How to Protect Your Business from a Chargeback

Because we’re all consumers of something, we’ve likely benefited from a chargeback. Whether you never got something you ordered (scammy biz) or you discovered someone purchased things without your permission using your credit card (scammy hacker), chargebacks  are useful sometimes.

What isn’t so nice is when you’re the small business on the other side of that chargeback — and you didn’t do anything wrong. It happens and you’ll get through it. But that doesn’t mean you can’t take precautions to prevent chargebacks and protect yourself when it does happen.

What’s a chargeback anyway? 

A chargeback is when someone disputes a charge on their card to their bank account instead of with the business. A chargeback may also come after a purchaser tries to work with the company to receive a refund but does not. While credit cards are most commonly known as having a chargeback policy, debit cards typically do, too. The caveat — it’s not simply a refund that the company gives. Instead it is a forced return initiated by the business’s bank. 

For consumers, chargebacks are a benefit that can make them feel safe and protected from dishonest companies. For honest businesses, though, this can represent a threat to your income. 

Why might someone file a chargeback

When a consumer requests that their bank initiate a chargeback, an investigation typically occurs. The bank requests an explanation and justification for the charge from the merchant. If the merchant cannot give a justification or simply doesn’t respond, the bank forces a refund from that merchant's bank to the consumer. If the charge is justified or explained, the bank typically closes out the investigation and notifies the buyer. 

Chargebacks can be requested by a consumer for a multitude of reasons including fraud, duplicate orders, quality of content, or a crappy return policy. Typically, if a consumer makes a duplicate order or feels that the quality of the content is… er… not so great, they should contact the merchant first. But, ya know, this doesn’t always happen. *eye roll*

Most chargebacks are filed as a result of fraud. This typically happens if a consumer checks their bank account and sees a charge they never made. Other reasons include the shipment never making it, or if the consumer sent the item back for a return and the money was never refunded. 

False chargebacks, also known as chargeback fraud or friendly fraud, is as crappy as it sounds. It’s when a consumer tries to play the bank by purchasing something and then requests a chargeback after they receive the product. This is unfortunate because, for online business owners especially, this means that someone can buy your product, get access to it (and all of its glorious benefits) and then say it was a fraudulent or unfulfilled charge.

The other downside: Banks typically side with the customer, thanks to consumer protections in place in most banks. That’s why it’s critical that you keep a copy of all transactions and have a solid refund policy in place. 

How to avoid chargebacks

While chargebacks are common, you can take steps to minimize or prevent them altogether. 

Be consistent with the merchant name you use.

We’ve all seen that weird charge on our account from a merchant we’ve never heard of. So, we call the bank, start going through the process of canceling the charge (and requesting a chargeback from the company), and getting a new card. Then the bank says that merchant is also known as [insert brand name]. And then we remember — oh crap, we did purchase something from them!

But the reality is… if a customer has to go through that hassle they might not want to purchase something from you again. You’re also getting charged every time a chargeback request happens (regardless of whether it’s legit or not). Avoid this and just be consistent. 

Be realistic about product quality and prices. 

You can’t sell dollar store shoes at Chanel prices. Everyone knows that. If you’re selling a product, be real about the cost and quality. Figure out what the market for a product like yours is and make sure it could go head to head with a competitor. Otherwise, you’ll be receiving requests for money back from customers. 

Have a clear and generous refund policy (there’s a reason Amazon is booming).

Companies like Amazon will literally refund your money for no reason. You don’t know exactly what you’re going to get when you buy something off the internet and people hesitate when there’s not a clear way to get their money back. That’s why we have a 14-day, money-back guarantee, no questions asked (ok, a few questions but that’s just for our improvement)! While we’re not telling you to be the next Amazon, we do think that having a clear refund policy can help build trust and prevent chargebacks.

Quickly issue refunds when products are returned or canceled. 

Issuing refunds is important to prioritize. If you’re flaunting a great refund policy but the refund takes forever, what good is that? Plus, if you don’t issue a quick refund, the customer might be afraid you’ve taken the money and will request a chargeback from the bank… isn’t that what we are trying to avoid? 

Use third-party chargeback protection tools. 

You can be proactive by using third-party chargeback protection tools from the get go. Companies like Kount and Stripe offer to handle disputes for you and cover the costs. Keep in mind, though, you’ll typically pay a fee for protection. 

Respond to chargeback claims quickly.

Most importantly, if you are hit with a chargeback, you’ll want to respond to the claim quickly and in enough detail that the bank understands you are not at fault. Responding in a timely manner to the bank can also help ensure your evidence is taken into account.

Education is (mostly) the key to prevention

Because it is often easier to get a refund through a bank, buyers are choosing to work directly with their bank more often to get refunds — instead of working with the company they purchased from. However, if you have an easy and accessible refund policy, you can cut down on time spent fighting chargebacks. Plus, when you have a great policy, you can encourage more people to buy with confidence.

Protecting your business is important, and that’s why we created ours. Want more background on creating happy customers and less refunds? We created Refund Recon™ to share our 3 dirty little secrets to happy, long-term customers.