What are Chargebacks and How Do They Hurt My Business?

If you’re an online merchant who hasn’t yet experienced a chargeback, you’re in luck. But don’t let down your guard; it can happen to anyone. Business may be humming along and your website may have no problems accepting credit card payments. Out of the blue, though, you find out that you got a chargeback. It might not seem like a big deal at first, but then you get more. Then one day, without warning, your payment processor suddenly shuts down your account. Unfortunately this story happens all too often to talented entrepreneurs who were doing everything right and above board. 

What are chargebacks? 

Chargebacks were originally designed by the U.S. Congress as a means of protecting consumers from potentially predatory practices of merchants or creditors. Through the 1974 Fair Credit Billing Act (FCBA), Congress created the chargeback mechanism so that consumers could dispute any erroneous transactions that showed up on their billing statements. 

What started as a necessarily deliberate process that required a consumer to submit a written request has now become much more simple. In recent years, credit card companies have made it exceedingly easy for a consumer to dispute a transaction and subsequently trigger a chargeback. As a result, the pendulum has swung the other way and now merchants are more likely to be wronged. 

How does a chargeback work?

When a customer decides to dispute a transaction (for whatever reason), he or she will contact their credit card issuer and officially submit this request; many banks now allow this to be done directly from your online account page. Once the request is submitted, the card issuer will typically deduct the amount of the transaction from the merchant’s account and credit it to the customer — all before making any attempt to verify the authenticity of the transaction. 

The card issuer will then begin an investigation, but the burden of proof is really on the merchant to adequately demonstrate that the transaction was indeed legitimate. For some merchants, especially those who deal in digital products or services, this can be difficult to demonstrate since the product isn’t a physical object. The merchant has 10 days to provide the proof; if they win the dispute, the refund is reversed. If the merchant loses the dispute, the refund will stand and they will be charged a penalty fee.   

Why do chargebacks happen?

There are many different reasons a customer might dispute a transaction and trigger a chargeback, but it often comes down to a question of authorization, amount, or a problem with the product or service. An increasingly prevalent reason for chargebacks, however, is what has come to be known as “friendly fraud.” This oxymoronic term refers to the practice of a customer legitimately receiving the product or service they paid for and then fraudulently demanding a refund. This type of fraud is unfortunately on the rise, and it means that defending against chargebacks is more important than ever for online merchants.   

How do chargebacks hurt my business?  

On the surface, chargebacks might seem like just another cost of doing business that has to be factored in. While that’s true to some extent, the cumulative effect of multiple chargebacks can become devastating to merchants for several reasons: 

  • Chargeback fees: depending on the issuing bank, the fee assessed for processing a chargeback can be between $20-$100 per transaction. For many merchants, that kind of hit can very quickly become too much to handle. 
  • Product loss: in cases of fraud, you lose the money from the transaction in addition to the value of the product or service you sold. If you sold a $100 widget, for example, and the customer received the widget but then fraudulently disputed the transaction, you would lose the $100 sale, the amount of the chargeback fee, and the value of the product that was in your inventory. Some have estimated that every dollar lost to chargeback fraud equates to an actual $2.40 loss for the merchant.
  • Possible merchant account shutdown: the general rule in the payment processing industry is that 1% of a merchant’s transactions can be chargebacks. Depending on your transaction volume, that can be a pretty low threshold. If you exceed the 1% level, many payment processors will immediately (and often without notice) shut down your merchant account.  

How can PayCafe help?  

Chargebacks can become a major burden for new merchants and veteran merchants alike, and getting a chargeback isn’t necessarily a sign of a problem with your business. That’s why chargeback defense is such a high priority for PayCafe, and it’s why they’ve designed their processing system with chargebacks in mind. Through PayCafe’s advanced dispute early warning system, you’ll be able to greatly reduce the likelihood of even getting a chargeback in the first place. 

If a chargeback does come through, PayCafe also offers an easy-to-use dispute management system that automates many parts of the dispute process that are tedious and time-consuming; between that and access to comprehensive transaction information, you’ll win more disputes and keep your chargeback rating at a healthy level. But PayCafe also knows that not all situations are the same, and so they’re committed to working with you to understand your business and the circumstances that may surround chargebacks; they’ll always communicate with you about the status of your merchant account. Ultimately, PayCafe is in your corner and wants you to thrive while keeping problems with chargebacks at bay.