Chargebacks are something that businesses have had to deal with and have unfortunately become almost unavoidable. Research carried out by pyments.com and published in 2022, highlighted that “approximately one-quarter of eCommerce shoppers disputed at least one charge in the last 12 months”. The huge numbers of chargebacks made annually can cause businesses a major headache- with a financial hit having to be taken and more admin to carry out. Here we discuss why chargebacks are a risk for businesses and what, if anything, businesses can do to help limit their impact.
What is a chargeback?
charged by the merchant. A chargeback is different from a refund as the customer has contacted their bank rather than contacting the merchant themselves. This route means the bank then forcibly removes the funds from the merchant’s account effectively reversing the payment, and there are additional processing fees the business will need to pay as well.
Reasons why chargebacks occur
Merchant error
There are times when the merchant is at fault and the customer simply needs to get their money back. If the merchant’s refund policy was not clear, or if the company didn’t respond to a customer dispute in a reasonable amount of time could both be legitimate reasons to file a chargeback.
In some cases, goods can be damaged once they get to the customer. Some pieces may have defects or there could have missing parts. Whilst merchants are often contacted directly on these occasions, there will be some customers that opt to go through their bank instead which will trigger a chargeback rather than a standard refund. This often happens when the customer finds the process of contacting the bank less hassle than speaking to the company itself.
Sometimes the customer can end up being charged an incorrect amount. This can easily happen if there is a lot of manual data entry such as taking orders over the phone.
Criminal fraud
There are some cases when the cardholder’s information is stolen and used to make the purchase. On these occasions, the business can end up suffering as whilst the customer is protected through their bank, the merchant will not be protected and will need to pay the chargeback and the associated processing fees.
Friendly fraud
This happens when someone purchases an item knowingly but then later disputes the charge, claiming there was something wrong. For example, it was never delivered or was defective. People often think that they are taking the easy way out by contacting their bank rather than the company, sometimes without taking into account the increased charges the company will have to incur as a result.
The customer wants to end a subscription
Subscription services tend to be a high-risk option when it comes to chargebacks as they result in a high number of disputed charges – especially for companies that do not have a clear unsubscription process.
Cyber Shoplifting
Cyber shoplifting occurs when customers are ignoring the return policy, refusing to wait for refunds from the merchant, and simply want to get something for free. This is becoming more common as people think they can abuse the chargeback process in their favour but to the detriment of the company.
Why are chargebacks a risk for businesses?
Loss of revenue
Chargebacks are extremely one-sided. Whilst they are great for protecting the customer, the merchant has a lot to lose, including lost revenue from each chargeback. Each chargeback a business gets can cost them between £20-£100. This can quickly add up and will have a direct impact on the business’s cash flow and profit. The best-case scenario is that the chargebacks are so rare they don’t make a huge difference. The worst case scenario is that the business’s bottom line is completely wiped out and they will need to recoup these costs quickly or risk going out of business. Not only does the business lose the cost of the sale, but it will also lose stock as the customer will not return the item.
Increased workload
It is not only the financial cost companies need to think about when it comes to chargebacks. There is a significant amount of time involved in each dispute and time is money. You will have to assign a member of staff to deal with this when there could be other areas of the business they should be focusing on. Each chargeback needs to have documents and evidence to be sent to the banks to prove your side of the story.
Damaging to reputation
One of the most damaging results of chargebacks is the damage they can do to the reputation of your company. Customers who have gone on to file a chargeback claim may opt to leave a negative review and if it happens regularly, the level of trust in your company can decline rapidly, resulting in future loss of sales.
In addition to this, having a high number of chargebacks can affect your reputation from the bank’s point of view. They may see your business as a higher risk and this can impact your credit reputation. You may end up having to pay higher fees in the future. In severe cases, banks also have the power to stop your ability to process card payments.
What can businesses do to avoid chargebacks?
The good news is that there are now ways businesses can not only reduce the number of chargebacks they receive, but they can also eliminate the risk of chargebacks completely. Here are some strategies
Make unsubscribing easy
As we mentioned above, a common reason for chargebacks occurring is when people want to cancel their subscriptions and think the simplest way is to contact the bank and have them sort it on their behalf. Ensure your unsubscribe process is as user-friendly as possible. Whilst you want customers to keep their subscriptions for as long as possible, you don’t want to end up with chargebacks that could easily be avoided.
Simplify Returns
Make returning items to you as easy as possible for the customer. If they no clearly how long they have to return items and make the process simple- perhaps by pre-paying the postage, can help you increase customer satisfaction dramatically and could lead to fewer chargebacks.
Provide great customer service
If your customer service is great, there are less legitimate reasons for customers to start a chargeback dispute. Ensure your business is available when the customer needs them, ideally 24 hours or at least have a short response time. Doing this can significantly reduce customer frustration and allow you to sort out issues before they escalate.
Inform customers
If customers don’t receive their item when they are expecting it, they can end up starting a chargeback claim. Keep your customers up to date throughout the entire purchasing process, informing them when they should expect their item if there are any delays, the reason for these delays, and an easy option for them to cancel. It’s easier for them to cancel now than receive the item late and still want their money back.
Embrace Open Banking
Chargeback risks can be completely eliminated by streamlining your payment process through companies such as TrustistTransfer. Through Open Banking, payments are made directly from the customer’s bank account to your own account and not via intermediaries such as the bank. This process greatly reduces the risk of chargebacks whilst still being safe for customers.
By fully understanding chargebacks and the risk they pose to a business, owners can take control of the situation, put a strategy in place and ensure the business stays in the best position possible. Ensuring your return policies are clear and simple to follow, and opting for payment methods such as Open Banking to streamline your payment process, allows businesses to gain back some of the control when it comes to dreaded chargebacks.
