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  • Writer's pictureSusan Miller

How to Avoid Chargebacks and Protect Your Small Business

A chargeback is a consumer protection tool that allows users to get their money back for fraudulent, unauthorized, or defective merchandise. When chargebacks work as intended, they serve as an important consumer protection mechanism. But what happens if a customer is abusing the system by filing a false credit card dispute?

Before answering this question, let me illustrate the impact a chargeback can have on your business.

Impact of chargebacks

So what do chargebacks mean for your business? They hit your bottom line. When a customer is disputing a charge, you lose both the product sold and the revenue from that sale. In addition, small businesses can be impacted by:

  • Chargeback fees. Each time a consumer files a chargeback, you may be hit with a fee. Even if the consumer later cancels, you, as the merchant, will still have to pay fees and administrative costs associated with the process.

  • Excessive fines. If your monthly chargeback rate exceeds a predetermined threshold, you may be charged with excessive fines.

  • Termination. If your chargeback rates remain above the acceptable threshold, your acquiring bank could simply terminate your merchant account. Once an account is terminated it can be placed on the MATCH (Member Alert to Control High-Risk) list. This means your business can be labeled as high-risk, which can lead to ramifications when obtaining a new merchant account.

Winning a chargeback does not mean you will regain your chargeback-to-transaction ratio; you will regain profits but will not reduce the risk of a terminated merchant account.

What happens if your customer files a false credit card dispute?

First, don’t just automatically assume that all chargebacks are valid. As a merchant, you do have reasonable rights under the chargeback process that allow you a chance to dispute and win back the funds. You should certainly rebut chargebacks if you are confident the transaction was legitimate, you have compelling evidence against the chargeback, and the amount is large enough to justify the work of submitting evidence.

You must be clear about the procedure and policies you’re obligated to follow after a chargeback. A complete and timely response can go a long way in strengthening your position and can help to reduce the number of chargebacks that ultimately succeed against you.

Pay attention to deadlines. Time is of the essence when it comes to credit card chargeback disputes. If you miss a deadline, you will probably lose your chance to win.

After you submit your rebuttal to the bank, the chargeback dispute will be out of your hands. It is now up to the bank that issues the credit card (like Visa, MasterCard, or American Express) to decide who wins or loses a dispute. But you may now wonder, is the bank’s decision the final decision?

If you dispute a chargeback initially and the issuing bank sides with the cardholder, you’ll likely receive a pre-arbitration or second chargeback notice. This letter will inform you that the bank has initially sided with the cardholder and asks if you’d like to pursue arbitration. You can choose to decline, which will mean that the chargeback is upheld, or you can choose to pursue arbitration, where the credit card company will determine who wins the chargeback.

Arbitration with the credit card company is final. Once it makes a ruling, there are no further appeals. Going for arbitration will usually incur a fee of several hundred dollars

If you lose a chargeback …

I’m often asked, can a business hire a debt-collection agency after losing a chargeback?

To answer this question, let’s look at the background of disputes. The federal government enacted the Fair Credit Billing Act (FCBA), a 1974 amendment to the Truth in Lending Act, to protect consumers from unfair billing practices. The Truth in Lending Act gives consumers the legal right to dispute credit card charges if there is a billing error.

That law spells out the “card issuer’s” responsibilities when cardholders file disputes. But the law is silent on the merchant’s role in this process. How merchants respond to credit card disputes is spelled out instead in the contract agreement between the merchant and the payment processing company. So let’s take a look.

Most payment processing companies do not allow merchants to directly charge a consumer’s card after a chargeback. However, that doesn’t stop merchants from trying to collect payments from consumers directly. As with federal law, a review of several merchant agreements gives little answer on whether a merchant can subsequently try to collect from consumers after losing a dispute.

The bottom line is since both federal law and merchant agreements are silent on whether or not a merchant can go after consumers for payment, non-payment for a chargeback can be viewed as any other liability. This means that as long as you can prove that the debt is owed, you can proceed.

How to reduce chargebacks

Don’t be a victim to credit card fraud. According to ClearSale, stolen credit cards are the No. 1 (30%) cause for chargebacks. When a customer’s credit card is fraudulently used for a transaction, the merchant is held solely responsible. Therefore, it is up to you to ensure that the credit cards consumers use to purchase your goods or services have not been stolen.

  • Have a recognizable name. On your merchant account, make sure the name you use is recognizable to your customers. Most customers initiate chargebacks when they see payments to companies that they do not recognize.

  • Provide a phone number. To encourage customers to call you with questions before automatically requesting a chargeback, add your phone number to your credit card transactions. When customers see a phone number next to the charge, they will be more likely to call you directly before initiating a dispute.

  • Sell quality goods or services. Your customer can initiate a dispute just because a product or service did not meet their expectations. Make sure you provide value for your customers and clearly indicate what they should expect when they make a purchase. Also have a clear refund policy page on your website that indicates when customers can dispute charges for goods or services.

  • Provide proof of delivery. To avoid claims of non-receipt, get tracking information from shipping carriers to prove your item was delivered to its destination.

Preventing a chargeback is far easier than battling one. You might have to deal with chargebacks even after taking all the right precautions, but there are measures you can take to reduce your loss.


Disclaimer: Any and all information is not intended to be, nor is it, legal advice. Please consult your attorney for information concerning allowable rates of interest.

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