Chargebacks: The Good, The Bad, and The Ugly

Posted by Jayme Moss on Aug 3, 2017 1:00:00 PM

Don’t let chargebacks (and the issuing bank lobbyists) derail your business

Chargeback liabilityCredit card chargebacks can often be the bane of a small business owner’s existence. They require significant investments in time and labor to research and respond. Let’s face it: The card issuing banks have lobbied for years to ensure that the cardholders receive the benefit of the doubt when there is a chargeback case, not the merchant.

A little unknown fact is that the bank that issued the credit card involved in a chargeback is the decision maker between the merchant and cardholder as to who wins the chargeback case.  This decision is based on the documentation received by both parties. The only point in which the cardholder receives an unbiased decision on a chargeback case is if the merchant loses the chargeback case and wants to ultimately take it to arbitration. At that stage, representatives from the card companies are involved in the decision. Unfortunately this is somewhat of a gamble, as there is a fee as high as $400 if the merchant takes the case to arbitration and LOSES. Once again, the rules are slanted in the cardholders favor. 

Given that the issuing banks have stacked the deck, we suggest you take the following steps to protect your company against costly chargebacks, and guard your crucial cash flow:

Learn the Reasons Why Customers Initiate Chargebacks

Getting in the mindset of your customer is a sound strategy across many areas of business, from pricing and marketing to customer service. Chargebacks are no exception, as having an understanding of why your customers most often initiate chargebacks can illuminate a clear path to future prevention. There are myriad reasons why customers choose to begin the chargeback process, including billing errors, perceived substandard quality of the service or product, or outright fraud. Sometimes, a cardholder will reject a legitimate charge simply because they don’t recognize the transaction, preferring to let the credit card company do the leg work rather than contacting the vendor themselves. At any rate, taking proactive measures to prevent fraudulent card use is a step in the right direction.

Start with Prevention

Card Not Present: In the case of an online transaction, make sure you are collecting all of the appropriate data from the cardholder, such as the unique three- or four-digit security code and billing address. If you have more than a few chargebacks per month or the dollar values are high, it may be time to invest in fraud management tools such as IP Geolocation, Verified by Visa/ Mastercard Secure Code. You can even review suspicious transactions via Google Earth to validate that the person behind the transaction is not a fraudster. Work closely with your processing partner to devise a toolset that comes with a Return on Investment that makes sense for your business.

Card Present: Although there are fewer cases of card present chargebacks, they typically can be stopped quickly by doing a verification of the cardholder by asking for a license when it feels like a suspicious transaction or the card cannot swipe. With EMV on the horizon, and the EMV chargeback liability shift occurring in October, it may make sense to invest in the EMV capable terminal. But keep in mind, investing in an EMV terminal only protects against counterfeit card fraud. If you have never seen this type of fraud before, rarely receive a chargeback, and know your customers, then this investment may not be needed right away…

Restaurants are a perfect example of an industry where counterfeit card fraud is not an issue. The cost of upgrading to an EMV device may far exceed the threat of a chargeback. Again work closely with your processor to discuss your specific business and whether it makes sense to rush out and buy a new terminal or EMV capable device. But keep in mind, this is starting to feel like Y2K all over again… therefore, make sound not rash judgments when it comes to this investment. Best Buy in Canada waited years to invest in EMV equipment and mitigated chargebacks by reviewing driver’s license to mitigate their risk. You could easily do the same until the time is right to invest.

Read: Top 7 Reasons NOT to Adopt EMV

Follow Credit Card Company Instructions and Respond Promptly

Credit Card providers issue strict instructions for how to respond to chargebacks, and it’s important to follow these regulations as delays in the process or missing documentation can severely damage your case. It’s wise to assign one person the responsibility of checking and responding to chargebacks each day, lest you risk falling behind and missing response deadlines... Resulting in automatic disqualification of your claim.

Take a Proactive Approach to Chargebacks

Rather than sitting back and taking a reactive approach to chargebacks, Solupay is actively pursuing and implementing Fraud Management and Chargeback reduction solutions that are customized to the unique needs of each client that, again, actually have an ROI. If you are ready to have a discussion, please feel free to reach out to us directly so we can do a review of your current business processes and determine if we have tools to augment your fight and make things fair again!

Contact Solupay to Learn More