When you run your own small business or ecommerce company, a merchant account that allows you to accept credit or debit cards as payment is a must. Most modern customers are used to paying for their purchases with credit or debit, so a merchant that doesn’t offer customers this convenience definitely risks losing business to competitors that do.
However, the ability to accept credit cards as payment doesn’t come without its share of risk. Charge-backs can be especially worrisome for small businesses and understandably so, especially if they’re frequent. But why do charge-backs occur in the first place? Even more importantly, how can a small business owner adequately protect himself? Here we’ll go over everything you need to know to ensure your charge-back risk is as low as possible.
What Are Chargebacks and Why Do They Occur?
A charge-back occurs when a customer decides to dispute a charge with their credit card company. That company then investigates the dispute and if it’s found to be valid, the customer receives their money back. If the charges in question have already cleared, your merchant account will be “charged back” to cover those costs. You also must pay a charge-back fee which can set you back anywhere from $15 to $100 depending on the circumstances so you’d better focus on charge-back prevention to avoid wasting resources.
A credit card company or bank could deem a dispute valid for any number of different reasons. Many times, a customer disputes a charge because it was made fraudulently by a third party using that customer’s identity. However, a customer may choose to dispute a charge they actually did make if:
- They weren’t billed correctly for whatever they bought.
- They never received the item or service they paid for.
- They did receive the item or service, but it wasn’t as described or failed to meet the customer’s quality standards.
- They failed to actually recognize the charge when they checked their credit statement.
Credit companies are much more vigilant than they once were when it comes to fraud prevention, so charge-backs due to identity theft are on the decline. However, minimizing your chargeback risk on an ongoing basis is still something you as a business owner really need to stay on top of. Start with the following suggestions.
- Make sure you’re following processor protocol to the letter.
Each credit card processor is going to have its own protocol in place as far as merchants that accept credit as payment. The better informed you are when it comes to that protocol and the more closely you follow it, the less likely chargebacks become. When processing a purchase where the payment card is actually present at the point of sale, double-check the expiration date and enter the security code found on the back of the card. Also check the customer’s signature against the one on the back of the card.
If you plan on taking orders under circumstances where the card won’t be present (i.e. online or over the phone), make sure you’re aware of any additional protocol that might be in place. Some credit card processors need to grant you special permission to process such transactions. In many cases, you’ll need to capture customer IP addresses, digital signatures, or information attached to social media profiles before you’ll get the official green light.
- Make sure your payment descriptors are clear enough.
One of the most common reasons a customer might decide to dispute a charge is also one of the most easily prevented. It has to do with payment descriptors that simply aren’t clear enough. When customers see such charges appear on their credit statements, they simply assume they’re fraudulent and don’t hesitate to dispute them.
Make sure your descriptor includes your actual merchant or store name and not just the name of a parent company your customers might fail to recognize. This makes it a lot easier for a customer to actually recall a purchase they made with you, especially if some time has passed or if they do a lot of shopping in general.
- Protect yourself with contracts.
We’ve all heard the expression “get it in writing” a time or two and with good reason. One of the most important things you can do to protect yourself is have your customers sign contracts, especially if you offer services as opposed to goods. The contract should spell out in detail what exact services or items you’re offering in exchange for the exact amount of money the customer in question is paying you.
When your customer’s express authorization appears in writing this way, there’s a lot less room for misunderstanding or ambiguity later on down the line. Even credit companies that are famous for defending their customers no matter what (i.e. American Express) often decide in the merchant’s favor when there’s an ironclad contract in place.
- Be prompt when addressing customer service problems.
Most credit card processors offer to send you up-to-the-minute notifications in case of a chargeback. If yours does, take advantage of it. The sooner you find out about a potential issue a customer might be having with a purchase, the more quickly you’ll be able to address it. In some cases, you can even save the sale and prevent the chargeback altogether.
Even if you can’t ultimately prevent that particular chargeback, keep in mind that great customer service really does go a long way. People have a way of returning to businesses that go the extra mile to treat them right, especially when it comes to addressing problems and issues.
- Train yourself to catch the signs of fraud early.
Some merchants wind up learning the hard way when it comes to fraud-related chargebacks, especially when it comes to ecommerce. A web purchase will be made using a stolen credit card number and a chargeback will occur when the rightful owner disputes the charges. However, when the merchant attempts to seek help from the authorities, they may be told there’s nothing that can be done.
The best course of action is to stop fraudulent purchases before occur, especially online. Learn to spot the signs and then take the proper precaution. Pay careful attention to details attached to credit or debit cards. Red flags include security codes that seem incorrect or a shipping address that doesn’t match the billing address. In the event something doesn’t add up, call the customer to confirm the purchase or verify the information via a social media account.
- Make sure any employees you have are just as well-trained.
Fraud awareness shouldn’t start and stop with you. It’s just as important to make sure your employees not only know how to spot potential red flags, but understand the protocol for dealing with potential issues as well. Teaching points should include but don’t necessarily have to be limited to:
- How to deal with both card-present and card-not-present transactions of all types, including adjustments and returns.
- How to promptly spot and successfully navigate suspicious transactions.
- When and how to obtain signatures on sales orders, contracts, et cetera.
- Proper signature verification protocol.
In fact, fraud prevention should be a top company priority when you own or run a small business. One of the smartest things you can do is make sure this value system extends to all of your employees, but especially those that handle money and sales transactions.
- Make sure your record-keeping technique is spotless.
Solid record-keeping is an absolute must when you run a business of any size and this is especially the case when it comes to credit card transactions. The more detailed and fastidious you are, the easier it will be to fight a chargeback if you ever have to. Make sure you include transaction dates, exact amounts, and all authorization data.
Not every chargeback is related to identity theft. Some customers really do forget they made an otherwise legitimate purchase and others actively try to take advantage of the chargeback system. Detailed records are the best way to protect yourself.
- Don’t be afraid to fight back against unfair chargebacks.
Every so often, even the most careful merchant has to deal with a chargeback. While it’s understandable that you may not want to pour the time and expense into fighting every single one, you should be willing to do so when it actually makes sense. Remember, each chargeback also costs you in fees, as opposed to simply lost sales. Plus, developing a history of getting hit with chargebacks can potentially damage your relationship with your merchant account provider.
That said, if you think you have a good chance of winning a case, it’s worthwhile to at least consider trying. You can always hire a chargeback management professional to help you if it’s too much to handle on your own. Just make sure you carefully weigh the costs of each option before you make your decision.
At the end of the day, no merchant wants to deal with chargebacks, but they become infinitely less damaging if you know what to do to prevent and deal with them. Start making your company chargeback-proof today!