credit cards are the top cause (30%) of chargebacks. If a customer’s credit card is fraudulently used in a transaction, the merchant is solely responsible. Hence, you need to make sure that the credit cards consumers use to purchase your goods or services have not been stolen.
- Have a recognizable name. In your merchant account, make sure that the name you use is recognizable to your customers. Most customers initiate chargebacks when they see payments made to companies they don’t recognize.
- Provide a phone number. Add your credit card transaction to encourage customers to call you with questions before automatically requesting a chargeback. If customers see a phone number next to the charge, they are more likely to call you directly before opening a dispute.
- Sell good quality goods or services. Your customer can start a dispute just because a product or service didn’t meet their expectations. Make sure you are adding value to your customers and clearly state what to expect when they buy. You can also find a convenient Refund Policy page on your website that shows when customers can dispute charges for goods or services.
- Submit proof of delivery. To avoid non-receipt claims, you will be provided with tracking information from carriers to prove that your item was delivered to its destination.
Preventing a chargeback is far easier than fighting. You may have to deal with chargebacks even if you took the right precautions. However, there are steps you can take to reduce your loss.
CONNECTED: Is Your Ecommerce Business At Risk? How to prevent credit card processing fraud
About the author
Contribution by: Susan Miller
Susan Miller is a senior consultant at Fair Capital and has more than a decade of receivables management and business development experience.
Company: fair capital
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