What is a chargeback? Definition
In simple terms, a chargeback is a disputed transaction that can result in a return of funds. The payment dispute is addressed and processed by the bank or your credit card issuer.
If you are a merchant, chargebacks can really hurt your business to the extent of collapsing it. For consumers, chargebacks protect them from dishonest merchants and save them the time they would have wasted urging on the legitimacy of the transactions.
The purpose of chargebacks
- Make customers feel secure: Merchants offer exceptional services to avoid forced reversal of funds.
- Act as a warning to merchants: Merchants who might be tempted to offer sub-par products and services have no other option but to provide quality products and services. The reversal of funds keeps them in check.
- Helps merchants to stay transparent: The magnitude of chargebacks forces merchants to stay transparent all the time—no charges without authentic transactions.
- Protect innocent cardholders from criminal fraud: Today, it is common for cardholders to learn of unauthorized transactions made on their accounts. Chargebacks help them recover their hard-earned money.
The history of chargebacks
The Truth in Lending Act of 1968, designed to promote the informed use of consumer credit, set the ground for credit cardholder’s chargebacks. However, the issue of chargebacks was fully addressed by the Fair Credit Billing Act of 1974. This act further forced payment industry professionals to start taking the issue of chargebacks very seriously.
Initially, chargebacks were a form of consumer protection for credit cardholders. This meant cardholder’s money was safe no matter what happens. To date, chargebacks are still used to alleviate fear and protect cardholders from unauthorized transactions.
When can consumers legally use chargebacks?
Lack of knowledge of what chargebacks are and how they work limit many from legally use them. One particular moment when it is ok to use a chargeback is when you are a victim of identity theft. If a victim and fraudulent purchases were made, you have a right to call your bank to prevent further losses and recover the lost money.
In every other scenario, it is advisable to first communicate with the merchant before involving the bank. For example, consider when you forget you made a purchase. In such a case, reaching out first to the merchant can help address the issue without involving the bank.
The only time you need to bring in the bank is when the merchant is not prepared to work toward a mutually agreeable solution.
How to protect your business from chargebacks
Chargebacks can bring your business to a halt, or total closure if you don’t take the right measures. Fortunately, it is possible to stop them. How?
- Stick to a name your customer recognizes: One reason why customers initiate chargebacks is because they don’t recognize the companies behind the transactions. Consider a scenario where your customers are aware of your products, but not your company. In such a case, they can initiate chargebacks.
One way to address this is by changing the way charges appear on the customer credit card statement. Instead of “70 Flemish, LLC”, switch to “70flemish-charge.com 670.xxx.xxx IL”. Changing to such an URL makes it easier for your customers to know it is your company behind the charges. Besides, they can always use the URL to contact your support or billing team for help. As you try to tweak how charges appear on your customer credit statements, remember to adhere to the credit card processor’s rule.
- Include your phone number: Adding a phone number makes it easier for your customer to reach out when not sure why they are being charged.
Credit card security
Fraudulent transactions are common today, and you (merchant) have the role of safeguarding your customers. Installing a fraud tracking mechanism is one excellent way of preventing chargebacks.
You may also want to verify customer details, phone numbers, and addresses by the bank that issued the credit card. Fortunately, many banks offer fraud services. Use all those services exhaustively to stop any fraudulent transactions.
Good and services
Fraudulent credit card use is not always the reason why chargebacks are initiated. Offering sub-par products and services also trigger customers to use chargebacks. Offering quality products and services as well as having an elaborate refund policy eliminate the urgency of initiating chargebacks.
Avoid expired credit cards and remember to get authorization for the full amount that is on sale before initiating the selling process. That way, in case of any fraudulent activity, you will detect it before it is too late. For example, consider when a large order is fraudulently placed. Seeking authorization from the cardholder will stop you from processing such a request.
Read our article on how to handle a chargeback
Reducing chargebacks in your business should always be a top priority. While sometimes it can be an uphill task, being creative and implementing best practices recommended will go a long way into helping you contain chargebacks. Otherwise, if you rest, you will only have yourself to blame.
What technique are you using to stop chargebacks? We would be happy to hear from you in the comment section below.