What Every Business Needs To Know About ChargebacksPayments 101

What Every Business Needs To Know About Chargebacks


Last Updated on May 22, 2024

Chargebacks are an unavoidable part of doing business, but they don’t have to be a source of frustration. They happen for a variety of reasons, ranging from fraud prevention to simply buyer’s remorse. Regardless of the cause, businesses must take steps to prevent them and respond appropriately if one does occur. In this article, we’ll look at what chargebacks are, common pain points businesses face with chargebacks, and the best practices to deal with them.

What is a chargeback?

A chargeback happens when a customer challenges a financial transaction on their credit card statement and requests reimbursement from the bank. The bank examines the complaint before deciding if it is valid, then returns the money to the consumer while also charging fees to the business for initiating this process.

Why do chargebacks happen?

As we mentioned before, chargebacks happen for a variety of reasons, not all of them are legitimate. Some common causes of chargebacks include the following:

  • Fraud — When someone uses a stolen credit card or otherwise accesses money without the proper authorization.
  • Processing Errors — Sometimes the cardholder may not recognize a transaction due to an error in processing, such as incorrect information or missing details.
  • Buyer’s Remorse — Customers may regret their purchase and ask for a refund even though they don’t have a good reason to do so.

Just because a customer requests a chargeback doesn’t mean it will be approved by the bank. Banks look at the reason for the chargeback, like if the credit card was stolen, if there was a mistake in how it was processed, or if the customer just changed their mind about buying something. If the bank doesn’t find a valid reason, they will not approve the chargeback.

What are the consequences of chargebacks?

Chargebacks are meant to provide a safety net for consumers if they are victims of fraud or other nefarious deeds, but they can cause some major issues for businesses, including the following:

  • Financial Loss — Chargebacks result in the business losing the initial sale and also having to pay a chargeback fee, which can range from $20 to $100. This can add up quickly and result in significant financial losses.
  • Time and Resource Drain — Each chargeback must be investigated and a response must be provided to the bank. This can be a time-consuming and costly process for merchants, taking away valuable time and resources that could be used to grow their business.
  • Risk of Losing Merchant Account — Businesses may face the risk of losing their merchant account or having their account frozen if they have a high number of chargebacks.
  • Administrative Burden — The process of dealing with chargebacks can be administratively burdensome, requiring businesses to provide evidence, communicate with both the customer and the bank, and respond in a timely manner.

How do you prevent chargebacks?

There are a number of things that merchants can do to resolve issues with chargebacks and minimize the impact on their business.

  1. Prevent chargebacks from occurring in the first place. It is essential to provide accurate and clear billing information, so that customers are aware of their purchase agreement. Any customer inquiries should be attended to promptly and professionally.
  2. Invest in fraud prevention tools and technologies. Look into AI driven tools — like Kount — as well as address verification systems (AVS) and card verification values (CVV) to verify customer information and reduce the risk of fraudulent transactions.
  3. Establish efficient and effective chargeback processes. Streamline your chargeback process and increase efficiency by implementing an automated chargeback management system. This can simplify the response time to any incoming chargebacks, making it a more manageable task.

Find the right payment processor and solution.

Not all payment processors are created equal. The world of payments is complex, fragmented, and ever-changing. Each processor has its own way of dealing with these complexities. Some focus on just providing payment processing and don’t provide any additional software or services. Others are known as full-service providers and provide one solution for the several fragmented aspects of payments. There are pros and cons to each type of provider, so it’s up to you to determine what you need.

If your business deals with chargebacks on a regular basis, we strongly encourage you to look into a robust payment solution that has chargeback management services included. It is well worth the investment and will save you countless headaches now, and in the future.

Nexio’s chargeback management

Nexio provides payment infrastructure and strategy for multiple types of businesses. Our platform simplifies chargeback management by centralizing transaction reporting and dispute processes into a single, easily accessible dashboard. Receive instant notifications, analyze chargeback details, and electronically dispute chargebacks.

Contact us for an obligation-free consultation to see what Nexio can do for you.

Conclusion

Understanding and managing chargebacks is essential for any business engaged in online transactions. Effective strategies include implementing strong fraud prevention measures, providing excellent customer service, and choosing the right payment processor. By taking these steps, businesses can minimize the financial and operational impacts of chargebacks, maintaining a healthy bottom line and a positive reputation.

FAQs on Chargebacks

What is a chargeback?

A chargeback occurs when a customer disputes a credit card transaction and requests reimbursement from their bank. The bank reviews the claim and, if valid, refunds the customer and charges a fee to the business.

Why do chargebacks happen?

Chargebacks can occur for various reasons, such as fraudulent use of a credit card, processing errors, or even buyer’s remorse.

What are the financial consequences of chargebacks for a business?

Businesses face financial loss from the reversed transaction and a chargeback fee, which can range from $20 to $100 per incident, leading to substantial cumulative losses.

How do chargebacks affect a business operationally?

Chargebacks require time and resources to investigate and respond, can risk the loss of a merchant account, and create an administrative burden.

Why is choosing the right payment processor important in chargeback management?

Different payment processors have varied approaches to handling chargebacks. Some offer comprehensive solutions, including chargeback management services, which can significantly reduce the burden on businesses.

What steps can businesses take to prevent chargebacks?

Preventative measures include clear billing information, prompt customer service, and investing in fraud prevention tools like AI-driven tools, address verification systems (AVS), and card verification values (CVV).

What services does Nexio offer for chargeback management?

Nexio provides a payment platform that simplifies chargeback management by centralizing transaction reporting and dispute processes in a single dashboard, offering instant notifications, and facilitating electronic dispute resolution.

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