Credit card purchases are major drivers of small business revenue. In a 2014 study, results showed that Canadians used cash for less than 10 percent of their purchases. They also offer a significant number of protective benefits for consumers. Even though accepting credit can be a significant boon for a small business, it comes with a few downsides – most business owners cite the cost of processing fees, for example. One of the less talked-about disadvantages, especially for small businesses, of consumers’ reliance on credit is the misuse of chargebacks.
First and foremost, what is a chargeback?
Moneris defines chargebacks as:
“An adjustment to a merchant’s account from a previous sales transaction. The reasons for chargebacks can be due to errors made by the merchant in the submission of their credit card transactions, non-authorized transactions and disputes from cardholders.”
Generally speaking, this kind of consumer protection is well-intentioned. It benefits the reputation of most merchants to be able to handle any processing errors efficiently and easily. However, it’s once we get to the “disputes from cardholders” section of the definition that many merchants begin to view chargebacks as more of a hassle, or even a threat, than a benefit. This is because some consumers will deliberately set out to defraud a business by exploiting the mechanics of the chargeback system.
Under current Canadian guidelines, a consumer is eligible to make a chargeback request for up to two years after the date of purchase. This means that some consumers may purchase and use products, only to later report service disputes and leave businesses to absorb the loss of the purchase value, in addition to fees and processing costs associated with the chargeback.
The rising importance of e-commerce has opened up more opportunities for unfair chargebacks to cost small businesses. Online transactions are considered under the category “Card Not Present” by most payment processors. This, unfortunately, means that the seller is liable for any losses due to fraud. In order to reduce the likelihood of losses from chargebacks in e-commerce, businesses must do all they can to establish and maintain a clear record of each transaction, with tangible proof that a purchase was made with a specific card on a specific date, as well as that goods were shipped and received at a particular address.
So-called “friendly fraud” – where customers might have no ill intent toward your business but might forget to pick up an order from the post office, and then contact their bank for a chargeback refund rather than dealing with the business they ordered from – accounted for over 70 percent of online chargeback requests in a 2016 inquiry.
What can be done to stop the negative impact of chargebacks? First and foremost, it takes awareness on the part of a business and its employees. Everyone should be trained to recognize this type of fraud. Avoid making credit card transactions over the phone (where there is little to no ability to keep good records), and consider enforcing a policy whereby customers need to present ID or the same credit card that was used to make a purchase in order to pick it up – and opt for shipping that requires a signature confirmation upon delivery. For point-of-sale purchases, make sure to use the now nearly ubiquitous chip-and-PIN technology wherever possible. If you can’t swipe a card, get a manual imprint.
If a customer disputes a transaction on the grounds of insufficient quality of the merchandise or service, try to resolve the issue directly with the customer and document your efforts to satisfy the customer. Always keep accurate records of each transaction because you may need to provide documentation in your response to a customer’s dispute.
With the right preparation, small businesses can reduce the harmful – if not always intentional – effect of chargebacks, while allowing their customers to feel protected at the same time.