Chargebacks

What are Chargebacks and How to Prevent Them?

What are Chargebacks?

In simple terms, it is a reversal of a credit card payment that comes directly from a bank. Instead of asking for a refund from the merchant, a customer will request their money back through their bank and the bank will conduct an investigation. If the bank finds the customer’s claim to be valid then funds are removed from the merchant’s account and returned to the customer. The customer is then not obligated to return whatever they purchased. Chargebacks were designed as a security measure to prevent merchant’s from committing fraud or not delivering what was promised.

Why Customers Do Chargebacks?

Some customers may feel they were wronged in some way if they do a chargeback. Usually for restaurants it could mean the delivery service was late, the quality of the food was not great, or etc. However, there are a number of wrong reasons why customers will do a chargeback as well:

  • To avoid an online fee or shipping fee
  • Buyer’s remorse
  • Return process is too bothersome
  • Wasn’t patient enough for delivery service
  • A child made the purchase without their parent’s or guardian’s consent
  • They didn’t remember the transaction and assumed it was false
  • Wanted the item for free or extra money
  • Stolen credit card

Recommendations

Since the burden falls on merchants when it comes to chargebacks, merchants should find ways to protect themselves or else they are susceptible to lose money from unsatisfied or dishonest customers. To reduce or prevent chargebacks, merchants should do the following:

  • Call the customer directly when a chargeback is made. If a merchant has access to the customer’s information then they should contact them immediately to find out their reason for the chargeback. If it is a unsatisfied customer then this is a good opportunity to make it right for the customer so that they can reverse the chargeback. Also, investigating the matter by contacting the customer will indicate if the customer was legitimate or not (i.e. stolen credit card).
  • Double-check credit card purchases that are a high amount or high quantity by following up with a customer before delivering their goods. For instance, if a customer puts in a delivery order at a restaurant that is over $100 then it would be wise for the restaurant to call the customer to check the validity of their purchase.
  • A merchant can also dispute a chargeback when they receive the notice. As long as the merchant is able to provide solid evidence that they fulfilled the transaction then they can dispute the chargeback. However, the success rate for a merchant to win a dispute is low. Therefore, it is the merchant’s responsibility to provide evidence that is compelling, which can include sales receipts, proof of shipping, proof of delivery, etc. It is also beneficial to get familiar with a bank’s chargeback rules and regulations in order to provide accurate evidence to certain chargebacks.