Understanding chargebacks and how to avoid them

Understanding chargebacks and how to avoid them

We are committed to providing retailers with information they need to keep their businesses successful and safe. As you begin to see the welcomed increase of customer traffic in-store and online this holiday season, it is a great idea to brush up on what chargebacks are, the potential impacts for your business, and how to avoid them.

What is a chargeback

A chargeback occurs when your customer disputes or questions a charge from your business and calls their card issuer (usually their bank) to reverse it. The existence of credit card chargebacks is to protect consumers from transactions they did not authorize. This may mean your customer has a valid reason for disputing the charge, but it can also be an indication of fraud. Whatever the scenario, chargebacks may have a negative impact on both your bottom line and your reputation.

What are the reasons a chargeback can occur?

For the most part, chargebacks are legitimate claims on the part of your customer, but there are times when fraud can play a part:

• For the claim that an item was never delivered or received, your customers may have their own expectations on when an item will be received. Additionally, COVID-19 has impacted product production, supply chains and deliveries.
• Customers may see a double charge on their credit card statement for the same item/transaction, but they may have accidentally bought the item twice.
• Your customer may see a charge on their credit card statement for a purchase they never made or a transaction that is not at a retailer they shopped at. Sometimes this occurs because your customer does not recognize the name of the business that the purchase was made at.
• Your customer receives a product that they feel is not representative of what they originally intended to buy.
• For fraud claims, a customer may say they are a victim of identify theft and never made the purchase or they knowingly make the purchase with their own credit card but then claim they were not the ones who did so. This type of fraud is called “friendly fraud”.

What is the chargeback process?

Even though it is the customer who initiates the chargeback with their credit card issuer (the issuing bank), as a retailer, you will not be dealing directly with the individual. In fact, once the customer calls to complain about a charge on their statement, the issuing bank will contact your merchant payment processor demanding evidence of the disputed transaction. It is at that point that you are contacted directly by your payment processor with a “chargeback notification”.  You should address these notifications quickly. 

The payment processor will usually  charge a fee for the work done on evidencing the claim.  Upon receipt of the notification, the payment processor will debit your merchant account for the disputed amount. At this point, you can either decide to challenge the chargeback or agree to it. If you decide to contest it, the payment processor will require evidence from you that the transaction was valid such as receipts, invoices, or proof of delivery such as tracking numbers if the item(s) was shipped.

Once you provide the information to your processor, they will provide all the evidence to the issuing bank who will determine whether the chargeback claim was valid. If it is, the customer will be refunded their transaction amount; if not, you will be credited back the amount, less any fees and processing costs.

It is in your best interest to dispute a chargeback, especially if you feel that the charge was fraudulent.  By not doing so, you may be encouraging fraudsters to continue targeting you and other independent retailers. There is also a risk that even when a charge is valid, the customer will view you negatively and may have some impact on your reputation. To mitigate this, below are some tips you can adopt to manage customer expectations.

Tips for avoiding chargebacks

1. Be up front about your policies including returns and shipping. 
2. Be clear and accurate about the products you are selling with tight descriptions and images to avoid customers mistakenly claiming they received a product they did not order.
3. Make sure your business name is used consistently and accurately on all receipts whether in store or online so that customers can recognize the charges.
4. In addition to paper receipts, have an option to send a customer an electronic version. This provides an additional record of the purchase.
5. When a customer requests a refund, make sure it is done right away. This will ensure that they come directly to you in the future for any issues with items they purchased.
6. Make sure you respond to any customer issue quickly to avoid them taking the next step to initiate a chargeback.
7. When shipping a product, make sure your customer provides a valid shipping address. Your eCommerce platform should have a way to automatically verify the address. Make sure to ship out goods quickly once the orders are received and be honest and upfront about the time it will take.
8. Keep your customers up-to-date on shipping with tracking numbers and let them know of any delays in the shipping process.
9. If you offer any type of recurring payment such as a monthly charge, make sure you keep the documentation that authorized you to do so from your customer. Be very clear about the terms of the recurring payment and most importantly, address your customer’s request to stop those payments immediately.
10. Follow best practices when accepting cards in-store – always encourage tap or insert, and never allow for keyed-in transactions.

Although chargebacks can’t be avoided entirely, if you follow these simple tips you can reduce a lot of hassle and aggravation. And remember, do not hide from chargeback notifications – answer them promptly and do all that you can to prove the legitimacy of the transaction. Happy selling!

More resources:

• Shop Safe, Shop Early campaign has great information for retailers and consumers about how to shop safely this holiday season.
• Our payments partner, Chase has additional resources on protecting your in store and online transactions.
• Here are some additional ways to protect your business from credit and debit card fraud from the following card brands:
  • Interac
  • Mastercard
  • Visa