With improvements in web technology, lower barriers to entry for non-technical entrepreneurs, and the overall growth of e-commerce in the global economy, it has never been easier to start an online business. But running an online business is not without its challenges, however, and one of the most insidious challenges is associated with the ability to accept online credit card payments: chargebacks.
Stemming from disputes between consumer and merchant, chargebacks can be a truly debilitating problem for any online business. What many new and established merchants aren’t always aware of, though, is that there are several strategies and tools available to both reduce the likelihood of chargebacks and increase the chances of winning the disputes that led to them. The key is to select a payment processor that makes chargeback defense a high priority.
What are chargebacks and how do they work?
In 1974, as part of an effort to curtail an ongoing practice of creditors taking advantage of consumers, the U.S. Congress passed the Fair Credit Billing Act (FCBA), an amendment to an earlier law that also sought to protect consumers. One of the provisions of this law is the mechanism now known as a chargeback: the ability for a consumer to dispute a transaction they believe is erroneous and subsequently receive a refund.
Originally, requesting a refund required submitting a request in writing, a practice many consumers were unaware of or unwilling to do. In more recent years, though, credit card companies have made it easier for consumers to dispute transactions. As a result, more transactions are disputed and it has become increasingly burdensome for merchants.
Though there are undoubtedly times when a customer is justified in disputing a transaction, one of the unfortunate side effects of it being easier is that there is a greater chance for fraud. A customer can make a purchase and legitimately receive the product or service but then claim that they never received the product. At this point, the card issuer will usually immediately debit the transaction from the merchant’s account and credit it to the customer before starting an investigation.
In this investigation, the burden of proof is on the merchant to provide sufficient evidence that the transaction was legitimate, but this can be difficult for the merchant, particularly if receipt of the product is difficult to prove. The merchant has 10 days to provide this proof, otherwise, the refund to the customer will be permanent; the merchant typically only gets the money back if they “win” the dispute. Additionally, the issuing bank will charge the merchant a chargeback penalty fee; depending on a variety of factors, this fee can range from $20-$100 per transaction.
How do chargebacks affect my business?
Beyond the obviously onerous penalty, the impact of a chargeback can extend beyond an individual transaction. Each chargeback that hits a merchant’s account accumulates and is evaluated in comparison to the total number of transactions. The general rule in the payment processing industry is that up to 1% of your transactions can be chargebacks before a problem arises. In fact, there are some payment processing services that will immediately (and without notice) shut down a merchant account if the chargeback rate exceeds 1%.
It is because of this potentially looming risk of being shut down that merchants are understandably wary of having too many chargebacks. The truth is, though, that many merchants don’t have the expertise to know how to reduce the chances of getting chargebacks nor how to effectively deal with them if they arise. This is why the choice of payment processor is critically important in the operation of an online business.
It’s time to reevaluate your payment processing service
For those who are just getting started in the world of e-commerce, it’s important to make sure your search for a payment processor includes a close look at how they handle chargebacks. Many will pay lip service to the idea of dealing with chargebacks, but they might not offer any concrete solutions or features that describe their approach. One valuable tool to look for in their feature set is integrated chargeback alerts; this automatically notifies the merchant if a customer is trying to dispute a charge, and it allows them to issue a refund before it can actually become a chargeback.
Another component to be mindful of is how the service helps you manage disputes in the unfortunate event that a chargeback does happen. Since you only have 10 days to dispute the transaction, you’ll want all the help you can get to move the process along. Manually responding to disputes can be cumbersome and time-consuming, so you’ll want to make sure your processor has automated features that make it easy to submit the necessary detailed evidence and have a better chance at winning the dispute.
Even for those who already have a payment processor they work with, it’s never too late to reevaluate the relationship. Are they dedicated to reducing the likelihood of chargebacks? Do they describe the features of their service that are designed to do this? Do they have tools in place to make it easy to dispute chargebacks when they happen? If they answer no to any of these questions, then it’s time to find a new partner.
Bolster your chargeback defense with PayCafe
The philosophy behind PayCafe’s services is to value your business and help you thrive through customizable payment processing that works for your business’ specific needs. Beyond providing an easy-to-use interface with bank-grade security and concierge-style customer support, PayCafe has advanced chargeback defense features that include an early warning system that alerts you to potential disputes as well as a streamlined dispute management system that allows merchants to respond quickly and win more disputes.