Eight smart steps to prepare your business for chargebacks

General Business / August 4, 2015

In the event of a chargeback, is your business prepared?

According to Wikipedia, “the chargeback mechanism exists primarily for consumer protection.”

Notice that the definition has nothing to do with the merchant or business.  Do you have the necessary steps in place to protect yourself and get your money back?  While chargebacks are not often used (generally about .01% of all credit card transactions are disputed), in the wrong hands, a chargeback can be a powerful weapon used by the unscrupulous consumer.

Some keywords and their definitions in this article

  • A Chargeback is the return of funds to a consumer, forcibly initiated by the issuing bank of the instrument used by a consumer to settle a debt.
  • An Issuing Bank is the bank that is named on the consumer’s credit card (American Express, Wells Fargo, Chase, etc.)
  • The Consumer is the one who charged the item on their credit card and requested the issuing bank to initiate the chargeback
  • The Merchant is the business that accepted the card from the consumer
  • The Merchant Processor is the company that processes the merchant’s credit cards.
  • Reason Codes define why the chargeback is requested.

Chargebacks were created to cover the consumer, as defined above, and to address fraud.  In those instances where a consumer might purchase something from a merchant and doesn’t receive it, or it’s broken, or it’s not what it was supposed to be, and the consumer does everything to reasonably work with the merchant, a chargeback can be used to make the consumer whole.  Additionally, if a consumer reports their credit card stolen, the credit card company issues chargebacks for any charges that are fraudulent.  For all of these reasons, the chargeback is a great tool.

Here are some things you may not know about chargebacks:

  • When a consumer submits a chargeback, the issuing card company contacts your merchant company and a course of action is taken.
  • Chargebacks are generally categorized into four areas:  technical, clerical, quality or fraud
  • There are numeric codes in each area that define the chargeback.  For example, a C32 is damaged goods or merchandise received;
  • Most often, the course of action is the removal of funds from the merchant account.  Sometimes, based on the reason code and how old the transaction may be, an inquiry is initiated instead of the money being removed.
  • If money is removed from the merchant’s account, it’s usually within 48 hours, but often sooner.
  • A notice of chargeback is usually mailed via USPS – this means you’re missing the money before you even know the chargeback was initiated.
  • Once the consumer initiates the chargeback, it is the merchant’s responsibility to prove that the charge was valid.
  • Chargebacks can be won by the merchant, but refiled by the consumer, as long as a different reason code is used.  This cycle can happen continually for up to 12 months (based on the consumer’s bank).

If you accept credit cards, you are vulnerable to a chargeback.  Depending on the volume of your business, and the average amount of each transaction, many businesses consider chargebacks a cost of doing business.  For a company whose average ticket is $30, and who might do $60,000 in sales in a month, a couple of chargebacks probably aren’t worth the time of the business owner to resolve.  But what if your average ticket is $3500 and you might do $60,000 in sales a month and you get a chargeback?  Suddenly you realize that your cash flow is a lot more vulnerable than you think.

Here are some ways to protect and prepare your business.

1.  Don’t take credit cards over the phone without written authorization. Before you internet business readers groan and stop reading, hear me out.  If you’re subject to a chargeback, the very first thing on the list to prove that it’s a valid charge is a signed sales draft.  If you’re taking a credit card on the phone without a written authorization you’ve probably just lost the chargeback battle.  It used to be that writing /s/ and “over the phone” on the signature line was enough.  These don’t necessarily count anymore.

2.  Make sure the written authorization to charge a consumer’s credit card is clear.  Under what circumstances can you charge the card?  Is it recurring?  Do they have to review the invoice?  For one-time purchases do they have to initial an amount field?  This document should be ironclad.

3.  What is your return policy and is it clearly started on whatever the consumer signs?  Take a look at your receipts or invoices that you print and give the customer.  Is it clear?  Is there an exact number of days and under what circumstances you’ll accept a return? Entrepreneur.com has a great article about writing a clear return policy, which you can read here.  To win a chargeback, you have to have a very clearly defined return policy that the consumer can understand.  A tie goes to the consumer, so make sure it’s consistent and easy to interpret.

4.  Keep all the pertinent documentation from the charge itself.  Other things you have to provide when you fight a chargeback are the cardholder number, authorization number, transaction amount, and date.  These are usually all found on the sales slip.  It sounds obvious but don’t throw these things away.  Ideally, they’re stapled to the written authorization in step one.

5.  Document and have the consumer sign an authorization if items are to be shipped to an address other than the one that you have on file for the consumer.  Example: A consumer buys auto parts but wants the parts shipped to a third party body shop for paint and installation.  Shipping items to someone other than the consumer can get you in trouble without written authorization.

6.  Print and save the tracking and delivery information.  If you’re shipping products, proof of delivery is necessary to prove the items were delivered to your consumer’s address or the address where they wanted items shipped.  Print these confirmations out when items are received. If you ship USPS, note that they only keep delivery confirmations for six to twelve months.

7.  If you receive a chargeback notice, don’t ignore it.  Fight it immediately.  Pull together your documentation and go after it.  You can win if you have the documentation and the backup to prove it’s valid.  Take a look at the reason code to help you fight it better.  If the reason is items never received, show the shipping confirmations and you’re one step ahead.

8.  Consider having two checking accounts at your bank – one for merchant deposits only and one for operations.  In the event you have a large chargeback, it doesn’t hit your operations checking, it hits your merchant checking.  Keep your merchant checking account balance low just in case.

You might have guessed by now that I was recently subjected to a chargeback.  Actually four chargebacks.  It started with two – one from January and one from April.  They were both American Express, and given what I’ve heard about AmEx, I was afraid I would lose them. Luckily, I had enough documentation that I won the first round.  Then the consumer opened them again, this time with a different reason code. These are still in process. And the monies came in and went out of my account a number of times, and in total, between phone calls, documentation and letter writing, I’ve spent about 20 business hours so far fighting them.

Based on what I’ve learned, I’ve made some changes.  We don’t charge a credit card without written authorization. The authorization is clear about what it is for, and the return policies are crystal clear and noted in a couple of places.  It’s my hope that this article prepares you for the possibility of fighting a chargeback and gives you the knowledge to have documentation which will make you successful.