What is a Chargeback?
July 3rd, 2019

A chargeback occurs when a cardholder’s bank forces the reversal of a transaction at the request of the customer. This can be initiated for many reasons from suspected fraud to dissatisfaction with a purchase. 

While chargebacks were created as a way to protect consumers from dishonest merchants, they’ve also enabled dishonest consumers to take advantage of businesses by forcing refunds where they may not be warranted.

No matter what kind of business you run, you’ll likely encounter chargebacks. It’s important to know what to expect when a customer initiates a chargeback and what steps to take to prevent them.

Why Chargebacks Happen

In many ways, a chargeback is similar to a refund, but there is one major difference: when a customer initiates a chargeback, they contact their bank to retrieve their funds rather than speaking directly with the merchant. There are some legitimate reasons why a customer might pursue this option:

  • They do not recognize the charge or the merchant from which it came (suspected fraud).
  • The customer did not authorize the merchant to complete the transaction (for example, if a charge was completed before a contract was signed).

Both of these options are legal reasons to pursue a chargeback. Of course, there are also less legitimate reasons that customers initiate chargebacks:

  • The customer forgot they made the purchase.
  • The customer is dissatisfied with the product and wants a refund without having to deal with the merchant’s return policies and associated fees.
  • The service took too long or the product arrived later than expected.
  • The customer wants to keep the product without paying for it.
  • A family member made the purchase and the cardholder does not want to be responsible.
  • Flagging a transaction for fraud is just simpler than asking for a refund.

As you can see, these reasons often fall under the customer’s umbrella of responsibility. However, it is the merchant’s financial responsibility to deal with these complaints.

What a Chargeback Means For a Merchant

While chargebacks are largely out of the merchant’s control, their consequences can be detrimental in both the short- and long-term. Here are some issues that merchants face as a result of chargebacks:

  • Revenue Loss: Because chargebacks are not subject to your business’ policies, you not only will be forced to return the customer’s funds but also will not receive your product back.
  • Chargeback Fees: every time a customer disputes a charge, merchants incur a fee. For Sonder Payments members can expect to pay $15 per chargeback on their account.
  • Possible Termination: Fraud and identity theft are so widespread that it’s impossible to avoid chargebacks completely. However, if your business incurs an unusual number of chargebacks, you may face occasional account freezes, wherein the processor disallows further transactions until pending chargebacks are resolved. In extreme cases, you may even face termination of your merchant account. 
  • Difficulty Opening New Accounts: The payment processing industry keeps a “permanent record” of your business. If your merchant account has a history of excessive chargebacks, you’ll have a hard time opening a merchant account elsewhere.
  • Higher Processing Rates: Businesses with a high number of chargebacks are often labeled as high-risk. To balance the risk, processors will often charge these businesses much higher processing fees.
  • Chargebacks Can’t Be Undone: Merchants can fight chargebacks if they feel they’re not justified, but doing so offers little reward. Winning a chargeback will allow you to retain your funds, but the dispute is not removed from your business’s “permanent record,” leaving you at risk for account freezing or termination.

How Can I Avoid Chargebacks?

Avoiding chargebacks should be a priority for any business owner. While there’s nothing you can do about stolen identities, you can implement several practices to protect your business from illegitimate chargebacks.

  1. Clearly communicate the terms of purchase: Customers should be well aware of what they’re buying when they complete a transaction. Things like delivery dates, product specifications, quantities, etc. should all be clearly stated in multiple places. By making this information easy to find, you reduce the likelihood that a customer will claim ignorance when initiating a chargeback.
  2. Adopt simple, customer-friendly return and refund policies: Many merchants try to make their processes complicated to discourage customers from seeking refunds or returns. In the end, these just result in a greater number of chargebacks. Printing return information on receipts and providing shipping labels for returns are great ways to avoid disputes.
  3. Send reminders for recurring transactions: Subscription-based businesses are especially prone to chargebacks. If you operate on this model, sending regular reminders to your customers will prevent unexpected transactions and reduce chargebacks.
  4. Follow card security guidelines: While fraud chargebacks are difficult to prevent, it’s wise to protect your customers’ private information by remaining PCI compliant and following standard protocol to properly ID customers.

How Can Sonder Payments Help?

Sonder Payments offers chargeback protection through the Cardholder Dispute Resolution Network (CDRN), which helps merchants to identify and eliminate potential chargebacks. When a customer contacts their bank to dispute a charge, the CDRN directs the customer to the merchant rather than escalating the dispute right away. This allows merchants to offer refunds or cancel transactions before they become chargebacks.

By taking advantage of the CDRN, Sonder Payments members can eliminate most, if not all, of the illegitimate chargebacks they face. This means you can have more satisfied customers, a clean chargeback record, and low processing rates. When using the CDRN, merchants can expect to pay $35 per dispute. 

If you’d like to learn more about chargebacks, the CDRN, or Sonder Payments membership, call (314) 722-6424, email info@sonderpayments.com, or visit www.sonderpayments.com.