When an online business owner starts to accept credit cards as a method of payment, there are several factors which must be taken into consideration. Most merchants will agree the biggest drawback resulting from credit card transactions is the high cost associated with credit card processing. With many merchants paying hundreds if not thousands of dollars per year in processing fees, the loss of income in other areas becomes even more problematic. Chargebacks occur when a credit card payment received by the merchant is reversed. When revenue is lost in the form of chargebacks, the cost of doing business goes up. Here we take a closer look at what happens when a charge is reversed and what online merchants can do to prevent this occurrence.
When a customer pays for a product or service with a credit card, a series of events takes place to facilitate payment to the merchant. Credit card processors execute the transaction, allowing the movement of money from the customer’s account to that of the merchant. If a transaction is disputed by the credit card user, an investigation is initiated to determine validity of complaint. If evidence is found supporting the cardholder’s claim, the charge is reversed. This forcible removal of funds from the merchant’s account is then credited to the customer’s account. If evidence is not found supporting the customer’s complaint, the chargeback will be denied and no reversal of funds will occur. In most cases chargebacks are the result of customer dissatisfaction or suspected fraud.
Chargebacks are a major concern for online merchants as they not only represent lost revenue but also raise the cost of credit card processing. With each chargeback the merchant is hit with a fee for the transaction. In addition, excessive chargebacks might trigger action from the card associations resulting in the loss of acceptance privileges. Merchants can reduce chargebacks by focusing on the two main causes of customer disputes. When a customer is unhappy with their purchase, there must be a policy in place to resolve complaints in-house. If the complaint is valid, in that the customer did not receive the product or service as promised, it is better to issue a refund voluntarily as compared to waiting for the chargeback to hit your account. To reduce confusion and support your position in the event of a complaint, clearly defined refund and return policies are recommended.
The second reason customers dispute transactions is fraud suspicion. If a customer does not recognize the charge they may dispute the transaction claiming their card was used fraudulently. This is a bigger problem for online merchants than for brick and mortar businesses. Smaller online stores often prefer to use a third-party credit card processor because of the lower initial investment required. Opening a merchant account would be much more expensive and is usually a good fit for established businesses. The problem with third-party processors is that a transaction would sometimes appear under their name on the customer’s statement. Ask you processor about this and make sure you know under what name the transaction can appear. In case it’s not your company, it may help to notify your customers by prominently alerting them the transactions are handled by XXX company.
Merchants must take steps to prevent the unauthorized use of credit cards for purchases. Verification of customer’s name, address and phone number and the issuing bank is important. Other fraud prevention tips include signature requirements on delivery and the use of fraud services (AVS, CVV) from processing banks. Taking the necessary precautions to prevent chargebacks can save your business money while at the same time keeping your customers happy.