Strategies to Manage False & Fraudulent Chargebacks

Everyone who has ever operated a business knows that chargebacks can be one of the most frustrating, financially taxing parts of being an owner. Due to loopholes in the original laws that created the chargeback process, some business owners now feel as if they’re held captive by fraudulent and otherwise “fake” chargebacks. When unscrupulous people abuse laws that were initially written to protect honest consumers, everyone suffers. Owners lose a significant amount of time and money trying to effectively deal with this recurrent problem.

Sadly, chargebacks are just part of the scenery for owners and entrepreneurs who try their best to deliver excellent service and quality products to customers. The situation really is a crap shoot in a lot of ways. Some business owners seldom feel the sting of a massive chargeback problem while others are nearly driven to stop operating their companies and finding another line of work.

In the worst cases, you can get tagged with the “high risk” label for having too many chargebacks from customers and have your merchant account shut down as a result. Fortunately, there are ways to deter, avoid, deal with, and otherwise cut down on the number of chargebacks you have to endure. Another tactic for owners is to take a pro-active stance and not only work to prevent these unhappy occurrences but also find a smart way to deal with chargebacks when they surface.

Owners need to begin by understanding what chargebacks are, learning how they happen, and finding specific methods for preventing them.

What Chargebacks Are

Simply put, a chargeback is a reversal of the flow of funds. The original movement was from customer to merchant. But when that flow changes and becomes a “merchant to customer” movement of funds, you’re dealing with a chargeback. For now, the reasons for this rather unnatural financial act don’t matter. The key point to grasp is the concept of reversed flow of money.

Before nearly all payments were done electronically, customers would often go to a merchant’s store or office and “demand a refund.” You might say that was the older version of a chargeback because the customer was reversing the payment process by returning an item for a full refund. In modern times, these funds reversals are done by a customer’s or client’s card-issuing financial institution. However, the customer is the person who sets things in motion.

Keep in mind that there are two very similar processes that can take place, but only one of them is called a chargeback. The other is a “return.” Say you order a blender from an online retailer and decide you don’t really need it. You contact the seller and ask for your money back, ship the item back to the company, and a few days later receive the purchase price back on your debit or credit card. That’s not a chargeback. It’s a return.

However, if you simply call your credit card company (any time after your order the blender) and dispute the transaction for any reason, the card company will initiate a chargeback. No one cares whether the blender has been shipped, is still in transit, is sitting on your porch, or is on your kitchen counter. A disputed credit or debit card charge begins the chargeback process.

What’s the formal definition? A chargeback takes place whenever a customer or client successfully challenges a charged amount on their account and the original charge is returned to the customer’s card or account. It’s basically a reversal of charges.

How They Happen

Chargeback fraud is more common than ever. It represents one of the most pernicious threats to the well-being of businesses of all sizes and in all segments of the economy. There are several ways that chargebacks can happen, but most of the causes are categorized in one of four ways:

  • Outright fraud: Fraud can be committed by customers, merchants or third parties. Many fraudulent transactions involve nefarious customers who retain ordered goods but say they never received them. Likewise, some unscrupulous merchants abuse customer card data and charge for items that were never ordered.
  • Unhappy customers: Instead of contacting you, the merchant, and asking for a refund, some disgruntled customers will simply contact the card issuer and begin the chargeback process.
  • Technical problems and errors: Mistakes happen. Banks and merchants make clerical errors that end up initiating a chargeback.
  • A combination of fraud and unsatisfied customers: It sometimes happens that unhappy customers don’t get fast enough service or are not able to get their money back quickly enough. Later, these same folks might try to get “revenge” on the company by engaging in fraudulent chargebacks. In essence, this example is a case of flat-out fraud, but one that was initiated by a legitimately disgruntled customer who let their anger get out of control. In social media circles, the term “revenge shopping” describes this behavior, which appears to becoming more common as the vast majority of commerce now takes place online.

Seven Effective Ways to Prevent Chargebacks

What are the most effective ways to prevent chargebacks? Here are some methods that can make a difference for any entrepreneur, business owner, or corporation:

  • Excellent Service: Attending to your customers’ needs from the very first interaction through the purchase will do a lot to keep chargeback rates low. Happy customers rarely initiate a chargeback. Instead, they’ll contact you when they have a problem or question.
  • Communication: Communicate with customers so you both know what to expect about services or products, prices, etc. Many problems begin when consumers and merchants simply don’t understand one another. Post your refund rules so customers can see them before they buy.
  • Confirm Expiration Data: To avoid clerical errors, double-check to make sure your customers’ card expiry dates are accurate. This tiny error is at the root of many chargebacks.
  • Be Easily Reachable: Clearly post all your contact information on your site and on receipts so customers can easily reach you for any reason.
  • Maintain Records: Even if you are a one-person, online merchant, keep meticulous sales and delivery records. Many times, you’ll be able to use these records to resolve disputes.
  • Be Honest About Shipping: Don’t leave buyers in the dark about shipping times, policies, or charges. Letting them know all the facts up front prevents unpleasant surprises related to additional charges and fees.
  • Describe Products/Services Perfectly: Buyers should know exactly what they’re getting. Do your best to describe and show photos of every product you sell. Describe services in minute detail.

Getting the Help You Need

Don’t let chargebacks ruin your professional reputation or your ability to do business. Make sure you have the help you need to minimize problems and stop them before they happen. At Metro Payment Technologies we specialize in chargeback handling so you don’t have to worry about the hassles of chasing down every minor disruption and funding glitch. Click here to find out more about our specific merchant services for dealing with chargebacks.

At Metro Payment Technologies we offer a full range of merchant products and services to make your daily operations simpler and more profit-focused. Our product line includes payment terminals, e-commerce solutions, e-check processing, and more. Some of our most popular services include payroll, customer support, leasing-related services, PCI compliance, and chargeback & retrieval handling.