Chargebacks: What Are They, Why Do They Happen, and How Can Merchants Prevent Them

Chargebacks, even in a best case scenario, can be very costly for a merchant. In a worse case scenario, they can hold up significant funds from being transferred to the merchant's bank account starving them out of much needed cash for operations and growth. In order for a merchant to really be able to prevent and decrease the number of chargebacks, it becomes important to understand what they are, why they happen, and how to prevent them.

What Are Chargebacks?
Quite simply put, chargebacks occur when a customer disputes a charge on his/her bill. They may dispute it for reasons such as:

  • An accidental double billing to an account
  • A customer not being satisfied with the product/service that was received
  • The business name not being recognized on the customers' bill
  • Fraudulent activity occurring because of an unauthorized purchase or identify theft

Why Do Chargebacks Happen?
Most transactions are given 120 days from when the charge is placed on the bill for a customer to dispute a charge. Should this occur the process could take more than a couple of months. The process usually begins when the issuing banks issues a code for the dispute. As a result, the merchant's bank withholds the funds in question while the customer gets a refund. In essence, the sale is reversed.

Once this occurs it becomes the merchants responsibility to either accept or dispute the chargeback. Depending on the specific reason for the chargeback, the merchant will need to present evidence in their favor to the cardholder association. Should they decide in the merchant's favor then the customer will be charged a 2nd time with funds being credited back to the merchant. Regardless of who wins, the merchant should neither refund or charge the customer again as this will be handled by the associated banks.

How Does A Merchant Prevent Chargebacks?
Their are a few ways merchants can prevent chargebacks. Some of them are:

  • Quickly respond
  • - If a merchant doesn't respond to a chargeback in a timely manner, banks will simply issue the chargeback.
  • Easy to understand return policies
  • - Customers should easily and without confusion be able to understand your company's return policy. In addition, offering great customer service can help address any complaints the customer may have since they may resort to a chargeback as a last resort to get their money back.
  • Use CVV/CVC codes
  • - By asking a customer to give you their CVV/CVC codes (the 3 digit numbers on the back of their card) you will be assured they card is physically with them and not simply a stolen account number.
  • Talk to your customers
  • - Talk to your customers so they know the status of their purchases. This will make them less likely to dispute a purchase.

Even though chargebacks can be a hassle for merchants, their are ways to prevent them only if you understand what they are and why they occur. Putting into place good policies and practices can help your business prevent many of these chargebacks leading to happier customers and an increase in revenue.

at 11:27 PM
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