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Is This Easily Preventable Problem Destroying Your Revenue?

Picture this: you’ve just finished a launch, and it went great. Your new clients are really excited to get started, and all the work you did to market and create your product is finally paying off. It’s a good day!

A week later, you wake up to an email from PayPal. One of your brand-new clients has issued a chargeback (a special type of refund request), and PayPal is requesting additional documentation from you.

What do you do now? And, what the heck *is* a chargeback?

Chargebacks Explained

If you are one of the lucky few who haven’t experienced a chargeback yet, you may not be familiar with the concept. It is important to have a basic understanding of the concept though, because very few businesses avoid them entirely.

A chargeback is a forced credit card refund. Rather than contact you, the cardholder reaches out to the bank for a refund.

Now, you might be wondering: who cares if the customer contacted the bank instead of you? They’re still asking for their money back, no matter who they asked to process the refund.

Well, there is a huge difference.

When someone asks you for a refund, it’s part of regular service. When they go to the bank (or credit card companies), they’re basically alleging that you aren’t delivering a service that you promised – it’s basically an accusation of fraud (which, unfortunately, many don’t realize when they do it).

So what does this mean?

First, each chargeback is accompanied by an administrative fee (this can range from $20 to $70).

Next, each chargeback filed against you will affect your chargeback-to-transaction ratio. The banks closely monitor the number of chargebacks you receive each month.

Since everyone is looking out for their own assets, the banks (and PayPal) will get their hackles up if they think doing business with you is too great a risk. If your monthly chargeback-to-transaction ratio exceeds 1%, the bank will close your merchant account.

And if you lose your ability to accept credit cards online, you’ll have to close up shop. Until other forms of payment become mainstream, processing credit card transactions is essential—especially for online sales.

After your merchant account has been terminated, you’ll be placed on the MATCH list (Member Alert to Control High Risk Merchants). This means it could take five years to get another merchant account.

If you are able to gain access to a different merchant account before your MATCHed time limit is up, you’ll have to pay excessive fees because of your “high risk” status.

So now that you know why chargebacks are bad for business, let’s talk about how to prevent them, and how to deal with them when they do occur.

Preventing Chargebacks

There is no doubt about it: chargebacks are a nightmare. They eat away at profits and can threaten the longevity of your business.

But it should also be noted that chargebacks are a needless profit loss. That’s right. Chargebacks are preventable.

Let’s look at some of the most effective prevention tactics.

Step #1: Update Your Product Descriptions

Think about a traditional buying experience.

An individual is considering a gym membership. He visits several gyms in the area, interviewing the staff, checking out the equipment, inspecting the locker room, reviewing the class schedule. If he finds all those things satisfying, he’ll sign up.

There are so many senses and emotions involved in the buying experience. In the world of online sales, you have to be the clients’ eyes and ears. You need to provide all those details the customer would normally be able to experience themselves.

That’s where your product descriptions come in.

Explain each and every aspect of the product or service. For physical goods, that should include everything from how heavy the item is to the materials it was constructed from. For digital goods and services, share things like file size, length of downloading time, or topics of discussion.

Each chargeback is accompanied by a reason code – an explanation of why the charge was disputed. One of the most popular reason code is “goods or services not as described.”

If your descriptions are misleading or lacking adequate detail, the consumer won’t have sufficient knowledge of what the product or service will be like – and that can lead to a chargeback.

Conduct a site design audit. See if you need to update your product descriptions. Go above and beyond when it comes to detail. And part of that update should include plenty of images.

Snap a photo of the product from all angles. Zoom in on details. Provide screenshots and demo videos of digital goods.

Step #2: Fine-Tune Your Return Policy…Then Broadcast It

For many businesses, a policy page is an afterthought: something you have to include, but isn’t really that important. But that thinking is very, very wrong!

Your policy page is one of the most important aspects of your website. And, it is a crucial part of chargeback prevention.

Think about it. You want people to contact you for a refund, not the bank. Make it easy for them to find, understand and implement your policy.

Don’t write a knee-jerk return policy that says all returns must be made within a certain period of time, no exceptions. Really think about the best ways to meet both your needs and the customer’s wants.

