Ever experienced a chargeback? You’d know if you have. It’s that moment when you see a cardholder has disputed a charge from your business. Obviously, it’s not a fun moment. And of course, you want to do everything in your power to avoid chargebacks going forward.
Chargebacks are meant to benefit consumers. They allow credit card holders to contact their banks, dispute charges, and force refunds. Chargebacks help people go around businesses to get reimbursed for any recent transactions they want to negate.
For business owners, chargebacks can be a real pain. They hurt your revenue and negatively impact your business. And during the holidays, they can hit even harder.
Reasons Cardholders File Chargebacks
Consumers file chargebacks all the time, for any number of reasons.
Here are some of the most common reasons for chargebacks.
- They believe the charge was fraudulent. (They don’t think they made the purchase.)
- Products or services rendered weren’t as described. (Or, they don’t believe they got what they paid for.)
- They didn’t receive the product or service paid for at all.
- They don’t recognize the transaction.
- Their card was run more than once.
- They think they’ve been charged an amount higher than what they agreed to pay.
You’ve probably endured chargebacks for at least a couple of the reasons above.
But do you know your chargeback rate? Do you know the average chargeback rate for a small business?
The industry standard chargeback rate is about 1% of your monthly transactions.
How do you calculate chargeback rate? Divide your total chargeback instances by every credit and debit card transaction you run each month. That number should be less than .01.
Note: Some credit card providers (like Mastercard) complicate this calculation a bit by dividing your current month’s chargebacks by the previous month’s.
…but you get the point. If your chargeback rate is greater than the industry standard of 1%, you need to do something about it. Like learning how to avoid chargebacks.
One More Thing to Worry About: Friendly Fraud
If you’re not already fired up, prepare to be.
Did you know at least 70% of chargebacks are considered “friendly fraud”?
Basically, consumers are discovering their banks and credit card providers have put this protection in place for their benefit, and they’re abusing it. They’ll request chargebacks for one of the reasons listed above, when none of those reasons actually occurred. Or, they won’t keep track of their purchases as closely as they should, because they know they have this recourse available to them later.
The issue with friendly fraud (and chargebacks in general) is clear — it’s hurting small businesses.
You’re losing money, and in some cases you’re paying fees to the banks and credit card providers on top of it all. And, if that chargeback ratio we broke down earlier gets too high, credit card processing software and providers may actually block you from processing debit and credit cards.
How to Avoid Chargebacks
It’s important to understand that aside from losing money, chargebacks can really damage your business. During the busiest time of year for most businesses? They can ruin the holidays.
You typically have a couple options when you’re hit with a chargeback.
- Endure the refund, and cut your losses.
- Dispute the chargeback. This involves gathering evidence the chargeback is fraudulent or otherwise unworthy of a refund. Disputes are hard to win, they can take up a ton of your time, and you still may end up being responsible for a fee.
There’s a third option. Let’s do something about it before you get hit with a chargeback in the first place.
Here are 5 ways you can avoid chargebacks during the holidays.
1. Itemize your estimates and receipts.
One of the top reasons consumers win chargebacks is because of unclear, vague receipts. So the first thing you can do to prevent chargebacks is to itemize both your estimates and receipts with more precision than you think necessary.
Picture this. You’re a general contractor, and you agree to retile a client’s shower for $1,000. They pick the tile, you do a demolition of what’s there, you replace it beautifully, and you call it a job well done. But a week later, the client is furious because you didn’t replace the shower pan or the tile on the floor, and you failed to carve out a trendy new insert for shampoos and soaps (none of which you included in your estimate or negotiations).
Sound familiar? If the estimate and receipt you gave that client didn’t itemize the amount of tile you purchased as well as the labor hours it took to do exactly what you did, you may be vulnerable to a chargeback.
2. Keep those receipts.
So you issued an itemized receipt. Great. But, you’re still hit with a chargeback.
What now? If the chargeback is worth fighting, you’ll need your copy of that receipt, preferably signed by your customer or client, to dispute it.
3. Promote your refund policy.
A clear refund policy is great protection against chargebacks. But it won’t do you any good unless you share it and can prove customers knew about it.
Tell your customers about your refund policy verbally. Then, go the extra mile to protect yourself. Add a line about your refund policy directly above the signature line on your receipts. So when they sign on the dotted line, they’re affirming they understand when they will, and won’t, be eligible for a refund.
4. Make your business name clear on charges.
Do you ever log into your bank account online to review your recent transactions? If so, you’ve probably spent time staring at one, or even more than one, charge wondering what the heck you spent $16.99 on last Thursday.
The only reason you’re unable to figure out what that charge was for (aside from your own forgetfulness) is because the business used a less-than-clear name when they ran your card.
Choose a credit card processor like Thryv that lets you label your invoices clearly with your business info and the exact service you provided. That way, when customers and clients go back to compare notes, you’ve covered your bases.
5. Note types of transactions you process.
Knowing what you sold, and for how much money isn’t enough to help you avoid chargebacks. You also need to know how you processed each customer’s card.
When you take payment, make note in your system or on your copy of the receipt how you accepted the payment. Was it online, in person, or over the phone?
Since fraud is high among card-not-present (CNP) transactions, this is particularly important in those instances. Learn more about CNP transactions here.
