How to Prevent Chargebacks in 2023
This article is part of a larger series onPayments.
A chargeback is when a customer requests a refund through their bank or credit card company to reverse a transaction. Customers will initiate refunds through their bank instead of a business if they don’t recognize the transaction or can’t come to an agreement with the merchant.
Although chargebacks can happen for many reasons (logistical issues, clerical errors, fraud), most are preventable. In this article, we will look at how to prevent chargebacks in your small business.
1. Set Clear Expectations
Be explicit about what customers should expect from your product or services to avoid unhappy or confused customers.
Write Crystal-clear Product Descriptions
To help avoid buyer’s remorse or complaints the product isn’t as expected, be clear about what your customer is getting. Write easy-to-understand and comprehensiveproduct descriptionswith dimensions or sizing information,product photosfrom several angles, and even a bulleted “what’s in the box” list of what buyers can expect.
Tip:If you sell used items, disclose functional defects and existing cosmetic damage.
It can also be helpful to incorporate areviewssection into your product pages so buyers get a glimpse at the item from another user’s perspective before purchasing.
Provide Itemized Receipts
Whether physically or digitally (via email/text), you should provide your customers with an itemizedreceiptupon purchase showing everything they bought. This will prevent them from claiming they purchased items they didn’t. You should also save a copy of the receipts for your own records.
Related:How To Create and Send QuickBooks Online Sales Receipts
In addition to an itemized list of what customers purchased, include explicit payment descriptors. Let customers know what to expect in their statements by including it on the receipt of payment acknowledgment.
Better yet, work with yourpayment processorto change the way the charge appears. If you operate under aDBA or trade name显著不同于你的LLCor what’s listed on yourmerchant account, you may be more prone to this issue.
Tip:Include your customer service phone number and email address on receipts and charges so shoppers have somewhere to contact before opening a dispute.
Be Upfront About Return Policy
Another way you can avoid chargebacks is to post yourreturn policyclearly on your website, receipts, and in your store. It’s also a good idea to let people know at the register.
At my store, we would inform every customer of our return policy before swiping their card or accepting payment at checkout. Then we would sign the receipt, where the policy was printed, to indicate we had told the customerhow returns work.
Have Customers Sign Contracts for Subscription Services
Contracts are an excellent way to set expectations, especially for services and subscriptions or any time you userecurring billing. Contracts can also help you dispute chargebacks. Your contract should clarify terms of service and rate charges or changes, as well as indicate when charges are incurred (first of each month, for example). It should also outline how to cancel. Service contracts should include specific services, rates, and timelines.
Tip:Subscription services should also send charge reminders and payment confirmation emails for each installment, along with instructions on how to change or cancel the subscription.
2. Provide Transit Details
Another major contributor to chargebacks is logistical confusion or mistakes. Be sure you mitigate this by providing logistical details to your customers and working with a trusted shipping and fulfillment company.
Be Upfront About Fulfillment & Delivery Times
Consumers expect fast shipping—as fast as three days—and delays often cause concerns. Upon checkout, let customers know how long it may take to complete the order before shipping, along with approximate arrival dates if you can provide them.
Somefulfillment companieseven offer different ship times that customers can select based on their schedule. You should also include your approximate dispatch and delivery dates in your confirmation email.
Related:FedEx vs UPS vs USPS: Shipping Rate & Reliability Comparison (2022)
Provide Shipping Notifications & Tracking Information
Customers should know when their purchase is on the way and be able to track the package themselves. In fact, as many as 90% of consumerswant package-tracking tools.
Related:Best Shipping Software for Small Businesses
When orders ship, send your customers a shipping notification via text or email that also includes their tracking information. If there are any shipping delays or problems with fulfillment, you should also notify your customers and provide an updated timeline.
Explain Out-of-Stock Listings
If you choose to display anout-of-stockproduct, make it extremely clear that customers should manage delivery expectations. For out-of-stock items, you should mark the item as gone and also include expected restock, dispatch, and delivery dates. Depending on your website, you might also include a place where shoppers can leave their email to receive a notification when a product is back in stock.
You may also simply decide to not list items that have sold out.Tracking your inventoryis a good way to avoid receiving payments for out-of-stock products.
