Any business that accepts credit cards risks chargebacks. With chargebacks rising at a rate of 20 percent per year and merchants losing $2.40 to chargebacks, fees and merchandise replacement for every dollar of losses, businesses are more at risk than ever.
Although there are a number of different ways through which they can occur, they are almost always the direct results of intentional or unintentional fraud. The first step to comprehensive protection against fraud and chargebacks is understanding how different chargebacks occur. To help you out, we’ve put together a four-part series on the most prominent chargeback sources and how to protect your business against them. But before we get started, let’s better define chargebacks and how they negatively impact your business.
WHAT ARE CHARGEBACKS?
A chargeback is when a customer disputes a charge on his or her credit card bill and is always the result of intentional, or unintentional fraud. Chargebacks can happen for a number of reasons:
- A customer being unhappy at not receiving a product, or receiving a product that was different than what they paid for
- A mistake on behalf of the merchant
- If a customer doesn’t recognize the transaction on their statement
- When a customer claims that they never made that purchase in the hopes of getting something for free
Chargebacks have negative impacts for a business:
- Fees are issued, usually anywhere from $15 – $100
- Revenue is lost
- The cost of goods sold is forfeited
- Transaction processing fees are wasted
Merchants that frequently have to issue chargebacks are placed on the MATCH list, can have their merchant account close, can be forced to use high risk payment processing, or can losing the privilege of accepting credit cards. The extra expense of a high risk account usually drives a merchant out of business.
As previously stated, chargebacks can be extremely threatening to a business’ well-being and result from a variety of different situations. Although we’ll be covering each of those situations in coming blog posts, this post will focus on the most prominent chargeback sources: fraudulent chargebacks.
WHAT ARE FRAUDULENT CHARGEBACKS?
Fraudulent chargebacks one of the most common types of fraud and account for 35% of revenue loss for merchants. They occur when a customer files a chargeback on a legitimate transaction in hopes of getting something for free. The person often claims:
- The purchased item was never delivered
- The purchased item wasn’t as described
- The merchant didn’t cancel the customer’s recurring payment when requested
- The original transaction wasn’t authorized
HOW CAN YOU PREVENT FRAUDULENT CHARGEBACKS?
The key to preventing and combatting fraudulent chargebacks is setting processes in place that will prove that transactions are legitimate.
- Maintain Records: Keeping all of your credit card transactions recorded can reduce the risk of chargebacks. Being able to prove who made a purchase, when the purchase was made and the total amount of the transaction is important. If a person initiatives a chargeback, these records will help you prove that a transaction was valid. Common methods for documenting who made a purchase include requiring a signature on credit card purchases and imprinting the authorized charge on the customer’s receipt. If your business delivers purchases, invest in tracking numbers and require the purchaser to sign for the delivery. This will protect you against claims that items were never delivered.
- Adjust Consumer Expectations: Clearly describing what a customer should expect from a purchase can mitigate instances when customers claim a product or service wasn’t as described. Create up-to-date and detailed product/service descriptions, provide pictures and/or videos and don’t oversell. If you’re signing up a customer for a service that requires a contract and/or recurring billing, make sure the customer understands all details of the contract. Have the customer sign a statement that shows that they understand what they’re signing up for, what they’ve agreed to pay and the terms and conditions they’ve agreed to abide by.
- Use Secure Technology: You can protect your business from fraud resulting in counterfeit, lost and stolen cards by maintaining high security standards, such as PCI compliance, and using EMV capable terminals. Since 2015, the liability for card-present fraud has shifted to whichever party is the least EMV compliant in the fraudulent transaction. So if a counterfeit card was used at a business that does not accept chip technology, the merchant would be held liable and would have to handle the cost of the fraud. This means that merchants that are not EMV-complaint are a bigger target for fraudsters and fraudulent chargebacks. To fully protect your business and your customers, make sure your transaction and processing equipment is up-to-date with the latest security standards.
People who intentionally dispute transactions in the hopes of receiving a chargeback aren’t going to stop committing fraud. However, by taking the necessary precautions to protect your business, you can become a less desirable target for fraudsters and ensure that you have the proof necessary to win any potential disputes.
The post Chargebacks 101: Fraudulent Chargebacks & How to Prevent Them appeared first on Eliot Management Group.
