Ah, the chargeback. Even if you are not familiar with the term, you definitely are familiar with the practice. A chargeback occurs when a consumer files a dispute regarding their credit card statement, and the card provider forcibly removes funds from the business and places it back in the account of the consumer.
The Pros and Cons of a Chargeback
A customer can file for a chargeback for a variety of reasons, ranging from fraudulent charges to simply feeling the services/goods rendered were not of a sufficient quality.
From a consumer’s perspective, the chargeback can be a lifeline during a time of major distress. Did someone hack your account info and buy $400 worth of Best Buy DVDs? You can call your credit card company, and they will swiftly return that $400 right back to your account. It can feel like a tiny miracle to have your card company’s fraud department immediately return the money you know you didn’t spend.
But what about the business? Best Buy is now out $400 and their selection of DVDs. Often, the business even incurs a fee for this chargeback. From a business perspective, particularly a small one where every dollar counts, chargebacks can be a nightmare.
Turning the Tables
There are several things you can do as a business owner to minimize the amount of damage a credit card dispute can do to your accounts. Be proactive and very clear regarding your payment terms in order to reduce the risk of a chargeback occurring later.
Sometimes chargebacks occur simply due to a misunderstanding. A customer sees their statement online. They don’t recognize the name of a certain company so they file a dispute because they think their account has been compromised. Make sure the name of your business as it appears on statements is one customers will recognize. If you know they won’t recognize the name, put a disclaimer on invoices and receipts that says something along the lines of, “All charges will show up on statements as [your name here].”
Another step you can take to prevent painful chargebacks is to break up payments into smaller units whenever possible. PaySimple offers a great example for how this can help. Perhaps you run a gym, and a customer purchases an annual membership up front. Then this customer cancels halfway through the year. Even if you deny the customer a full refund, they can still file for a chargeback, and you lose six months worth of membership fees that they already used! By charging in smaller increments, say 30 days at a time, you protect yourself against these sort of “lump sum” chargebacks.
Finally, great customer service goes a long way. Enticing (or even just reasonable) exchange and refund policies – paired with accommodating customer service – will encourage your customers to come directly to you when they have an issue with an order. By removing the middleman of the credit card provider, you can better understand and troubleshoot your customers’ disputes and reach some sort of agreement about the best way to resolve their problem. Not only will it save you money in chargeback fees, it will increase overall customer satisfaction and brand loyalty to your business.