There are some parts of small business that just suck.
They’re not enjoyable, and they don’t make you money in any way.
One of those such parts is getting chargebacks. One second you thought you had a sale, and the next second you find out that not only did you lose that sale, but you also have to eat the product loss and fees on top of that.
The worst thing is that in many cases, you did absolutely nothing wrong.
Just like life, business isn’t always fair.
Chargebacks were created with good intentions, and usually used correctly, but are sometimes abused.
As a small business owner or manager, it’s up to you to protect your business from them.
This guide will start with a simple overview of chargebacks in the context of small business, and then I’ll show you the ways that you can protect your business from them.
Keep in mind that laws and chargebacks are a bit different in just about every country or state, but most of the concepts here will still apply.
- 1 The Basics: What Does a Chargeback Mean for You?
- 2 The 3 Types of Chargebacks
- 3 How to Dispute a Chargeback Effectively
- 4 The Better Solution: How to Prevent Chargebacks in the Future
- 5 Summary
The Basics: What Does a Chargeback Mean for You?
Long story short, when a consumer buys something with a credit or debit card, they can do a chargeback to get their money back.
When used properly, it protects consumers from businesses who don’t deliver, and in situations where their cards are stolen.
On the business side, it’s expensive.
A 2016 study performed by LexisNexis found that chargebacks cost businesses $2.40 for every $1 of product lost. This is because of overhead like fines, penalties, time cost, and more.
If you only sell low-priced items, chargebacks hurt even more. Paypal applies a $20 base fee to any chargeback case. Depending on the merchant you’re dealing with, this fee can go over $100!
If it becomes a reoccurring event and you cross a threshold of chargebacks, you can face fines that are thousands of dollars.
So it’s a big deal for any small business owner.
The 3 Types of Chargebacks
Before you can prevent and defend against chargebacks, you need to understand what you’re up against.
There are 3 main types of chargebacks.
Type #1 – Fraud
When someone purchases something with the intent of getting your product and then using a chargeback to make money, that’s fraud.
And yes, it is illegal.
You can, and should try to prevent these purchases from ever being made. Additionally, you can dispute these chargebacks, and have a good chance at winning if you’re prepared.
Type #2 – “Friendly” Fraud
This type of chargeback is also abuse of the system, but it’s typically not malicious.
Some consumers use chargebacks in inappropriate situations, not understanding how much it can hurt a business.
- They get buyer’s remorse
- They’re too lazy to return the product
- The shipping is taking too long
- They forgot they even ordered it.
It’s understandable that if someone sees a charge on their credit card that they don’t recognize, they’re going to try to get their money back.
You can still fight these chargebacks, but you want to do so carefully, as these customers can still be great future customers.
Type #3 – Legitimate Chargebacks
There are definitely cases where chargebacks are legitimate. In most cases, the business either lied to or misled a customer.
In others, a credit card was stolen and was used to purchase products. In this case, the consumer should go to the credit card issuer first and they should take care of it, but sometimes chargebacks are mistakenly filed.
Most legitimate chargeback cases are the first type.
How to Dispute a Chargeback Effectively
Fighting chargebacks takes planning beforehand and effort afterwards.
If the consumer has a valid claim, and your business made legitimate mistakes, it’s better to absorb the cost than waste more resources fighting a lost cause. Just learn from it and move on.
When you do decide to fight a chargeback, you’ll want to look up the chargeback code that you were provided. There’s 151 over the main credit providers, and you need to tailor your defense to the specific code.
Keep in mind that even if you provide reasonable evidence, sometimes you’ll still lose as chargeback cases are typically consumer-favored.
While every specific case is different, let’s look at how you would fight back in a few common chargeback scenarios.
Appealing Fraudulent Transaction Chargebacks
If a consumer suspects their credit card was stolen and used to buy your product, they might file a chargeback with one of the several fraud reason codes.
If you think that they’re mistaken or lying, you can defend yourself by providing:
- Proof of delivery
- An order form or receipt with the customer’s signature
- A copy of the customer’s ID
- Any proof that the order recipient and credit card owner are connected
- Proof that the customer has made a purchase before with the same IP address.
Now it should be clear why you need to plan ahead to defend yourself. Unless you’re making a copy of your customers’ IDs, your chances to win will go down.
As long as it is legal where you live, you can provide just about anything as evidence — emails, photos, receipts, and analytics data included.
Another common reason that customers file chargebacks is if they’re on a subscription plan and want to cancel without paying for the last period. Alternatively, it can happen when they forgot they signed up or thought they canceled in the past.