Draft a logical policy that offers as much leeway and understanding as possible. Yes, returns are a hassle, but they sure are preferable to chargebacks!

Once you’ve written an easy-to-understand policy, make sure every customer reads it – preferably before making the purchase. You should include a link to (or mention) your policy in the following locations:

  • Your product descriptions
  • In the checkout process
  • In the order confirmation email
  • On the invoice or receipt
  • At the cash register (if you also have a brick-and-mortar store)

Step #3: Draw Attention to Your Contact Information

Again, one of the main aspects of chargeback prevention is getting unsatisfied customers to contact you instead of the bank. They will only be able to do that though if they can find your contact information, so make it readily available.

Include a “contact us” page on your website. At the very least, it should include your email address and phone number. Ideally, it would include additional information like:

  • Your email address (and phone number, if applicable)
  • Your mailing address (if you interact with customers at a physical location, consider adding your GPS coordinates and a Google map)
  • Department-specific contact information
  • Fax number (do people still use those?!)
  • Social media accounts

It is also a good idea to include the basic contact information (phone number and email address) on every page of your site. Again, make it easy for customers to find what they need.

Also, be sure to list all your essential information on the order confirmation email, invoice and delivery receipt.

Another tip is to contact your merchant processor. Find out how your name appears on customer credit card statements. It might be possible to include your phone number beside your company name. That way, if the cardholder questions the charge, they can easily contact you to discuss it.

Step #4: Communicate Effectively

Now that the customer has access to your contact information, be sure to address any complaints or questions that come your way.

Always send an autoreply message to emails. Let the individual know when to expect a personal response. We live in a world of instant gratification. Customers want to be acknowledge right away. Your “soon” might not be the same as theirs.

Remember social media is really about communication. To you, it is an inexpensive form of marketing. To them, it is a legitimate form of contact.

Addressing customer concerns is crucial. A disgruntled customers is liable to make life miserable for you and anyone around him. It is easy to file a retribution chargeback just because you don’t address concerns in a timely fashion.

A little tender loving customer service might be able to talk him off that chargeback ledge he is on.

Step #5: Digital Protection

Chargebacks are a possibility in any industry, but they are especially prevalent in the world of digital goods and services.

The reason for this is the ease of friendly fraud. Friendly fraud is usually committed in one of two ways. The customer might say something wasn’t delivered when it actually was. Or, they might falsely claim the transaction wasn’t authorized.

There are a few things you can do to reduce the risk of chargebacks associated with digital services.

  • Require the shopper to provide a digital signature. This will help fight false claims of unauthorized transactions, but it won’t do much to prevent legitimate fraud.
  • Explore alternate payment options—like Bitcoin.
  • Require an activation key. Or put an access code in the cloud. You could even send an activation link through email. This will act as documented proof that the item was delivered.

Step #6: Detect and Deter Fraud

Fraud is another big cause of chargebacks. Scammers gain access to credit card information and make unauthorized purchases.

It is basically impossible to fight against fraud. If the cardholder really didn’t authorize the purchase, they shouldn’t be held responsible for it.

Since fraudsters are usually professionals, they know all the best ways to get the most bang for their stolen buck—meaning your business could lose a lot of money.

There are various tools to help detect and prevent fraudulent transactions. These include AVS (Address Verification Service), MasterCard SecureCode, and Verified by Visa. Your processor can also help you set up maximum limits and velocity checks. These help mitigate the damage of chargebacks that do slip through the cracks.

Visa has created a list of potential indicators of fraud. Review this list and be on the lookout for anything that seems suspicious.

Step #7: Subscription Management

Reoccurring payments are glorious. Once you’ve made the initial sale, the money rolls in like clockwork. But they aren’t such a great deal for everyone.

If you don’t properly manage your subscriptions and recurring payments, you could suffer a major blow to your profits.

If customers get really vindictive, they could technically file a chargeback for each and every charge. If you sold a six month membership, that could mean six chargebacks – and six chargeback fees.

Here are some subscription best-practices:

  • Clearly outline the terms of the subscription. What date will the card be charged? Are there additional fees involved? What exactly will the customer receive in exchange for payment? Are there early termination fees? Is the subscription automatically renewed?
  • Have the customer sign a contract outlining all the details before starting the subscription.
  • If the customer requests a termination, grant it immediately. If you continue charging the card after the request is made, you greatly increase the risk of a chargeback.

