What are you most afraid of as a digital business owner?
Fraud likely ranks pretty high on the list. Picturing your business falling victim to cybercrime like hacking – which BigCommerce estimates happens to 20% of small businesses annually – may have you nervously considering your risk of attack.
But have you considered a more insidious risk to your business that could come from your own customers?
We’re talking, of course, about the dreaded chargeback.
Your own customers could cause significant financial damage to your business and entangle you in messy disputes with financial institutions via chargebacks – unless you retool your customer service and business systems for chargeback prevention and risk reduction.
What Exactly is a Chargeback and How Does it Impact Your Digital Business?
Chargebacks occur when customers dispute a purchase from your digital business with their credit card company.
The most common reasons businesses experience chargebacks include:
- Dissatisfied customer. This scenario is the one merchants think of the most. A customer purchases something, is dissatisfied or disappointed with it and they initiate a chargeback for the punishing effects and to get their money back for an item that didn’t meet their needs.
- Customer who mistakes chargeback as a form of return. This customer may have slightly less rancour than the dissatisfied customer, but they have decided they don’t want the product. Rather than going through a return-and-refund process, they initiate a chargeback thinking it’s basically the same thing, heedless to its negative effects on your business. Customers may feel more comfortable going through a third-party like their bank or credit card instead of coming to you – something you could address through friendly and frequent communication**.**
- Fraud-based transactions. This scenario is the most frightening for a digital business, wherein hackers use customer card numbers to rack up purchases, and the real customer initiates the chargeback to recover their funds. You’ll have little recourse here, and you may be looking at much higher sums of money involved due to the credit or debit card fraud.
Because a chargeback can be initiated up to 6 months after a purchase, it could have a severe impact on your finances. Much of that money may already be going through your business systems for other uses, and if you lose a chargeback, you will lose that money.
Once a chargeback is initiated, your options are to either accept or dispute the claim. You’ll have 10 days to respond and 45 days to put together any supporting paperwork for your response. The bank or the credit card company will have an additional 45 days to request more information if they need it.
Meanwhile, those funds are tied up in this dispute and either not available to your business or at risk.
What Can Digital Businesses Do About Chargebacks?
Leaving chargebacks unaddressed can be costly for your business, especially if you’re experiencing a glut of them.
Yes, chargebacks are a part of doing business – but they don’t need to eat your business alive. Getting to the root of the cause and also adjusting some of your business practices to reduce your chances of chargebacks can help keep those costs under control.
Here are some proactive ways to tackle a chargeback problem:
1. Use customer service tactics to get ahead of the problem
Most of the time, chargebacks occur because customers feel they will not get their money back through your company, or were not happy with the resolution when they dealt with your company.
Impeccable customer service smooths a lot of roads when it comes to digital business. If you haven’t given your customer service team training in how to respond to refund requests or to de-escalate situations that could lead to chargebacks, start now.
Here are a few things you can do from a customer service standpoint to prevent or reduce the likelihood of a chargeback:
- Remove the credit card company middleman where possible. Encourage customers to come directly to you and not the credit card company if they have any issues with their order. This can be done through frequent communication during and after the order process, and stating clearly what the customer’s options are when they receive their item. You can increase your chances of resolving a situation peaceably and without a chargeback.
- Give customers options. Make it clear up-front that you’re willing to resolve issues without friction. For instance, Amazon allows customers to choose a full refund or a new item, and in many cases lets customers keep the original merchandise regardless, in an effort to keep up their customer satisfaction score, or CSAT. If you give them options to resolve their complaint, they may never think of resorting to a chargeback.
- State and enforce a clear refund policy. First of all, make sure you have a refund policy, and that it’s unambiguous in terms of what you’ll refund and what is not eligible. The clearer you are, the better your chances when it comes to a dispute. We’ll also point out, however, that some countries strictly regulate the type of language you can use in your refund policies. We covered that in some detail in this post for digital business owners about refunds.
2. Prepare your business practices to minimise chargeback effects
Physical businesses have some protections digital businesses do not. For instance, it will be difficult for you to produce signed credit receipts or video evidence of a purchase – and customers can always say their credit card information was stolen, even if it wasn’t.
Some examples of concrete steps you can take include:
- Cover your shipping bases. Oftentimes, chargebacks occur because the customer reports the merchandise did not arrive. Make sure you’re tracking everything you should be to cover yourself, including updating the customer frequently on estimated arrival, logging when packages were delivered, having customers sign for high-value items, etc.
- Consider fraud protection. Some partnerships like Amazon Payments offer merchants a measure of protection against consumer fraud. You can also investigate fraud insurance options available for digital businesses.
- Review your pricing methods. Sometimes, paying a large sum all at once for a service can leave customers feeling panicked or dissatisfied with what they’ve received so far compared with what they paid up-front. If your product supports it, consider smaller payment plans or subscriptions. For instance, if people keep filing chargebacks for an online course where they’ve paid up-front, before completing the course, consider using a per-class system. You won’t collect everything up-front, but you may also reduce your chargebacks.
- Implement additional security features. Because there’s no way for a human clerk to read an identification along with a card, or for digital business to use a more secure chip reader, the risk of fraud increases significantly. Rather than allowing purchases with card numbers plus easily-obtained information like names and addresses, add an extra layer of security by requiring additional information like CCV codes or ZIP codes.
3. Dispute chargebacks, within reason
Should you receive a chargeback despite all your efforts, you can either accept the financial institution’s filing or dispute it.
If you have the resources and the cost-benefit analysis indicates it would be worth your time to dispute, then you should certainly do so. Repeated chargebacks to your company through certain financial institutions could also tarnish your reputation with those banks and credit companies.
You can strengthen your chargeback prevention program to avoid future chargebacks, but if you have a chargeback in front of you, your only options are to fight or accept. You no longer have the option of reaching out to the customer to resolve it through other means once the financial institution files their complaint on their behalf.
A Global Risk Technologies study estimated that nearly a quarter (24%) of all United Kingdom purchases in the last quarter of 2015 resulted in chargebacks.
That’s a truly staggering statistic, and emphasizes the danger for digital businesses, especially those who operate within fine margins. Preparing your company to prevent and dispute chargebacks can help lessen your losses as a result.
Of course, it’s not possible to completely prevent chargebacks. Too many elements are out of your control. Fraud may occur. Customers may choose to initiate unwarranted chargebacks despite your best customer service efforts.
It’s part of the cost of doing business, certainly, but preparing for and minimising the effects of the dreaded chargeback on your business will help you become more financially secure.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.