Merchants of all shapes and sizes incur them. As a side effect of doing business it’s hard not to at least part of the time. But what exactly are chargebacks, what do they mean to your business, and how can you avoid them, or at least limit their ability to negatively affect your day-to-day operations.
Chargebacks, put simply.
The simplest definition of a chargeback is as a reverse credit-card transaction. But, even this description is vague enough to stay confusing. Maybe all-powerful Wikipedia can help.
“Chargeback typically refers to the return of funds to a consumer, forcibly initiated by the issuing bank of the instrument used by a consumer to settle a debt.”
That helps. The first part, about returning funds, sounds like a refund. The second part is a little more ominous. You might be thinking about product returns and the amount you see in a given time period. But you don’t need to worry there. If Joe Somebody buys a toolbox at your hardware and returns it, you are NOT going to incur a chargeback, or a chargeback fee.
One good thing to remember is that a chargeback isn’t another name for a return of charges. A chargeback is a return of funds for other reasons. There are a few ways this can happen, but the important thing to be aware of in that Wikipedia definition is that all of these occurrences are forcibly initiated by the bank. This can happen when a card is lost or stolen, if there is a processing error in accepting the card, or if a consumer disputes charges.
None of that sounds like a particularly negative policy for returning funds to consumers. But where problems arise is on the merchant end of the equation, where business owners ultimately bear the responsibility for the amount charged back to the company. That last statement is especially important for small businesses. The idea here is consumer safety. But the benevolent protectors of the little guy forgot to include small businesses in the mix.
What Chargebacks Mean to Your Small Business
Now that we’re on the same page with what chargebacks are, let’s see what they mean to small businesses. A cardholder’s ability to call for a chargeback is part of the consumer protection rights offered by Visa and MasterCard. The processing bank is responsible for all the transactions that the merchant performs. That responsibility, and its costs, are passed on to the merchant, you.
What is the responsibility, you ask? In the event that a chargeback occurs, merchants are on the hook for the entire amount being charged back, as well as a chargeback fine assessed by card companies, usually in the neighborhood of $15-25. The fine itself might not seem like a lot, but coupled with the chargeback amount, and loss or product or service, nickels and dimes begin to add up.
The only way to recover the loss is for merchants being charged back to provide evidence to the credit card company that the transaction was legitimate. This is easier said than done. In the event that a paper trail contains customer signatures you can fight the chargeback. Win or lose, this can be a lengthy battle that takes time away from other, important, day-to-day functions, like running your business. Large corporations have full staffs that specialize in this. As a small business owner, you probably don’t. That is the main purpose of this discussion. Knowing what chargebacks are and then understanding how to prevent them.
How to Avoid Chargebacks
This is a two-parter. First, because some chargebacks are difficult to avoid. Unscrupulous people will always be out there. The best way to deal with them is to keep good, organized, records of purchases and purchase agreements. Make sure signatures are made where signatures are required, and that backs of cards match those signatures. These are the little steps that sometimes fall by the wayside during long and busy days on the job. When doing business over the phone, be as cautious with information and other parties as you would if your own info was being recited. That three-digit code on the back of cards is there for a reason. Basically, general precaution is your friend, as always. You won’t be able to stop every chargeback, but as stopping them is a good goal, limiting them is a fine result.
The second idea is to keep doing what you’re probably already doing: practicing good business. By being as honest with your customers as possible and providing them with transparency throughout the purchase process, you lessen the potential for a chargeback. When clients and customers are aware of what they’re buying, and the costs, they are less likely to chargeback. And offering a clear line of communication will alleviate most other honest causes of chargebacks.
While you’re protecting yourself from the possibility of incurring chargebacks, it wouldn’t hurt to set aside some rainy day money for the possibility. If you don’t have to use it, great. In the case that you do, the chargeback won’t be the end of the world. Setting aside 2 or 3% of your annual budget for unanticipated costs is smart business practice even without chargebacks looming.
One silver lining, now that we’ve become experts in the world of chargebacks, is that, in the whole scheme of things, they are pretty rare. The idea here is not to bank on the fact that it won’t happen to you. That logic didn’t work after prom and it doesn’t stand to be the best advice when money is on the table either. What we’re trying to accomplish is easy enough. By understanding what chargebacks are, we make ourselves less susceptible to them. By knowing how they affect us in day-to-day operations, we make ourselves less susceptible to them. And by knowing a few simple measures of protection, we make ourselves less susceptible to them. Especially for small businesses, knowing really is half the battle. Maybe even more so.