For small business owners, they’re a nightmare that can cost untold money and time to correct. Unfortunately, in this increasingly digital economy where fraud or consumer fickleness runs rampant, they’ve become increasingly commonplace. What is this bane of every merchant’s existence? Credit card chargebacks.
Chargebacks happen after a consumer disputes a credit card charge. To rectify the supposed transactional error, the card issuer will then credit back the amount of the charge to the consumer’s card while leaving the merchant with a gaping hole in his or her merchant account. Sometimes a credit card chargeback can be the result of human error, technical glitch, or in the worst-case scenario, deliberate fraud. However, even if the outcome was triggered by illicit intentions, small business owners still have to contend with the fallout, which may include penalty fees incurred as a result of these chargebacks.
Card Hub, a credit card information site, recently released the findings of it its 2012 Chargeback Policy Report, which polled the top credit card companies to find out what consumers need to successfully execute chargebacks. The study revealed that:
- Among the credit card networks and issuers that responded, all have consumer-friendly chargeback policies and tend to favor the customer over the merchant;
- Usually a merchant is charged back in the event that the merchant does not respond to a customer’s dispute; and,
- The most common scenario in which the customer is not credited for a dispute is when a customer is unable to produce a receipt when claiming that a tip was inflated.
In a sales climate in which “the customer is always right,” how then can merchants minimize credit card chargebacks? The following best practices can offer relief from these annoying gremlins of credit card commerce:
Document, document, document
Kate McGinley, the owner of the Pittsburgh-based McGinley Media, a nearly four-year-old web development and marketing firm with a staff of 11, has been an unfortunate and frequent victim of chargebacks. So much so that now every time her company performs a service for a client, McGinley always makes sure to produce a paper trail that will support and verify that the client received what they ordered. This due diligence was prompted in response to an incident that she says almost resulted in the closure of her business.
“I had a client who had my company build an app for thousands of dollars and then issued a chargeback, saying he never got it,” recalls McGinley. “He's currently selling the app in an app store. That chargeback was the biggest one [I’ve had]. After that experience, it became our policy to also send a flash drive with the code/graphics work we've done to the client. We also get delivery confirmation as well.”
Ask every cardholder for multiple IDs
“If [the name] doesn't match, do not allow the transaction to be consummated,” says Jim Angleton, president and CEO of Aegis FinServ Corp, a three-year-old prepaid debit and credit card issuer that frequently deals with small business clients.
Also, if the cardholder is asking for cash back, Angleton says the merchant should review the signatures on both the card and ID to see if they match. But even then, the merchant still needs to exercise extreme caution.
“Cash back and possible returns can make for problems,” notes Angleton, who has nine employees in the U.S. and six in Central America. “I've seen unsuspecting employees give a full refund including the cash back.
Pay attention to each individual order
If you’re a larger company or website that processes a multitude of orders per day, this is a difficult best practice to follow, particularly if the orders are automated. But for Izzy Goodman, founder CCS Digital-Com, a family-run online operation that sells ink cartridges, it’s become the standard when dealing with customer orders and preventing fraud.
“Orders come in to us and we have to process them,” explains Goodman. “They don’t happen automatically. So we’ll catch such things as address or security code mismatches. We insist that the shipping address match the billing address—at least on the first order.”
Although some customers may get irked at Goodman’s extreme vigilance when it comes to verifying names and addresses, he insists it’s not only for his protection but theirs as well. He cites an example: “When a scammer got hold of my credit card number and ordered items to be shipped to a different address, my issuer flagged it as suspicious and called me. Yet there are people who routinely use their card and have items sent all over. Then they get upset when their cards are used fraudulently.”
Provide stellar customer service
It better not be merely good, but excellent, insists McGinley. “This mostly prevents chargebacks from those who may not like your product or service,” she adds. “By offering good customer service, you have the opportunity to fix the problem before the chargeback.”
When in doubt, e-mail the customer
To prevent online fraud, which can often result in chargebacks, this is a key takeaway, says Goodman.
“Scammers try to use a card quickly before it is reported stolen,” he says. “If you send an e-mail, scammers very often won't reply because they're too busy placing orders with all their different stolen cards.”
Understand your merchant agreement
“Read carefully your merchant agreement,” advises Angleton. “Make sure you understand the merchant discount percentage and costs associated with card acceptance and card processing. They should be in the range of 1.75 to 3.75 percent.” He also counsels small business owners to carefully review their monthly and merchant statements for unknown charges, unknown fees and out of place chargebacks.
Have a liberal return policy
“If you can prove to the issuer that your customer can easily get a refund, they will deny the chargeback,” maintains Goodman. In this instance, he adds “there is no reason to do a chargeback unless it’s a scam.”
He also adds that in the past when a customer has done a chargeback several months after a transaction claiming product ineffectiveness, Goodman contacted the card issuer to explain that “it doesn’t take several months to discover [our ink cartridges] don’t work.”
Credit card chargebacks are vocational nuisances for all small business owners. But if you follow some precautionary measures, you will start minimizing them, if not squelching them entirely.