If the word chargeback leaves a bitter taste in your mouth, then you understand just how devastating they can be to your business. Anytime your business is held responsible for a chargeback, they lose both their product and any potential revenue. This makes any opportunity for limiting chargebacks extremely valuable. Continue reading the rest of this article to learn how you can help your business cut back on chargebacks!
What are Chargebacks?
Imagine your business just made a particularly large sale. This is usually cause for celebration, because big sales mean more money in everyone’s pockets. A few days go by and you start to forget about the sale, when suddenly you get a not-so-friendly call from a credit provider.
They tell you that your lovely customer has called to report an unauthorized transaction at your store. Not only that, but they’re now demanding that you compensate them for the credit they’ll need to reissue to the customer.
Not only are you out of the inventory you sold in the first place, but now you’re being asked to fork over the money you made on what you assumed was a legitimate sale. If this scenario sounds familiar, then you’ve been a victim of chargeback fraud.
Chargebacks are what happen when a credit card transaction is disputed. They were designed to help protect consumers from fraud. Without chargebacks, there would be no way for a victim of identity fraud to restore their financial well-being. If customers were held responsible for all unauthorized transactions, they’d quickly go bankrupt.
This means that chargebacks are a fantastic safety tool, but it is a system that comes with flaws. The very nature of chargebacks entail that you return money to a customer. If they didn’t actually purchase a product from you, then they weren’t choosing to spend that money and it is only right that they be refunded. However, things get trickier when customers have actually purchased a product, but instead use a chargeback to get it for free.
What Impact do Chargebacks Have?
If you end up being held responsible for the value of a chargeback, then there isn’t really much you can do in the moment besides pay it. Even if you aren’t deemed responsible, you’ll still end up having to pay a fee just for the hassle. When you look at it, there’s nothing good about a chargeback.
What typically ends up happening is you lose the income and your original product. You’ll still want to report the sale as income, but fortunately you won’t be fully taxed on it later on. When you encounter and pay a chargeback, you’re essentially losing or returning money.As you’re filing your business expenses, you’ll notice a section on your Schedule C for returns and allowances.
In this section you can include any chargebacks you’ve had throughout the year, which will lend you a small tax break. Unfortunately, it won’t do anything to return your initial product, service fee, or the recompensation you gave to a credit provider. This means that your efforts to deal with chargebacks are best served preventing them from happening in the first place.
How to Prevent Customer Chargebacks
With prevention being the best way of cutting back on costly customer chargebacks, you’ll want to know how you can stop this fraudulent behavior from impacting your business. In order to properly understand what is required for prevention, you’ll need to know what the intention is behind a chargeback.
Some chargebacks are made as a result of error and poor memory, but unfortunately most are made fraudulently.
This means that some chargebacks can easily be avoided with improved understanding, while others are more challenging because the customer plans to deceive you from the start. Whether you’re looking to improve clarity or decentivize fraud, here are some great ways to lower the amount of chargebacks your business has:
- Be Transparent – Sometimes a chargeback is a result of something being lost in translation. Perhaps the name of your business is different on billing statements, which might confuse someone reviewing their bank account. Try to keep your operating name the same across all forms of communication. If you have any added fees associated with your product, clearly and obviously disclose them so customers aren’t surprised later on.
- Credit Card Verification – Every business should have some form of credit card verification, but consider investing in stronger verification. Something like Address Verification Service (AFS) is excellent for ensuring that a customer’s provided location matches the same address that the credit card is registered to. While this isn’t a foolproof prevention method, it can help filter out some uninspired fraud attempts.
- Receive Authorization – Credit card verification is great for an automated defense mechanism, but you also want to use manual authorization for added security too. This includes things like verifying that a credit card is signed and having an invoice signed to see if it matches. If you have large orders, you can also try calling or faxing them to see if they’ll actually pick up.
Expert Advice for Better Clarity
No business owner enjoys dealing with chargebacks, but they’re an unfortunate reality of conducting business. If there is every an environment where people with nefarious intentions have the ability to receive something for free, then you better believe they’ll take advantage of it!
While this is definitely nice for them, it’s much more frustrating to deal with as a business owner. Many credit providers will make you as a merchant compensate them for unauthorized transactions. This not only costs you the revenue of a sale, but you’ll also lose out on the product you sold in the first place. This makes chargebacks doubly impactful.
Because chargebacks are often a product of fraud, it can be difficult to prevent them from happening altogether. If you take the time to make sure you’re transparent with billing, using secure credit card verification methods, and receiving the proper authorization that a customer is who they say they are, then you can help save yourself thousands in lost revenue down the line.
If you want another opinion on how you can help lower the number of chargebacks you have, get in touch with the accountants at Evergreen CPAs! With several years of experience and expertise in many fields, Evergreen CPAs have the wisdom to help any business evaluate their financial standing. Book a consultation with Evergreen CPAs today so you can see how much money you stand to save!