Chargebacks: What are they, where they come from, and what should you do?

No matter what area of the market your small business is involved in, chargebacks is a term that no small business owner wants to hear, but one that every small business owner should understand, inside and out.

Although chargebacks can seem like a personal attack when someone files a chargeback claim against your business, they were originally established in an effort to ensure that consumers are protected from fraudulent charges while maintaining that merchants remain accountable in regards to the goods and services they offered.

In the most basic of terms, a chargeback is simply a reversal of funds transferred.  However, as anyone who has processed a chargeback, they can be anything but simple.  Where a cash return simply involves the direct exchange of the purchased goods for the amount spent, a chargeback involves indirectly refunding the consumer through the card issuing bank and merchant’s bank.

When a consumer initiates a chargeback as a result of an incorrect charge, the issuing bank is notified and proceeds to credit the cardholder’s account.  Simultaneously, the issuing bank will debit the merchant’s bank, which then debits the merchant’s account.

The intended nature of chargebacks as a means to protect consumers from dishonest merchants regretfully results in the assumption that the merchant is guilty until proven innocent.  As a result the large majority of chargebacks can end up harming the merchant.  If proven to be valid, a chargeback carries with it a large number of penalties and fees and can result in either a freeze or complete termination of your merchant account.  This is actually one of the biggest selling points of working with a merchant processor as good ones will work with to to ensure that if you followed the right procedures, you will retain possession of the funds. Third party services such as Intuit/PayPal/Square provide very little help in these matters and often merchants find out that the funds will be removed and they have no process to have the funds restored.

The best policy a merchant can have in regards to chargebacks is to ensure that your small business avoids them at any and all costs.  The best way to avoid chargebacks is to understand the reasons behind them and the ways to prevent them.

Chargebacks can occur for numerous reasons.  A large fraction of chargebacks are the result of technical or clerical errors on the behalf of the consumer and or merchant.  From simple bank errors, to expired authorizations, to accidental billing duplications, to incorrect amounts billed, these errors are easily fixed and typically can be handled in a relatively easy manner.

The other typical reason behind chargebacks is simply a matter of how the consumer perceives the quality of the product they received or the services they were rendered, and as a result of their dissatisfaction they desire a refund.

Another common issue is that the consumer checks their processing statement and do not recognize the purchase. This is not uncommon at all especially when the legal name of the business (which is what the business was set up under and is the name on the processing statement) is different than the store the consumer remembers buying the product from.

The last and ever increasing major cause for chargebacks for the modern business are cases of fraud, instances where a consumer’s information was stolen and a purchases was made by someone other than the cardholder. In these cases it is important that a business owner is taking the necessary steps to avoid and limit fraudulent charges.

Ensuring that you understand the ins and outs of chargebacks provides you with a great foundation upon which you can better prepare your small business to deal with the inevitable chargebacks your small business will face.

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SMB Reviews
SMB Reviews 473 posts

SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

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