The days when businesses could survive being cash-only establishments are long gone. Now, customers have replaced the bundles of cash in their wallets with several credit cards. According to a 2020 study conducted by Federal Reserve, almost 27% of U.S consumers prefer to use their credit cards for making online or offline purchases.
Therefore, if you want your small business to succeed and make a name for itself in a highly competitive market, you will have to offer a credit card payment option. Else, you will most likely lose tons of sales. While credit card payments play a crucial role in expanding business growth, they also bring many stressors for merchants. One such stressor for the merchants is a dreaded chargeback fee.
Dreaded chargeback fee causes merchants a lot of stress and panic. Business owners often avoid accepting credit card payments because they fear the financial damage that a chargeback fee will cause them. Now, you must be wondering what is a chargeback fee and who issues a chargeback fee. Read this article to find an answer to all your queries related to a chargeback fee!
What is a Chargeback Fee?
A chargeback fee is the reversal of funds from the merchant to the customer forced by the credit card issuing bank. Suppose a customer buys a t-shirt from a merchant and pays through their credit card. However, the merchant charges the customer for two t-shirts instead of one. Later, the customer decides to dispute a charge which means a customer is requesting the card-issuing bank to return the funds back to their account.
When the customer files a dispute for a chargeback fee, the card-issuing bank reimburses the cardholder’s transaction amount by pulling funds through their own pocket. However, later the card issuing bank pulls the transaction amount from the merchant’s account to recover the lost funds. Also, the card-issuer bank charges the merchant an additional fee on payment disputes as it works its way through their system.
Initially, chargebacks were first introduced as a way to protect customers. Even now, the system works quite more in favor of customers. When a customer files a dispute, the credit card issuing bank assumes that they are being truthful. Therefore, they issue a temporary credit to them to resolve the issue. However, later it is upto the merchant to prove whether the dispute filed by the customer was legitimate or not.
Types of Chargebacks
A question often pops into your mind – Why did I get a chargeback fee? Different scenarios cause chargebacks, resulting in huge financial damage to a merchant’s business. Fortunately, a merchant can avoid these unnecessary fees and disputes by learning about the different situations that lead to chargebacks and tips on dealing with them.
Here are three types of chargebacks that any business owner should be aware of:
Criminal Fraud Chargebacks
Criminal fraud takes place when a fraudster uses stolen credit card data to make a purchase. Later, when the cardholder learns about the transaction, they file a dispute for chargeback fees.
Examples
- A criminal steals someone’s credit card and uses it to make purchases.
- A criminal uses stolen credit card information to make purchases online.
- A criminal gains access to a cardholder’s online account and make purchases.
When your business gets hit with a criminal fraud chargeback, there is nothing much you can do about it. You would be held accountable if you conducted the transaction without authorization. The system will work in the customer’s favor, and you will lose the sales revenue plus overhead fees like shipping and interchange.
The financial damage caused to you by criminal fraud chargeback does not end here. You will also be charged a hefty chargeback fee( ranging from $20-$100 per transaction).
How to Prevent Criminal Fraud Chargebacks?
You must deploy a multilayer fraud management strategy to prevent criminal fraud chargeback. By doing so, you will have multiple fraud detection tools to give you a quick and detailed impression of the transaction. You can also use fraud scoring to process each transaction and rate the purchase according to potential fraud risk.
Later, you can manually review the purchases flagged by fraud scoring or reject them immediately.
Merchant Error Chargebacks
This chargeback occurs because of bad business practices rather than malicious intent from a third party.
Examples
- Inaccurate billing descriptors
- Entering the wrong amount while processing the payment
- Tracking mixups
- Shipping the wrong or defective item
- Inaccurate product descriptions
Like in criminal fraud chargeback cases, you can do nothing to protect your business once the merchant error chargeback claim is initiated. If your business committed any error that led to a customer filing a dispute, you would be bound to pay a chargeback fee.
How to Prevent Merchant Error Chargebacks?
To prevent merchant error chargebacks, you must eliminate your business’s internal system errors and operational missteps. After reviewing your business operations thoroughly, you will be able to identify the problematic areas and take action to resolve the issues. Once all your systems and operations are optimized, your business will be less likely to receive any merchant-error chargeback claims.
Friendly Fraud Chargebacks
As mentioned above, the aim of the chargebacks was to help customers get their amount back if a product or service is not meeting their expectations. However, many customers misuse this power and cause substantial financial damage to small businesses.
According to a consumer survey conducted by chargebacks 911, 81% of cardholders have admitted to filing a chargeback out of convenience. They find it easier to contact a bank for a chargeback than call a merchant for a refund. It is an example of friendly fraud chargeback.
Examples
- Shipping took more time than promised, resulting in a cardholder filing a dispute.
- A child, spouse, or other family member purchased without the cardholder’s knowledge.
- A cardholder filed a chargeback hoping to ” get something for free” as compensation.
- A cardholder thought asking a merchant for a refund would be a long and tiring process.
Unlike merchant error or criminal fraud chargebacks, you can get your money back after a friendly fraud chargeback through a process called “Representment.” All you need to do is “represent” the transaction to the bank, accompanied by strong evidence and a chargeback rebuttal letter.
If you can explain your case better to the credit card issuing bank and present strong evidence to prove your point, your amount will be returned.
How to Prevent Friendly Fraud Chargebacks?
Let’s face it – you cannot prevent friendly fraud chargebacks entirely. All you can do is eliminate transaction dispute triggers and keep a record of all transactions. By doing so, you might not be able to prevent friendly fraud chargebacks entirely, but you will definitely increase your chances of getting your amount back by presenting compelling evidence.
Conclusion:
Every day chargeback fee disputes are filed, causing substantial financial damage to the businesses. While, in some cases, the merchants are at fault, most cases are baseless and a part of fraudulent activity. Due to the immense amount of chargeback fee disputes, merchants are left with no choice but to deploy a multilayer fraud management strategy as well as chargeback alerts.
If you have not deployed them yet, you must do it immediately. Otherwise, be prepared to pay hefty chargeback fees, resulting in a huge financial loss to your business.
