How Can Small Businesses Avoid Customer and Fraudulent Chargebacks

By Gary Prince, SimplyPayMe’s Chief Strategy Officer.

For many small businesses, figuring out how to manage chargebacks effectively can be challenging. Chargebacks can lead to fees imposed on your business, weaken your financial health, and lower your credibility with your payment processor.

Here are a few tips to dramatically reduce your number of chargebacks and a few preventative measures to help shield your business.

First, it’s essential to understand what a chargeback is and why it occurs. As the name implies, a chargeback is a sum of money spent initially on your product or service that is “charged back” to the customer.

Why do chargebacks occur?

The reasons for a chargeback can differ, though the most common reasons are:

The customer experiences’ “buyers remorse”

The customer isn’t patient enough to wait for a refund

The customer committed fraud

The customer forgot about or didn’t recognise the transaction

Please note that your payment processor should communicate the reason behind the customer’s chargeback.

How can it happen?

Chargebacks can only occur for customers purchasing credit and debit cards for amounts over £100 or alternative payment methods such as Pay by Bank App.

However, chargebacks are not as simple as they seem. Long-term complications can arise when customers abuse a business with multiple chargebacks. For example, a potential risk is for your payment processor to strike your enterprise with a separate chargeback fee ranging from $10 to $100.

The most apparent consequence of chargebacks is the weakening of your financial health (particularly when hit with hefty chargeback fees for every dispute) or losing business credibility.

Moreover, your payment processor may deem your business high risk leading them to freeze your account, block transactions, impose higher fees or – in the worst case scenario – suspend your account for good.

“Chargebacks cost merchants more than 3.5 times the initial loss, which represents $360 for every $100 they lost in terms of direct fraud costs”.

How can you prevent chargebacks?

Knowing just how frequently credit and debit transaction frauds occur is essential. Whilst online payment has many consumer benefits, it also allows for cardless transactions (also known as “card not present” or CNP transactions).

1 – Be aware

Online payments allow for cardless transactions (also known as “card not present” or CNP transactions). Meaning, merchants should be vigilant to prevent inconsistent or unauthorised transactions. Knowing how frequently credit and debit transaction frauds occur is essential.

Be vigilant with:

Differences in billing and shipping addresses

A shipping address to an empty property or P.O. box

Identical shipping addresses for different customer orders

Fake or bogus email addresses

Incorrect security codes

Next day deliveries for big orders

Rely on your instinct – If something doesn’t feel right, it usually isn’t!

2 – Create a strong refund policy

For these reasons, it is vital to have a strong refund policy stating your terms and conditions: how, when, and why a customer can return a product or opt out of a service, with strict terms on when a customer should be eligible for a refund.

This refund policy is one of the best ways to combat chargebacks. It encourages banks and card issuers to advise customers to settle disputes before the chargeback is requested. It also means that the customer is less likely to go to a card issuer if they know a firm policy is in place.

To do so:

Write an easy-to-understand policy using precise language

Be flexible by offering a 30-day return policy, which decreases the number of cashbacks compared to a 14-day window

Add free shipping to your policy, with a payable return, as customers will less likely send the product back if they have to pay the shipping cost

To summarise, customers resort to chargebacks as they are quick and easy. However, the key for any business is to enforce a strong refund policy, keep an eye on suspicious data movements and to maintain top-quality customer service.

Author Bio:

SimplyPayMe is an award-winning global payments company whose mobile-based payment and business management solution is specifically designed to meet the growing demands of the SME underserved community.