Chargebacks are a significant hurdle, impacting your business’ revenue and reputation. Consumers claim that 67% of chargebacks are avoidable. But is it really that easy?
Understanding chargebacks, why they occur, and, most importantly, how to avoid them is critical for maintaining a healthy and prosperous business.
This guide offers valuable insights and strategies tailored for high-risk industries. Find answers to questions such as:
- What is a chargeback, and what impact does it have on a business?
- How many chargebacks are too many?
- How to avoid chargebacks in a high-risk industry?
Read on to become an expert and to meet your best ally in chargeback prevention.
What is a chargeback?
A chargeback allows customers to get a refund directly from their bank or credit card company, bypassing the store where they made the purchase. It’s essentially a financial safety net.
Here’s how it works:
- A customer contacts their bank or credit provider and tells them what went wrong with the purchase.
- They look into the claim and if they agree that a customer was wronged, they’ll take back the money from the store’s account and return it to the customer.
Chargebacks are meant to protect consumers from fraud or mistakes. As such, it’s important to use them responsibly and not just because someone changes their mind about a purchase.
Misusing them can lead to undesirable results for both the purchasing and selling parties.
Consumers may incur penalties or even lose their credit card privileges. On the other hand, businesses with too many chargebacks can land on a TMF or MATCH list, which makes it hard for them to process credit card payments.
Why do chargebacks occur?
Chargebacks are a form of consumer protection that lets customers get their money back in certain situations. If you operate in a high-risk industry, it’s crucial to learn how to avoid chargebacks and what reasons lead to them.
1. Unauthorized transactions
This is especially common in high-risk industries where fraud rates are higher. If someone uses a customer’s card details without their permission, the customer can file a chargeback to reverse the transaction.
2. Item not received
In industries where goods or services are sold online, customers might request a chargeback if they don’t receive what they paid for. This could be due to shipping issues, digital goods not being accessible, or services not being rendered.
3. Not as described or defective products
If a product or service doesn’t match its description, or if it’s faulty, customers might seek a chargeback. This can happen if there’s a mismatch in the quality or specifications promised versus what is delivered.
4. Duplicate charges
Errors in payment processing can lead to customers being charged multiple times for the same transaction. In high-risk sectors, where transaction amounts can be significant, this becomes a major concern.
5. Service disputes
This is particularly relevant in service-oriented, high-risk industries. Customers might opt for a chargeback if services are rendered poorly or not as agreed upon.
Effective customer service, clear communication, and reliable product or service delivery can reduce the likelihood of chargebacks. Remember, chargebacks affect immediate revenue and impact your business’s reputation and relationships with payment processors.
Why chargebacks hurt your business
Chargebacks are not just about losing a sale; they have broader impacts – especially for businesses operating in high-risk industries. Here are a few of the possible repercussions of chargebacks:
Loss of revenue
The most direct impact of a chargeback is the loss of money. Not only do you lose the sale, but you also lose the product or service that was provided.
Plus, there are often fees associated with each chargeback, which can add up quickly, especially in high-risk industries.
Damaged relationships with banks and payment processors
Too many chargebacks make your business look risky to banks and payment processors. They might increase your processing fees or in extreme cases, end their relationship with you.
This can disrupt your ability to accept payments and hurt your business operations.
Increased security concerns
Fraud-related chargebacks raise concerns about the security of your payment systems. They could also indicate that your business needs to invest more in security measures to prevent future fraud, which can be costly and time-consuming.
Bad customer experience
Chargebacks often indicate that customers are unhappy. This can be due to poor product quality, service issues, or delivery problems. Frequent chargebacks damage your business’s reputation, leading to a decrease in customer trust and loyalty.
Administrative burden
Dealing with chargebacks takes time and resources. You need to communicate with banks, process paperwork, and possibly engage in dispute resolutions. This administrative burden takes your focus away from higher-value activities.
How many chargebacks are you allowed to have as a business?
Different card networks like Visa, MasterCard, and PayPal have their own rules, but they all agree that too many chargebacks are bad news.
For example, Visa typically allows a chargeback ratio of up to 0.9% of your standard transactions. This means that if more than 0.9% of your sales end up as chargebacks, you might face penalties or even lose your ability to accept Visa cards.
Other networks, such as MasterCard, have similar thresholds. The numbers and conditions may vary. These limits are in place because many chargebacks signal problems like fraud, poor customer service, or product issues.
To support businesses, card networks and payment platforms often provide fraud and chargeback prevention tools. This can include:
- Regular and clear communication with customers
- Better transaction tracking
- More secure payment processes
How to prevent chargebacks? 7 Expert tips to reduce them
Chargebacks can be a major challenge, especially in high-risk industries. But there are effective ways to reduce them.
If you’re figuring out how to avoid chargebacks, follow these expert chargeback prevention tips:
1. Provide clear service and product descriptions
Ensure your product or service descriptions are clear and accurate to set the right customer expectations.
Include details like size, color, features, and any limitations. The more accurate the description, the less likely customers will feel misled and file a chargeback.
2. Use recognizable billing descriptors
Customers often file chargebacks because they don’t recognize a charge on their statement.
Ensure your billing descriptors clearly reflect your business name or the product sold to prevent misunderstandings.
3. Implement strong customer authentication
Strong authentication verifies the customer’s identity, adding an extra layer of security.
Use security measures like two-factor authentication for transactions. This reduces the risk of fraud, which is a common cause of chargebacks in high-risk industries.
4. Have a clear and easy refund policy
Make your refund policy easily accessible and straightforward. If customers know they can return a product or cancel a service easily, they’re less likely to go straight to their bank for a chargeback.
5. Provide excellent customer service
Respond quickly to customer inquiries and complaints. Be proactive in resolving issues and offer solutions that meet customer needs. A satisfied customer is less likely to file a chargeback.
6. Keep detailed transaction records
Maintain thorough records of transactions, including communications with customers. This can be invaluable if you need to dispute a chargeback.
Documentation like signed delivery receipts, email interactions, and service agreements can provide crucial evidence.
7. Monitor for fraudulent activity
Lastly, but perhaps most importantly for high-risk businesses, stay vigilant for signs of fraud. An example would be multiple orders from the same customer using different cards.
Implement tools that detect unusual transaction patterns such as this one, which can be indicators of fraud.
Remember, chargeback prevention is key, and a proactive approach can save your business time and money.
Avoiding chargebacks using PayFasto
Beyond teaching you how to avoid chargebacks, PayFasto proactively assists you.
The first step in dealing with a chargeback is to inform your bank about the situation.
With PayFasto, you can efficiently gather and organize all the necessary information to present your case effectively to your banking institution. This includes transaction details, customer communications, and any other relevant data that can help in disputing the chargeback.
PayFasto helps you identify potential causes of chargebacks in your business and prevent chargeback.
This could be through:
- Improving transaction security with its high-risk payment gateway
- Enhancing customer service with recurring and international payment options
- Customizing the perfect payment solution for your specific business
