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Chargebacks are the bane of any small business’s existence. They can be stressful, overwhelming, and downright frustrating. Chargebacks are even more of a liability if you operate a small business with few customers and no loyalty programs. They can leave you grabbing for your wallet every time someone buys from you online — which is to say, all the time. Fortunately, there are ways to reduce your risk of getting charged back so that you can focus less on dodging reprisal and more on growing your business.
You might be surprised by how much a little insight into how chargebacks work can go a long way toward keeping your cash flow steady. And your operation running smoothly. Knowing how to reduce chargebacks is integral if you want to keep your small business alive and thriving well into the future.
Not sure what we’re talking about? Read on to find out more.
What Are Chargebacks?
A chargeback occurs when a customer disputes a transaction with your bank, requesting that they reverse the payment. The bank then reverses the charge and holds the funds until they can decide if the customer’s claims are valid. It’s different from a refund in that the bank controls the fund reversal, not you as the company. The chances of receiving a chargeback depend on many factors, but the most common ones are:
- The bank didn’t follow the rules for accepting customers.
- The terms of the transaction weren’t clear or adequately described.
- The customer didn’t recognize or accept a shipping or other charge on the purchase.
- The consumer is conducting fraudulent
Why Do Chargebacks Happen?
The most common reason customers chargeback a purchase is because the item didn’t arrive as described. In most cases, the customer will claim that the product was not what was promised or that the item was damaged during shipment. This is a relatively easy way for customers to get a chargeback, especially if you don’t have a return policy. Unfortunately, the customer doesn’t have to be wrong — they just have to be suspicious. If a customer claims they got the wrong item or that it was damaged in transit, they can request a chargeback.
There are a few common reasons why customers initiate chargebacks against your business.
Incorrect Rules Of Acceptance
The bank accepts payment for a transaction but incorrectly flags it as fraudulent.
Too Many Fees
The bank adds fees to your credit card for the transaction, but the customer sees them as a chargeback.
The customer adds a shipping charge to their purchase but doesn’t notice that they’re also sending the product back.
The Customer Isn’t Eligible For The Service
This happens when the customer initiates a chargeback because they weren’t eligible for the service.
The charge wasn’t authorized by the cardholder.
These can include the customer receiving the wrong items, not getting a refund promptly, dissatisfaction with the item quality, or the product didn’t match the online description.
The Impact Of Chargebacks On Small Businesses
It is important to note that chargebacks almost always result in business losses. Because situations, where you have to return funds to the customer, aren’t great for any company. Past the apparent revenue loss, chargebacks are costly for businesses in other ways. They’ll cost you money and time because of having to deal with the payment processing providers. Along with inventory loss and fees for processing the chargeback. Chargebacks can also be a sign of low customer satisfaction. And a possibility of security if they are because of legitimate fraud.
The negative impact of chargebacks can be significant for smaller businesses hit with multiple chargebacks in a short period. Not only does this put your business in a bad light with customers, but it can also hurt your credit score and make it more difficult for you to obtain new loans, expand your operations, and even pay your employees and suppliers.
5 Ways Businesses Can Reduce Their Number Of Chargebacks
Chargeback prevention, and reduction strategies will vary from business to business, depending on your industry, product mix, and customer base. Here are some general strategies that can work for most companies.
1. Prioritize Security For Payments
It may sound like common sense, but ensure that your security processes work on every transaction. This includes verifying the identity of your customers and making sure they have enough account funds available to cover the transaction amount. If you notice that certain customers are more likely to initiate chargebacks, you can make an effort to educate them better on how to use your service. This can help prioritize security for those customers and prevent them from making unauthorized transactions in the first place.
Another quick and easy security measure is to use an integrated payment gateway, like PayPal, instead of creating your own payment page. PayPal has extensive security features built right in. While also offering a broader range of payment methods than your own payment portal can. You can also choose to provide payment plans or subscription plans that require payment before the end of the period. This helps prevent customers from making a one-time payment and potentially initiating a chargeback on that transaction.
If you accept credit cards, you should also use a payment gateway with chargeback protection. This means that if a customer claims they received an item that was not what was originally purchased, you can get your money back without having to jump through a lot of hoops.
2. Get Chargeback Management Software
Once you’ve identified which chargebacks have caused you the most trouble, you can turn to manage those chargebacks before they become a full-blown issue. One of the best ways to reduce your risk of chargebacks is to get chargeback management software. This will help you track your receipt and the status of chargebacks for each of your sales. The software will also help track customers’ claims that they did not receive the purchased items. Helping you determine who is claiming a chargeback and allowing you to reach out to them. This means you can let them know what happened and get them to accept the shipment again before you have to process a chargeback.
These systems can also help you understand your chargeback risk and provide tips and strategies to mitigate those risks. They also help you identify which chargeback types are most likely to occur so you can prioritize the most important chargebacks first. You can choose to use a chargeback management software platform as part of a complete merchant services suite. Alternatively, you can use a chargeback management software platform as a standalone product. These will give you more in-depth analytics and insights but may require more customization.
3. Have Clear Return And Refund Policies
Customers should be fully aware of your return and refund policies before purchasing from you. This will help you determine exactly how far a customer can go before you need to issue a refund or a return. If you make it clear in your return and refund policies that they must accept the item they purchased, they won’t be able to claim a chargeback. When the customer has a legitimate complaint, or the product didn’t work for them, you can offer to issue them a refund. But if they chargeback, you will need to reissue a refund. This will help you stay ahead of the chargeback game. By clearly stating that the customer needs to accept the item they purchase, you can prevent many chargebacks.
Post a clear policy on your product pages or get the customer to read and sign a return policy before they buy. As with all other terms and conditions, ensure that customers fully understand their policies before they make any purchases. This includes making sure that the customer has sufficient funds in their account to cover the transaction amount. Sometimes, a customer will initiate a chargeback without realizing they weren’t eligible for the service or product. In this case, you can simply refund the purchase amount and let the customer keep the product.
4. Be Clear With Product Descriptions And Availability
One of the most important ways to reduce your risk of chargebacks is to be transparent with your customers when selling to them. This means providing as much detail as possible with your product descriptions. Helping you prevent customers from claiming they did not receive an item that they did receive. Take the time to create clear, easy-to-understand product descriptions free of misspellings and broken grammar. This will help you prevent customers from claiming they did not receive an item that they did receive.
If your descriptions aren’t up to scratch, customers won’t know what they’re getting and may accidentally purchase something they weren’t eligible for. You should also ensure that your product availability is clearly displayed on your product pages. This will help customers understand how long your products will be available for delivery. Preventing them from making a last-minute purchase when the product is no longer available. This all protects your business from costly chargebacks.
5. Learn How To Spot Signs of Fraud And Stay Out Of Trouble
Finally, one of the best ways to reduce your risk of chargebacks is to learn how to spot signs of fraud. This will help you stay ahead of the chargeback game by letting you know if a customer is trying to get a fraudulent transaction approved. There are plenty of ways to do this, but a management system is a great place to start. If you invest in a good one, they often flag suspicious orders before they even get accepted. Even if those transactions aren’t fraudulent, you can manually consider the transaction. Adding a new level of security to your business.
Chargebacks can be an absolute nightmare for a small business. Luckily, they’re pretty simple to prevent and can be reduced significantly by using chargeback management software. Along with our other tips for protecting your company. These steps will help you reduce your risk of chargebacks and keep your business running smoothly.