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When People Want their Money Back - Chargebacks

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Introduction

A chargeback is when a customer who has purchased an item or a service by credit card decides to dispute the charge by approaching the card issuer directly, rather than going to the merchant. Chargebacks can also be a result of fraud; where a shopper has not made a purchase and their card details have been used fraudulently. Shoppers will likely invoke a chargeback.

Since the outbreak of Covid-19, chargebacks have increased significantly.. This is due to a sudden change of circumstances affecting credit card purchases, most commonly involving restaurants, pubs, cafes, theatre, sporting events, travel and hotel accommodation.

What are Chargebacks?

A chargeback is when a customer who has purchased an item or a service by credit card decides to dispute the charge by approaching the card issuer directly, rather than going to the merchant. 
Since the outbreak of Covid-19, chargebacks have increased significantly.. This is due to a sudden change of circumstances affecting credit card purchases, most commonly involving restaurants, pubs, cafes, theatre, sporting events, travel and hotel accommodation.

 

How Can They Affect your Business

Chargebacks can significantly affect your business if they are not managed effectively. Not only do they incur a chargeback fee which can be between £5 and £15 in addition to the full transaction amount being refunded to the cardholder, but they can affect the level of fees that your business will be asked to pay for accepting credit cards, and in extreme circumstances an excess of chargebacks can lead to the withdrawal of the credit card provider’s service. Chargebacks are distracting and if they become protracted they can create reputational harm to the business from the cardholder.

 

How do Chargebacks Work?

The chargeback process should serve as an escalation process in the event that a merchant and a customer are unable to agree. However in practice this is not always the case. The stages of a chargeback are as follows:
 
1. The customer contacts the card issuer to tell them which transaction they want to reverse
 
2. The issuer investigates the claim to verify what the cardholder is saying
 
3. If the issuer agrees they will recover the money from the merchant’s account and provide a conditional refund to the cardholder, and advises the acquiring bank, who in turn advise the merchant
 
4. The merchant can review the issuer’s decision and choose to contest it by submitting their own evidence to support their position, for example a delivery signature. This goes back to the acquiring bank, and then on to the card issuer.
 
5. The card issuer evaluates what each side has said and if the merchant’s case is considered more persuasive than the cardholder’s they will reverse the conditional refund, concluding the chargeback.
 
6. However if the card issuers finds in favour of the cardholder the merchant can pursue the matter further and ask for it to be reconsidered, and provide further evidence if it is available.
 
7. The final decision in favour of one party or the other, which is made by the card scheme rather than the issuer, cannot be challenged further, other than through the process of bringing the matter before a court.

Avoid Paying both a Refund and a Chargeback

It’s also important to note that some customers will both request a refund and pursue a chargeback, which can result in a double charge against your merchant account. Whilst there are mechanisms to recover the second charge, the better approach is to take an attentive and proactive approach to refunds. If the customer suggests that they have already spoken to their card issuer then it is sensible to contact the issuer to establish the status of the claim before issuing a refund directly.

What Types of Businesses are Affected by Chargebacks

Chargebacks are far more common in online transactions where there may be a number of parties involved in the transaction and the delivery process, than in physical stores where an item can be seen and inspected before it is paid for and taken away. Chargebacks can take place for many reasons, such as because an item has been wrongly described by the merchant, because the item has not been delivered, because a subscription has auto-renewed when the customer had intended to cancel it or when a customer’s card has been used fraudulently

Managing Chargebacks

It is unlikely that a merchant will be able to avoid chargebacks entirely, although there are ways to minimise them. Issuing a refund, if it is warranted, is a far quicker and more cost effective route to resolving an issue and maintaining a customer’s trust. However there will be occasions where the customer goes directly to the card issuer in the belief that it will be simpler, or easier to make their case.
 
 
It is important to be as full and frank in your product descriptions, and your terms and conditions of sale, as possible. It is also beneficial to be as open and available to your customers as possible to discuss any concerns they may have, and through as many communication channels as you can support, such as email, phone or social media

What Can you do Now to Minimise Chargebacks?

In these unprecedented circumstances you may experience difficulties fulfilling in part or whole new or existing orders. If this appears likely, rather than risking a chargeback it is recommended to take proactive steps in communicating with customers. Ask for their patience and, if refunds are unavoidable, advise of a reasonable timeframe in which they can expect return of their funds. Similarly, with delays in the fulfilment of orders, update customers and advise on likely delivery timescales. Be as open and honest as you are able.

In addition to this you can take extra precautions as a business and minimise risks when managing transactions where the cardholder is not present. If you have MySagePay check your free fraud screening before dispatch for extra reassurance and possible reductions of chargebacks. Another way to minimise chargebacks is to utilise fraud screening tools across other products like our Virtual Terminal or Pay By Link which come with fraud screening for those selling high value or luxury goods

Although it may not be impossible to be completely eliminate chargebacks minimising the amount and its harmful effects depends on how your clearly your business communicates to customers and the proper use of fraud and security tools.