Running a business comes with plenty of challenges, but few are as frustrating and costly as dealing with chargebacks.
Jake’s tech startup was on a roll until chargebacks started pouring in. Although he was aware of the chargebacks, Jake was so busy that he put off addressing them and implementing measures to prevent them going forward.
As a result, the unexpected disputes drained resources, tarnished his brand’s reputation, and jeopardized his merchant account.
Don’t be like Jake—take proactive steps now to protect your business and avoid the costly consequences of chargebacks.
Understanding the underlying issues can help mitigate their impact. Research shows that 86% of chargebacks are cases of 'friendly fraud,' costing merchants an estimated $40 billion each year globally.
Friendly fraud occurs when a customer disputes the charge on the credit card statement because the customer is no longer able to identify what the charge was for, and there is no clear way for the cardholder to contact the vendor to investigate the charge.
These staggering numbers highlight just how crucial it is for businesses to understand the different categories of “chargebacks” and implement prevention strategies to protect revenue and maintain a positive reputation.
Read on to learn how to stay ahead of these hidden dangers and keep your business running smoothly.
Understanding the Different Types of Charges
To effectively manage and prevent financial setbacks, it's crucial to understand the three primary types of charges that can affect your business: payment reversals, refunds, and chargebacks.
These are often grouped into the term “chargebacks,” but each type has its own unique process and implications.
Payment Reversals (Voids)
Payment reversals, or voids, occur when a credit card transaction is canceled before it has been fully processed.
Examples of reversals include duplicate transactions and incorrect amounts.
As a result, no funds are transferred from the customer's account to the merchant.
This results in minimal costs–usually just a small authorization fee.
Refunds
Refunds involve returning funds to a customer after a transaction has been fully processed and settled.
Unlike reversals, which cancel the transaction before settlement, refunds occur post-settlement, meaning the funds have already been transferred to the merchant.
Refunds, if excessive, can flag a merchant's account.
Reasons for refunds can include returning funds due to customer dissatisfaction, product returns, or order cancellations. The customer sees the refunded amount credited back to their account, which can take a few days to process.
The importance of efficient refund management became particularly evident during the pandemic.
Widespread cancellations of events, travel plans, and orders, along with financial uncertainties, prompted a high volume of refunds that overwhelmed processing systems.
This led to lengthy review processes and delays in returning funds to customers, straining merchant-customer relationships and underscoring the necessity for robust refund processes.
Chargebacks
Unlike payment reversals and refunds, chargebacks are customer-initiated disputes through their bank, claiming unauthorized transactions or issues with products or services.
Because chargebacks involve the bank, they can carry substantial penalties such as financial losses and possible suspension of the merchant account if chargeback activity is excessive.
Preventing chargebacks entails proactive measures such as accurate transaction details, robust security, and swift customer support.
Impact of Chargebacks on Merchants: Chargebacks are like figurative cracks in your business's foundation. A few tiny cracks might seem manageable, but before long, they can spread, compromising the entire structure and leading to financial instability and even reputational damage.
Their impact can be significant.
With each chargeback, the merchant loses the transaction amount, incurs additional fees, and faces potential fines.
Frequent chargebacks can lead to higher processing costs and even suspension of the merchant account, preventing the business from accepting credit card payments.
In addition, chargebacks go beyond financial losses, harming the merchant's reputation, reducing customer trust, and making it challenging to attract and retain new customers.
Microsoft Dynamics 365 Business Central can help track and manage these financial risks effectively, providing tools to monitor transactions and implement preventive measures. Increased scrutiny from payment processors can also result in stricter terms and conditions for future transactions.
5 Steps to Prevent Chargebacks
Preventing chargebacks requires proactive measures.
Here are five things you can do to improve customer experience and prevent chargebacks.
Ensure Accurate Transaction Details: Provide clear, accurate descriptions of products and services and billing descriptors that are recognizable to customers.
Provide Level-3 Data for B2B Transactions: For B2B credit card transactions, providing Level-3 data back to the cardholder through your PCI-compliant gateway is shown to reduce chargeback risk. This provides line-item details about the credit card transaction as part of the cardholder's spend report from their bank, ultimately reducing disputes.
Monitor Transactions Regularly: Keep an eye on transaction patterns to detect and address unusual activities quickly.
Implement Robust Security Features: Use CVV, AVS, and other fraud detection tools to verify transactions and reduce fraudulent activities.
Offer Excellent Customer Support: Provide easy access to customer service to resolve issues before they escalate to chargebacks. Display contact information prominently on your website and transaction receipts.
Use Microsoft Dynamics 365 Business Central: Leverage its tools to track and manage financial risks effectively, ensuring smoother and more secure transaction processes.
A Reliable Provider - The Game Changer In Chargeback Prevention
Chargebacks can pose a significant threat to any business, but with the right strategies in place, you can avoid the pitfalls that Jake experienced.
By understanding the different types of transactions—payment reversals, refunds, and chargebacks—you can better manage your financial risks and protect your revenue.
Partnering with USTPay and leveraging Microsoft Dynamics 365 Business Central can further enhance your efforts. USTPay offers seamless transaction processes, advanced security, lower fees, and expertise in transmitting Level-3 data to cardholders, reducing disputes and chargebacks.
Don't let chargebacks catch you off guard.
Take action now to safeguard your business, maintain your reputation, and ensure smooth operations.
By staying vigilant and proactive, you can keep your business thriving without the worry of unexpected financial setbacks.
About the Author:
U.S. Transactions Corp., a premier B2B enterprise service provider, collaborates with its clients to deliver an exceptional experience every time, from industry-lowest rates and cutting-edge technology to Level-3 processing that can save your organization up to 30 percent on costs!
Since 2009, UST has been a trusted source for Commercial Enterprises, Associations, and Nonprofits looking to maximize their success rate through superior payment solutions designed specifically for them.