In today’s business environment, nearly all businesses work with merchant services to accept and process card payments. Customers expect the convenience of paying with credit cards, debit cards, or even gift cards, and cash transactions are becoming less and less common by the day. Merchants also limit their risk of theft by limiting the amount of cash on hand.
Unfortunately, payment processing is not without its own set of risks including chargebacks, funding holds, rolling reserves, account suspension, and/or account termination. Chargebacks are perhaps the most common issue business owners and operators experience.
Today we will explore chargebacks, common risk factors which may lead to higher chargeback rates, easy ways to avoid chargebacks, and how chargebacks may lead to a payment processing account suspension or termination.
What Exactly is a Chargeback?
A chargeback is essentially any payment which has already been processed which has later been disputed. If the dispute is successful, the funds will likely be returned by the merchant to the purchasing party.
It is important to understand that chargebacks are not refunds. Refunds are handled directly between the merchant and the customer. Chargebacks must pass through the bank, credit card company, or other controlling financial institution.
Customers generally claim chargebacks under the Fair Credit Billing Act which was enacted in 1974 to protect the public from fraudulent charges. A legal chargeback should be successful on the basis of fraudulent activity by the merchant.
Risk Factors that Increase Chargeback Rates
Because chargebacks are linked to merchant fraud, one would think that simply operating their business legally will ensure their protection. Unfortunately, this is not always the case. There are a litany of reasons why chargebacks can be claimed even if the merchant has not done anything illegal. Here are a few common risk factors for chargebacks to avoid whenever possible:
Swiping or manually entering a Chip Card: When merchants swipe a card or manually enter card information from a chip card, EMV chargebacks become a possibility. This type of chargeback is not contestable and the merchant is left without the ability to recoup lost funds
Manually entered sales: any time a human being is entering information, there is a risk of error. Whether they are entering their credit card number or a cashier is entering the sales amount, this leaves the business exposed.
Online sales, particularly from services like PayPal: PayPal is one of the most widely used ecommerce companies in the world, with 100’s of millions of active users. It also has a history of siding with buyers over merchants when it comes to chargebacks.
Poor refund and return policies: another modern expectation is that customers can return their goods within a reasonable time for a full or partial refund. While this certainly isn’t required, it is important to clearly state your company’s refund/return policy to eliminate confusion.
Working with an inferior merchant service company: at the end of the day, an experience merchant services organization can go a long way towards protecting businesses against chargebacks. Companies offering a wide range of merchant services with advanced technology, great customer support, and anti fraud tools are ideal.
Simple Ways to Reduce the Risk of Chargebacks
To continue along those lines, how can businesses reduce their risk of chargebacks?
First and foremost, it is important that every company has clear policies and plans in place. These can be established with the help of a high quality merchant service organization. When disputing a chargeback, having a clear company policy shows that your organization is following protocol.
Another simple way is to always get information in writing. By providing written proof of the legitimacy of each transaction, the risk of chargebacks is dramatically reduced. This is also true of internal bookkeeping. Businesses which have clear and detailed books are in much better shape to dispute any transactional issues.
Many chargebacks stem from equipment issues, all credit card processing equipment should be capable of accepting chip cards. Businesses who can only swipe cards should upgrade their equipment as soon as possible. If customers chip cards are not functioning, merchants should have customers use another payment method. Overriding payments, attempting to swipe a card on a chip system, and manually entering card information may all increase the risk of chargebacks.
Last but not least, follow the protocols of your merchant service company. Each merchant service organization will have its own set of rules for payment processing. By following these rules, the onus will then be lifted from the business owner and put onto the merchant services company to process payments correctly.
Chargebacks, Suspended Accounts, and Terminated Accounts
Unfortunately, chargebacks can often indicate fraudulent activity. If a business owner is found to be at fault for a chargeback or other suspicious activity, he or she may be at risk of having their merchant account either suspended or terminated. This is a vital point, as the risk of chargebacks isn’t just the immediate loss of funds, it may also cost your business in the long run.
For this and many other reasons, business owners and operators should seek to avoid chargebacks whenever possible. By working with a quality merchant service company and adhering to best business practices, you will be giving yourself the best chance to avoid costly chargebacks, suspensions, and/or terminations.
True Merchant Payment Processing Reduces Your Risk of Chargebacks
At True Merchant, we understand that small businesses are at a high risk of damaging chargebacks. We are proud to offer a suite of services which are tailored to B2B businesses, small businesses, and more. At the end of the day, businesses are run by people who make mistakes. True Merchant strives to protect small business owners with comprehensive payment processing services and personalized customer care.
Whether you are looking for credit card processing, online payment solutions, business funding, mobile payment solutions, or any other payment processing service, let True Merchant go to work for your business today!