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Chargebacks: The Mysterious Killer of Online Businesses

2013 September 18

chargebackOnline money making schemes are flourishing these days.  If you can dream it, there are people online who are interested in buying it.  And if you run your online business from home – you have an ideal double-whammy.

Today, however, we are not going to discuss the ample benefits from online or work-at-home opportunities.  We are going to talk about one of the many downsides to the business world – a drawback you probably knew nothing about.

Introducing the Chargeback

Before you launched your online business, you probably spent a lot of time doing research.  You learned the ins and outs of taxes, domains, and e-commerce shopping cart software.  You read success stories.  You interviewed other business owners.  You arranged for a mentor.  But in all that prep work, you probably didn’t come across any advice about chargebacks.

Chargebacks are basically a credit card refund.  A cardholder can file a chargeback for a variety of reasons.  The most common include:

  • The cardholder didn’t receive the product/service.
  • The cardholder didn’t authorize the transaction.
  • There was a clerical error (charged the card twice, failed to terminate a reoccurring transaction in a timely manner, etc.)
  • The product/service didn’t adhere to the advertised standard of quality.
  • The cardholder engages in friendly fraud (received/authorized the product but claims otherwise).

Chargebacks are a topic few people in the business world talk about.  Perhaps it is because merchants see them as a personal fail – they weren’t able to make that customer happy or provide good enough services.

But in reality, chargebacks aren’t anything to be ashamed of.  With all the technological advances, it is easier than ever before for criminals to engage in fraud.  And let’s be real; you will never satisfy all of your customers – no matter how hard you try.

The Effects of Chargebacks

When a cardholder files a chargeback, the bank automatically withdraws the money from your account.  Once you are notified of the action, you have a set period of time to react.  If you feel the claim was made fraudulently, you can fight the chargeback.  Unfortunately, the burden of proof lies with the merchant.  You must have written documentation that backs up your claim.  As a result, few merchants win this battle.

Even if you are successful at getting the chargeback reversed, you will still have to pay the initial chargeback fee.  This fee can range anywhere from $20 to $100 per transaction.  For example, a client might charge six months of service and then decide the quality was less than satisfactory.  Because each month was a separate charge, you will be assessed a fee for each month.

In addition to paying the chargeback fee, you will lose the original profits.  And depending on what was sold, there is a good chance you won’t get the originally purchased item back – that cuts down on the potential for future gains.

The merchant processor (or bank) keeps a close eye on how many chargebacks occur each month.  If the amount of chargebacks you receive in a given time period (usually a month) exceed 1% of your total sales, you will be awarded a significant fine – around $5,000.

If the amount of chargebacks exceeds 2% of sales, the processor could simply discontinue your account.  At which point, it will be nearly impossible to get another.  You’ll have to stop accepting credit cards as a form of payment.

What Can Be Done

Chargebacks are usually caused by one of two things: faulty customer service or fraud.  Therefore, if you address both of these issues, you can greatly reduce the risk of chargebacks.

Check with both MasterCard and Visa.  Both credit card companies offer tools and services that help prevent fraud.  Visa also offers an extensive list of possible indicators of fraud.  Be on the watch for these iffy transactions.  If you suspect fraud, contact the cardholder before approving the transaction.

Your merchant processor can also help you fight fraud and improve customer service.  Check which services are available to your business.

Make sure your customer service is top-notch.  A few ways to do that is:

  • Answer the phone within the first three rings.  Reply to emails promptly.
  • Attend to clerical/billing issues.  Use these tips to properly set up reoccurring transactions.  Then, manage reoccurring transactions carefully to reduce the risk of chargebacks.
  • Make sure you product images and descriptions are detailed and accurate.
  • Share your exchange/return policy on the website.  Make sure it is easy to find and understand.
  • Include a link to your policy page in the checkout and order confirmation email.
  • Always list the anticipated delivery date for each delivery option.
  • Never charge the card until the item has been shipped.
  • Consider using delivery confirmation for high-dollar transactions.

Nearly half of all online companies go out of business because of chargebacks, their fees and their penalties.  Don’t be one of the majority.  Take the time to educate yourself about all aspects of the chargeback process.  Do all you can to prevent fraud and offer stellar customer service.  Don’t let chargebacks be the death of your online business.

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