Tip: The best way to manage your inventory and get real-time stock tracking is to use a point-of-sale (POS) system with inventory tracking. We like Square for a free option with lots of great features and capabilities, but you should check out all of thetop POS systemsto find the best one for your business.
3. Protect Against Fraud
Up to 85% ofchargebacks come from either friendly or criminal fraud. Sometimes, customers are trying to get something for nothing. In other cases, thieves or scammers may be using a stolen credit card to buy products online. There are a lot of potential scenarios when it comes to fraud.
True Fraud Chargebacks:This is a chargeback that results from hacking or identity theft, and means that a purchase was made with a stolen card (or card number) without the card owner’s permission or prior knowledge.
Friendly Fraud Chargebacks:This is when a customer disputes a purchase that they knowingly made. This might be because the customer is unhappy with the product, didn’t feel it matched the description, is trying to avoid the hassle of the return process, or simply did not recognize the charge on their bank statement.
While it’s tempting to think fraud happens with mostly high-ticket items, the Federal Trade Commission (FTC) reports that themedian paid in fraud complaintsis only $311. There are, however, measures that you can take to prevent fraudulent chargebacks.
Look Out for Red Flags
有很多事情你可以寻找时trying to detect fraud, including:
- Incorrect security codes
- Mismatched billing and shipping address
- Shipping address is a P.O. Box, shipping company, hotel, or vacant property
- Several orders from different cards go to the same shipping address
- Fake email address
- Shipping to a high-risk nation
- Request to change the shipping address after inputting a legitimate one
- Weird orders (50 pairs of shoes in 30 different sizes)
- Overpaying and then requesting a refund be sent to a third party or by wire transfer (always refund to the original card or bank)
- Request for immediate or next-day shipping, especially for international orders
Tip:Another type of fraud you might see is counterfeit money, but we have aguide to help you detect it and avoid scammers.
Require Customer, Payment & Order Verification Information
Although chargebacks are when a customer disputes the charge with their bank or credit card, retailers can also work to prevent fraud from standard returns. Require customers answer verification questions before they can submit a return request. You might request they provide their first and last name, the last four digits of their payment method, and order confirmation information, such as an order number. This will help you ensure that the customer you are speaking with actually did place the order, weeding out any fraudulent requests.
Delay Shipping
According to PayPal, fraudsters ask for overnight shipping so they can resell the merchandise quickly. It recommends a24- to 48-hour delayfor expensive and in-demand orders. This also gives customers the opportunity to edit their order, maybe size or color, before dispatch.
Use Processing Technology That Can Detect Fraud
Purchases made with stolen credit cards can be a significant source of chargebacks. The best way to avoid this and other scenarios involving fraudulent payments is to use atrusted payment processing platform.
You’ll also want to use a chip reader orcontactless paymentswhen possible—they’re the most secure. However, if you must use the magnetic stripe, get a signature and make an impression of the card if possible—this can be evidence in a fraud investigation.
Tip:You can learn more about accepting credit cards with ourcomprehensive guide.
Additionally, you should use payment verification measures for all online purchases. 3-D Secure, for example, uses three parties in the verification process (the customer, the issuing bank, and the payment processor). While required in Europe, it’s still optional elsewhere. Other verification technologies include Address Verification Services (AVS) and card security codes, like the Card Verification Values (CVV) code found on the back of most credit cards.
Use a Chargeback Prevention Service
Achargeback prevention serviceleverages technology to flag and prevent potential fraudulent purchases. It’s a smart way to take some of the manual management out of chargeback prevention.
Many payment processors offer some sort of chargeback prevention service natively built into their platforms. Some also offer optional paid upgrades for more comprehensive protection. Stripe has its Chargeback Protection feature, while PayPal, Square, and Shopify offer similar options.
You can also sign up for a separate dedicated chargeback prevention service to further protect your business.
4. Avoid Backend Errors
In addition to customers making fraudulent claims, another leading cause of chargebacks are clerical errors. In fact, up to 35% of chargebacks, as highlighted in the graphic above, come directly as aresult of backend mistakes. These might include inaccurate inventory counts, unprocessed credit, duplicate charges, sending the wrong items, or general poor recordkeeping.
The best way to avoid clerical issues that might result in a chargeback is to organize your records and amend any order issues quickly.
