Having the ability to accept credit cards is an essential part of almost any business. It gives consumers another payment option when cash just doesn’t cut it, and allows merchants to receive funds without having to worry about employees handling cash. But there are some risks involved when your customers opt for plastic instead of paper. Chargebacks are one of them.
What are chargebacks, exactly?
Chargebacks are reimbursements of funds to consumers, typically due to fraud.
The card holder will inform the issuing bank—the bank named on the front of the card in question—after noticing a suspicious charge on his or her credit card bill. As mentioned above, while this is often the result of fraud, consumers can also be erroneously charged or can fraudulently claim that a purchase they actually made was not made by them. Regardless, the issuing bank will then contact the business where the questionable transaction took place. If the card holder’s claim is verified, the business will issue a chargeback, whereby the funds are transferred from the merchant’s bank back to the issuing bank. Such verified chargebacks are obviously costly to the merchant, who is now no longer in possession of the goods sold.
Even if a chargeback is not verified by the issuing bank, and the merchant does not have to refund the money it received for the purchase, merchants nevertheless incur a fee from their credit card processor (of anywhere from $10.00 to $25.00) for each chargeback claimed by customers. This fee appears on the merchant’s credit card processing statement. Processors pass on this fee to the merchant, as they are charged by issuing banks for the costs issuing banks incur in the associated, comprehensive investigation process.
Why are chargebacks bad for business?
One of the major reasons chargebacks have negative impacts on businesses is because they cost merchants money and time.
For example: E-commerce businesses lost $6.7 billion in revenue as a result of chargebacks in 2016 alone. Merchants with brick-and-mortar locations who have not yet adopted EMV are also especially at risk of losing money to chargebacks, as the technology helps prevent fraudulent card transactions, and savvy fraudulent cardholders identify merchants who are not EMV compliant and initiate chargebacks so they can get their money back for purchases made. Issuing banks have consistently taken a hard line against merchants who are not EMV compliant and are being investigated for chargebacks. Since the EMV liability shift in October 2015, merchants who are not EMV-compliant are responsible for any instances of card fraud in which an EMV card is used.
In addition, excessive chargebacks can result in a merchant losing its right to process credit card payments. Chargebacks are a sign to processors that a merchant is either involved in deceptive sales tactics, selling unseemly products or services, or pushing a product or service that customers deem unworthy of the price they paid for it. All of these factors increase the risk to processors, who in turn look to merchants to mitigate their risk. Therefore, credit card processors have varying rules for merchants to keep chargebacks to a minimum. Once a processor’s thresholds are exceeded, merchants are often forced to either pay more for credit card processing (because they are deemed “high risk”), put up a reserve of funds to protect the processor against losses, or even stop accepting credit cards for payment.
Besides adopting EMV technology, merchants should re-evaluate their credit card processing agreement with their merchant service provider in order to help prevent chargebacks. Providers who offer high-quality solutions and services will be more effective at helping business owners save, not lose, money.