This is only a concern for you if you offer subscription plans, and is only common in digital businesses.
The outcome here will depend a lot on what the customer agreed to when initially subscribing.
Here’s what you’ll want to include:
- A screenshot or document that outlines what the customer agreed to when signing up.
- Proof that you were not contacted to cancel the subscription at any point.
- Your cancellation policy (if you have one and it is relevant to the case).
- Any proof that the customer received or used the product after the point they claimed they canceled.
- Any receipts, invoices, or confirmations you sent to the customer after each billing period. It’s even better if you an email tracking product that shows these emails were opened.
- Analytics data — depending on the specific claim, providing activity logs can act as proof of legitimate product use.
Product Not as Described
The final scenario we’ll look at is when you ship a product to a customer, and they claim it’s not what they ordered.
If they’re wrong, or just experiencing some buyer’s remorse (see “Friendly” Fraud, above), you should appeal the chargeback.
You do so by providing as much as the following proof as possible:
- Screenshots of the product page at the time of purchase (if sold online)
- Description or picture of return policy that customer agreed to
- Proof that product was delivered correctly (and not damaged)
- Proof of purchase and that the right product was shipped.
What about other chargeback reasons?
We can’t go through every reason here, but if you find the chargeback code provided to you on this list here, you will find detailed information on how to fight that specific claim.
The Better Solution: How to Prevent Chargebacks in the Future
The best way to defend your small business against chargebacks is to not get them in the first place.
So if you find that you’re spending a lot of time fighting chargebacks, you should also be spending time on preventative measures.
There are a variety of things that you can do.
1. Offer Great Customer Service
A decent portion of chargebacks come from customer confusion.
The customer doesn’t understand what they signed up for, or they are frustrated. They defer to making a chargeback, even if they shouldn’t.
You can prevent this, and gain more loyal customers, by having great customer service.
In general, you want to:
- Make it easy for customers to contact support. Every page on your website should have at least one clear link to a contact page or address (or live chat).
- Encourage contact in order confirmation and update emails. If a customer has a problem, you want them to come to you first.
- Be flexible and generous. It’s better to be lenient on cancellations and miss out on a tiny fraction of revenue if it means you prevent chargebacks.
2. Use a Clear Payment Descriptor
Beside every line of a credit card statement is a payment descriptor.
You can customize the text that shows up when payments are made to your business using different payment processes, including Stripe and PayPal.
If you leave it blank or it’s unclear, you’re just asking for customers to forget where it came from and have no choice but to process a chargeback.
Instead, make it as clear as possible. Put the company name or website as the descriptor, so that the customer can get a reminder or get in touch with your customer service.
3. Improve Your UI and UX
Customer frustration comes when people can’t find answers to their questions on your website.
You can make some simple tweaks to your online store and checkout process to reduce the chance of confusion that leads to chargebacks:
- Make your product offer crystal clear. Don’t leave customers guessing how big your product is or which features are included.
- Make shipping information clear. This is especially important if you have long shipping times.
- Send confirmations after every milestone. If you want to make sure that customers contact you with problems and don’t forget about their order, keep them updated.
4. Watch Out for Red Flags
It’s possible to prevent people from using stolen cards in the first place if you monitor purchases.
Thankfully, many payment processors take care of this for you. But if yours doesn’t, here’s what you should look out for:
- Large orders. If someone places a huge order (unusually large), investigate deeper. If possible, get on the phone and obtain additional verification.
- Orders from drastically different postal codes or countries. If a past customer usually makes orders from North America, and now an order is coming from Russia, look into it deeper.
Experian also has a list of the top 100 zip codes where fraud occurs.
5. Record Customer Data
As we saw above, you’ll often need customer activity logs when you want to appeal chargebacks.
This is where your web developer or IT person comes in. (Even some marketers can help.)
Record as much data as you can about your users, just in case you need it:
- IP addresses used
- Activity logs (when and what pages were accessed)
- Order histories
- Addresses used.
It’s better to have too much data and not need it, than not have it when you’re fighting a chargeback.
6. Use Any Anti-Fraud Measures Available
Credit card companies themselves put a lot of effort into detecting fraud, but you can help as well.
Some things you should start with:
- Require signatures for all deliveries
- Use an address verification service
- Require the CVV number on the card
- If you use a content management system for your e-commerce store (like Shopify), use its built-in anti-fraud tools.
Chargebacks are a necessary, but also painful part of business.
They can be scary and frustrating, but understanding them will help you prevent future chargebacks, and appeal current ones.
You’ll likely never completely eliminate them, but you can reduce them to a manageable level so that they do less damage to your business.