Keep Detailed Records
Ideally, you’ll never make an order or payment error, and you won’t face clerically induced chargeback disputes. The best way to do this is to keep detailed records of your sales or orders so you don’t make backend mistakes and have a detailed record of all your transactions you can turn to when disputes arise.
Reconcile your POS systemdaily to stay on top of your transactions and detect and fix any mistakes right away. You won’t be able to be in your store at all times, and many of your transactions and customer disputes will likely be handled by your staff.
Train your employees well and make sure they understand all the protocols for credit card payments. Pay extra care here if you frequently take orders over the phone. Your process may include verifying addresses, getting the CVV from the back of the card, and confirming the expiration date. You’ll also want your staff to:
- Double-check anything they input manually
- Ensure canceled purchases/items are fully voided before continuing
- Spot fraudulent orders
- Verify signatures
- Make sure contracts are signed
- Inform customers of the return policy
- 让客户知道会发生什么(如交付y dates and the name to expect on the credit card statement)
- Record authorization date, time, representative’s name, and dollar amount if they have to call to get an authorization
Amend Problems Quickly
当你运行一个小企业,偶然的错误pen. Maybe you charged a customer twice or sent out the wrong item—there are countless possibilities. The best thing you can do in these situations to avoid a chargeback dispute is to reach out to your customers as soon as the problem arises.
Reach out directly—by phone, text, or email—and give your customer a detailed account of the issue at hand. From there, you should also provide them with easy solutions, like a free return label or a customer care line, where they can resolve their issues without opening a chargeback dispute.
Adequately Train Your Staff
If you hire employees, you’re not the only person who needs to know how to proactively prevent chargebacks. It’s important to empower your staff with the knowledge and resources they need to help mitigate chargebacks as well.
充分的培训ing store associates involves a range of areas to focus on, including customer service, how to look for signs of fraud, and even how to correctly use your POS system and other payment technologies. Employee handbooks and guides with canned scripts, step-by-step walkthroughs with videos and screenshots, and tips on how to handle challenging situations are great to have on hand in the break room or at the cash register.
How Chargebacks Impact Small Businesses
While it’s comforting to assume chargebacks are rare and don’t really have a big impact, that’s unfortunately not the case. Chargebacks can result in huge hits to your margins. In fact, theaverage chargeback ratio, or chargebacks per number of purchases, was 1.52% in 2021 which translates to 2.31% of retailers’ annual revenue.
Here are a few other important stats that all small business owners should know about chargebacks:
- Chargebacks are often shoppers’ first resort:On average, only 4% ofcustomers will call and complainwhen there’s an issue; the other 96% are at risk of filing a chargeback.
- Chargebacks will cost you:As of 2022, every $1 lost to fraud costs US retailers$3.75, and that number continues to climb.
- Ecommerce retailers are at the greatest risk for fraud:Online retailers are on track tolose $41.4 billion in 2022because of fraudulent activity.
- Gift Cards are increasingly prevalent in chargeback scams:According to an FTC data spotlight, in the first nine months of 2021, retailers reportedlosing $148 million in scams where gift cards were usedas the form of payment.
Preventing Chargebacks FAQs
A chargeback is when a customer requests a refund through their bank or credit card company for a transaction rather than from the business directly.
- Payment processing errors
- Shipping and fulfillment delays
- Forgetfulness
- Difficulty contacting the merchant
- Unclear product descriptions and return policies
- Business name mismatch on billing statements
While you can’t prevent 100% of chargebacks, you can significantly reduce them by setting clear expectations with customers through product descriptions, store policies, product reviews, and transparent shipping timelines.
Chargeback prevention softwareand well-trained employees can also help spot fraud before the transaction occurs.
Bottom Line
If you’re having problems with chargebacks, conduct an analysis to see what the most common causes are and then look for targeted ways to fix the issue. As a reminder, you can prevent chargebacks by keeping detailed records, training employees on operational compliance, using clear payment descriptors, setting accurate product and delivery expectations, and keeping your eye out for fraudulent activities.
If it’s too much work, there arechargeback management servicesthat can handle disputing chargebacks for you. While they have expertise in this area, you should weigh the cost of these services over what you can do on your own.