How to dispute and prevent chargebacks as a small business

Title: How to dispute and prevent chargebacks as a small business and protect your chargeback reputation with Visa Mastercard.

Introduction:


In the world of credit card processing, chargebacks are a crucial aspect that merchants and consumers alike should be aware of. Chargebacks can significantly impact businesses and cardholders, so understanding what they are and how they work is essential. In this blog post, we will provide a comprehensive definition of chargebacks, discuss the reasons for their occurrence, and explore the implications they have on credit card transactions.

What is a Chargeback?


A chargeback refers to a transaction reversal initiated by a cardholder through their credit card issuer. It allows cardholders to dispute a charge on their statement and request a refund from the merchant. When a chargeback occurs, the funds from the disputed transaction are temporarily held by the cardholder's bank, pending the resolution of the dispute.

Reasons for Chargebacks:


Chargebacks can stem from various reasons, including:

  1. Fraudulent Transactions: Cardholders may identify unauthorized charges resulting from stolen or compromised card information.
  2. Dissatisfaction or Product/Service Issues: Customers might initiate a chargeback if they are dissatisfied with a product or service received, experienced non-delivery, or received damaged goods.
  3. Billing Errors: In some cases, chargebacks can occur due to discrepancies in billing amounts, double charges, or incorrect transaction details.
  4. Failure to Recognize the Merchant: Cardholders may dispute a transaction if they fail to recognize the merchant's name on their statement, leading them to suspect fraudulent activity.

Types of Chargebacks

  • Criminal Fraud - A fraudster makes a purchase with a stolen credit card or compromised card information
  • Friendly Fraud - A customer makes a legitimate, authorized purchase on their card, then disputes it

Implications of Chargebacks:


Chargebacks have several implications for both merchants and cardholders:

  1. Financial Impact on Merchants: Chargebacks can result in financial losses for businesses. Merchants typically incur chargeback fees, lose revenue from the disputed transaction, and may face penalties or higher processing fees if chargeback ratios exceed acceptable thresholds.
  2. Reputational Damage: Frequent chargebacks can harm a merchant's reputation and credibility. Excessive chargebacks may lead to being categorized as a high-risk merchant, which can limit payment processing options.
  3. Consumer Protection: Chargebacks offer a layer of protection for cardholders, ensuring they have recourse in cases of fraud or dissatisfaction. It provides a mechanism to dispute and potentially recover funds for unauthorized or problematic transactions.

How do Chargebacks work?

Purchase and Payment Dispute Initiation

A customer sees a suspicious or charge on their credit card statement or deduction from their bank account. Or, they want to dispute a charge due to bad service or never receiving the products they were charged for. They contact their bank (which we’ll refer to as the “issuing bank”), and they open an investigation.

Communication and evidence collection

The issuing bank alerts the merchant’s bank (also commonly referred to as the “acquiring bank”) of the chargeback and includes a chargeback code.

Chargeback reason code: A standardized code that indicates the reason a charge was disputed and a chargeback occurred. They help categorize cardholder disputes and determine next steps, and they vary by card network. Visa, Mastercard, Discover and American Express all have unique chargeback reason codes.

Next, the merchant’s bank works with the merchant to collect and provide to the issuing bank any evidence that may refute the chargeback.

Issuing bank decision 

The issuing bank’s investigator reviews all of the available evidence and determines whether or not the cardholder’s claim is justified. They either issue a chargeback to the merchant’s bank, or they find that the charge is authentic and side with the merchant.

If a chargeback is issued, the cardholder’s bank reverses the fraudulent charge by giving them a provisional credit. Then, they charge the merchant this credit amount to compensate for the bank’s loss, plus a chargeback fee.

Arbitration

If the two parties still do not agree, we step into a chargeback dispute process called arbitration. This gets the credit card company involved. Both the issuing and merchant banks present their evidence, and the card company makes a final decision to settle the dispute.

How do I dispute a chargeback?

Connect directly with the customer

  • Sometimes it was a misunderstanding and may have even tried to contact you.
  • Remaining in contact with customer service at the bank is key
  • Responding to customers is important
  • Once the chargeback is initiated, never issue a refund to the customer because you could be hit with 2 charges. The refund, and if you lose the chargeback you lose again.
  • Ask the customer to withdraw the chargeback if it was an innocent miscommunication.

Preventing Chargebacks


To minimize chargebacks, merchants can implement preventive measures such as:

  1. Clear Communication: Provide detailed product descriptions, accurate pricing, and transparent refund policies to avoid customer confusion and dissatisfaction.
  2. Robust Fraud Prevention: Utilize fraud detection tools and verification systems to identify and prevent fraudulent transactions.
  3. Prompt Customer Support: Address customer complaints and inquiries promptly and professionally, aiming for satisfactory resolutions.
  4. Accurate Billing Descriptors: Ensure that the merchant name or descriptor displayed on card statements is easily recognizable by customers.

Conclusion


Chargebacks play a significant role in credit card processing, serving as a consumer protection mechanism while impacting businesses. By understanding the concept of chargebacks, their causes, and the potential consequences, both merchants and consumers can navigate the world of credit card transactions more effectively. Implementing preventive measures can help businesses mitigate chargeback risks and maintain positive customer relationships, promoting trust and long-term success.

Scott Lorts

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