Effective chargeback prevention practices will go a long way to help protect profits. But no one is perfect – and determined fraudsters can slip through the cracks.

When you do come up against a chargeback, you’ll need to know how to dispute them.

How to Dispute Chargebacks

Chargeback prevention is definitely easier than disputing chargebacks (a process known as representment). However, that doesn’t mean it is impossible to regain access to your funds.

Here are some things you’ll need to know.

Tip #1: Have Written Documentation

Unfortunately, the burden of proof in a chargeback situation lies with the merchant (that’s you!). If you choose to fight the cardholder’s claim, you must have written documentation that disputes the chargeback.

Each chargeback reason code will require different forms of documentation. Supporting detail might include:

  • Signature confirmation indicating delivery did occur
  • Email communication with the client outlining requirements for special orders.
  • A signed contract outlining the duration of the subscription.

Stay organized. You never know when you might need a copy of this sales receipt or that email message.

Tip #2: Stick to Deadlines

You only have a limited time to dispute chargebacks. Each card company and each reason code will have its own deadline. If you don’t react in a certain time frame, you’ll simply have to accept the chargeback.

Tip #3: Read the Fine Print

Sometimes, chargebacks will be filed because of a simple clerical issue. Maybe the bank couldn’t read the sales ticket, or your client simply forgot that they purchased your product (hey, it happens!).

Don’t just toss all communications in a pile and assume there is nothing to be done about the chargeback. Sometimes all it takes is a simple phone call on your part to clear up the confusion.

Tip #4: Know When to Walk Away

Do you remember when we mentioned the chargeback-to-transaction ratio? If you get too many chargebacks in a certain time frame, the bank will close your account.

It might seem important to fight any and all chargebacks to keep that ratio in check. Sadly, that isn’t the case.

Even if you win the chargeback representment process, it won’t lower your ratio. Once the damage is done, it’s done.

Therefore, it might not make a lot of sense to spend valuable resources on fighting a $5 chargeback. Sure, you’ll want to recoup your money if the chargeback was for thousands of dollars; but if the effort is worth more than the potential profits, just accept the chargeback and move on.

Tip #5: Hire Professional Help

If you receive one or two chargebacks a year, you can probably manage them on your own. But if you are getting harassed on a regular basis, you might want some professional help.

There are lots of reasons why it is better to pass the chargeback management baton on to someone else.

  • The chargeback vocabulary isn’t universal. Language, terms, and requirements aren’t the same from bank to bank.
  • You’ll be using company resources to fix problems from the past. It makes much better business sense to keep your employees focused on the future. Spend your time thinking about how to grow your business, not how to appease that one unappeasable customer.
  • You won’t win very often. Unless you have a full-time chargeback analyst on staff who can devote all her time to researching reason codes, checking for updates, etc., you won’t be able to successfully fight everything that comes along.

Even if you don’t ask someone to handle all the chargebacks on your behalf, you could benefit from customized chargeback prevention suggestions. For example, Chargebacks911 will provide a free chargeback analysis. Use this service or one like it to find out how your business can close the chargeback gaps.

Chargebacks Aren’t As Scary As They Look

For some reason, the topic of chargebacks has become a taboo in the world of business. Many business owners suffer in silence, thinking they’re the only ones, or that chargebacks are completely outside their control. It is time to bring chargebacks to the forefront of conversation and put an end to these unnecessary leaches on your hard-earned profits!

Have you received a chargeback notification? How did you deal with it? Do you have a tip you’d like to add to the ones mentioned here? Let me know in the comments below!

About Jessica Velasco

Jessica Velasco is a business veteran, working in various entrepreneurial ventures over the last 14 years. She has successfully launched two companies in totally different niches. Now, she is helping fellow business owners learn from her successes - and mistakes! Find her on Google+ or Twitter.

22 thoughts on “Is This Easily Preventable Problem Destroying Your Revenue?

  1. This was really interesting and although I have not yet had any chargebacks since I sell mostly consulting, now that I am branching into ecommerce etc. and rely on Paypal, this will come in very useful. Thanks!

