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What are Chargebacks?

A chargeback is a transaction reversal to the customer/card holder's issuing bank. The funds from the original transaction, often a credit card transaction, are deposited into a business bank account and returned to the consumer's issuing bank.

Chargebacks are damaging, and if not adequately addressed, they can become unmanageable. Chargebacks can affect businesses' reputations, cause significant revenue loss, and in severe cases, they can cause a company to shut down.

Who Are The Participants Involved In The Chargeback Process?

The process involves cardholders, merchants, banks (Issuing bank and merchants bank), and the credit card network.

Customer/cardholder: The credit cardholder is the original owner of the card used to make the purchase before the dispute. The customer can be an individual or a business entity.

Merchant: The merchant can be an individual or a business selling services or products.

Issuing bank: An issuing bank is any financial institution that issues a payment card to the cardholder.

Merchant’s bank: The merchant's bank is any financial institution that a merchant uses to accept card payments.

Credit Card Network: A Credit card network is the intermediary between the issuing bank and the merchant’s bank. These networks include MasterCard, Discover, American Express, and Visa, each of which have their own chargeback procedures and guidelines regarding the usage of their credit cards.

Chargeback vs Refunds?

A chargeback usually occurs when a cardholder or a customer asks their issuing bank to reverse a particular transaction. However, the cardholder and their issuing bank can initiate the chargeback process. A chargeback is not to be confused with a refund. With the chargeback process, the Merchant is not involved; they become aware when funds are removed from their account. In this instance, the Merchant is unaware of the customer's complaint or any underlying issue and must go off on assumptions of what might've transpired. The Merchant is unable to prepare for the loss of revenue due to their omission from the conversation. The Merchant is also unable to negotiate with the customer and ask if they're willing to return the merchandise to possibly be sold again.

In contrast, a refund is a direct reversal of funds between a customer and the Merchant. The refund process is a better alternative for both parties involved and provides a quick resolution. The refund process provides the Merchant the opportunity to come to an agreement with an unsatisfied customer and provide quality customer service to address what's wrong, find a solution, prepare for the loss of revenue, possibly have the merchandise returned, and avoid penalties for increased chargeback activity.

The Impact off Chargebacks

The chargeback process is complex, time-consuming, and expensive. Chargebacks cause revenue loss and if chargebacks increase, revenue may be withheld in a reserve account. The Merchant could very well lose the ability to process payments all together, which could cause a closure of the business. For the Merchant’s business, the customer lifetime value also decreases as past customers stop engaging in business with the merchant; and negative reviews that surface may prompt potential clients to opt for a competitor.

Valid vs Invalid Chargebacks

Merchant’s will receive both, valid and invalid chargebacks. The reason for a valid chargeback is reliable, trustworthy, and heeds to the credit card network’s rules. A valid chargeback process should only be initiated when an unauthorized transaction occurs or an honest mistake is made and the merchant is not willing to take responsibility for it. An invalid chargeback should not occur in the first place as it isn’t credible, likely false, and doesn’t heed to the credit card network’s rules. Unfortunately, both valid and invalid chargeback disputes negatively affect the merchant and their business, with total disputes being mainly composed of invalid chargebacks.

How to Respond to a Chargebacks?

To respond to a chargeback believed to be invalid, a merchant must provide credible evidence that supports their claim of the original transaction being legitimate. If the issuer is presented with evidence it deems compelling, the merchant wins and the chargeback is reversed.

There are instances where regardless of the evidence presented, the issuer will side with the card holder resulting in a loss to the merchant. It's important to keep any and all documentation of credit card transactions and to follow the rules about how to prove that the cardholder was aware of the transaction, such as making sure card holders signatures are no more than 1.5 inches from the terms & conditions and refund policy.

How to Reduce Chargebacks?

For Merchants, chargebacks can be a frustrating and endless threat to business. A Merchant should focus on the quality of services and products offered. Low quality services and products pave the way for “defective merchandise” chargebacks. If custom orders are to be accepted, make sure that customers know what to expect and consider adding a no-refund policy to these types of orders, they usually can’t be sold again if returned. Provide thorough descriptions of the products and services, deliver efficient customer support, and have a clear refund policy if accepting refunds.

Merchants can also determine product prices and products that spawn more risk than revenue. There are certain product price points that are constantly the victims of chargebacks initiations, avoid those and hone in on price points that generate less risk. Certain products receive more chargebacks than others, consider discontinuing these products that cause more trouble than they’re worth. Be honest in your marketing tactics and make sure you deliver on what you advertise to avoid baiting and switching. Focus your marketing efforts on sources that generate the highest ROI and cease marketing on sources that mainly return chargebacks as opposed to increasing lead conversion.



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