    • Maggie, I’m glad I caught you in time! It is definitely easier to prevent chargebacks rather than dispute them. If you can lay the foundation of your ecommerce business, it will be a huge benefit in the future. Good luck!

  2. You know something interesting?

    While I’ve always been aware of charge-backs (And have used them to effectively get my money back from fraudsters), I’ve never considered that someday a disgruntled client could get pissed, and try to get their money back for my services.

    I agree with you that they aren’t as scary as some make them out to be, but they are a growing concern, especially when so many businesses are operating 100% online – It makes it harder to prove that the goods or services were delivered.

    I suppose what would be a better idea, instead of being on the lookout for people that may try to scam your business, is to try and build a real connection to your customers.

    People are typically less inclined to screw someone over that they actually like. Depending on your business model, this may or may not be possible. All of my businesses are service-based, so I can essentially screen most if not all of my customers & clients.

    But even with product-based businesses, this is possible with enough face-time. Vlogs, daily blogs, insiders-only podcasts. Little things, pieces of appreciation, that you give your customers can go along way.

    This way you’re not starting a working relationship in defense-mode, and you’re not operating with a mindset of scarcity.

    • Another thing to note…chargebacks aren’t necessarily a retaliatory action based on anger or spite. There is a new trend businesses need to be aware of…friendly fraud.

      Consumers don’t know the difference between a chargeback and a traditional refund. They don’t understand the consequences each time they “dispute a transaction” that appears on their credit card statement. In fact, I read that as many as 86% of chargebacks are considered chargeback fraud (the consumer contacted the bank for a chargeback before contacting the merchant for a refund). Technically, banks are supposed to send the consumer to the merchant before processing the chargeback, but that doesn’t always happen. Ack. I’m going overboard; I could write an entire blog post about friendly fraud! But I just wanted to point out that the act might not be as hostile as you think.

      You do have a very good point about fostering trusting relationships with customers, which also ties into friendly fraud prevention.

  3. Wow! I didn’t know that charge backs could crush your business like that.

    How do people operate with restrictive return policies? I’ve seen online course return policies that say thing like you have to prove you did all of the work to get your guaranteed 30 day money back guarantee. Is it a scare tactic? To me, that would send me to the bank asking them to get my money back.

    ALSO, the does 1% of monthly charge backs mean that one charge back in a year of similar priced
    transactions mean getting on the MATCH list?

    • Chargebacks themselves aren’t necessarily a bad thing. They were designed to protect consumers from fraudulent merchants. So yes, anyone who is using scare tactics in place of good old fashioned customer service increases their risk of a chargeback.

      Generally speaking, a merchant isn’t allowed to exceed a certain percentage each month. The chargeback-to-transaction ratio is calculated by dividing the monthly number of chargebacks by the total number of transactions in the previous month.

      So, the bank would divide 5 chargebacks in March by 1,000 credit card transactions in February.

  4. So educational, thank you. This is not something I had thought of. I am not currently selling on-line, but so agree that it is worth going well out of your way with customer service and accessibility.
    A thought about your friendly-fraud note above. I could well understand a customer taking the bank route as opposed to dealing direct with the supplier as it feels more anonymous – I once asked for a refund from MindValley, everything was totally above board, I was within 30 days and had tested the product but found it wasn’t what I expected, their “happiness team” bent over backwards to assist me – I knew I was within my rights but I felt guilty lol!
    If people decide to unsubscribe from our lists, we generally ask them politely not to mark us as spam, as it damages our reputation. Perhaps something similar would be useful to include in our returns information.

    • I do understand what you are saying about chargebacks being more anonymous than returns. They are also much easier for our time crunched society.

      Maybe I need to do an entire post about just friendly fraud!

  5. I had just been wondering about selling online, not at all sure about it, then Dany alerd me to your post. Thanks SO much – very informative indeed, as have been the comments that followed. I do agree a spoonful of honey goes over better than vinegar – especially in North America!
    Thanks again.

  6. Jessica, this was extremely timely as I am relatively new to online marketing. I am going to write those return policies and follow your advice for fine-tuning them. Thanks for sharing this info.

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