| Chargebacks |
From PaymentMerchant.com
Chargebacks Guide
Contents |
Also Known As:
Chargebacks are reversals of credit card transactions, a type of 'forced' refund.
What Is A Chargeback?
Credit card companies (such as Visa, Mastercard, etc) allow their card holders to demand their money back for almost any online transaction, sometimes even months after the transaction has completed. As a result, the Payment Merchant (middle-man between the client/seller and the credit card company) that gets charged-back by the credit card company will always pass on that charge-back to the individual client/seller.
In theory, chargebacks protect credit card holders from online fraud. If a customer ordered something online and never received it, they can call their credit card companies and demand their money back. The resulting chain of money-back demands is the chargeback.
Due to their complete lack of business interest in the individual sellers accepting payment via their cards, credit card companies tend to only listen to their card holders side for the story, regardless of how much time has passed since the transaction and often regardless of any evidence the seller provides showing purchasing / shipping of any / all disputed items.
In short, chargebacks are the bane of the online seller's existence.
Who Pays For A Chargeback?
Almost exclusively the individual seller involved in the charged-back transaction is forced to pay. When the credit card company receives a request for a refund by a card-holder, they immediately take that money back from the Payment Merchant involved in the transaction. Likewise, whenever a Payment Merchant receives a chargeback from a credit card company, they immediately take back (or at least freeze) that amount of money from the seller's account with the Payment Merchant. As such, in the end the individual seller pays for the chargeback – regardless of whether they have completed / shipped / fulfilled their end of the transaction!!!
Often, there are additional fees and charges involved with chargebacks. Different Payment Merchants have different arrangements with different credit card companies. But many / most of them take into account the level or ratio of chargebacks into their fee structures. In short, the more chargebacks a Payment Merchant receives, the more fees and expenses the credit card company will charge that Payment Merchant. And in typical Payment Merchant fashion, any increases in fees and other charges by a credit card company will be passed down via the Payment Merchant to the individual sellers. Some Payment Merchant track and display an individual seller's chargeback ratio (the total value of chargebacks divided by the total value of all sales) and charge higher transaction fees for sellers with higher chargeback rates.
How Does A Seller Fight Back Against A Chargeback?
Depending on the Payment Merchant involved, there is little-to-nothing that a seller can do in the face of a charged-back transaction. Some Payment Merchants give the seller a chance to provide 'acceptable' evidence that the seller has completed / shipped / fulfilled the transaction. However Payment Merchants are EXTREMELY restrictive of their definition of 'acceptable' evidence, for instance requiring that an item be shipped by the most express (fastest), most expensive (insured, delivered with signature) type of shipping, the cost of which can be prohibitive to small businesses trying to remain competitive.
How Can A Seller Prevent / Protect Themselves From Chargebacks?
There are a few ways sellers can help reduce the likelihood of chargebacks. One common source of chargebacks comes from buyers in third world countries. Less effective law enforcement may lead to a haven for cyber criminals commiting credit card fraud. Sellers might try limiting sales to certain countries, or tracking the countries of customers that are charging-back and not selling to people in those countries.
For physical goods, delivery by a trusted courier or priority mail requiring a signature upon delivery can be useful in the way of evidence when attempting to dispute a chargeback levied against a seller by their Payment Merchant (even though such evidence may not be considered acceptable by a Payment Merchant, perhaps it will be acceptable in a court of law?). Keep the receipts and any confirmations of delivery for 1 year past delivery, just in case.
When given a choice between a chargeback and a refund, its always preferred to go with the refund. Refunds are usually offered free by Payment Merchants, and do not affect a seller's chargeback ratio in a negative way. If a seller has a potentially fraudulent or suspicious order, they can always choose to refund and cancel the order, rather than risk likely chargebacks and all the associated fees, ratios and other headaches.
Finally, if a particular Payment Merchant has been leveling larger and larger fees against a seller as a result of what they consider an unacceptable chargeback ratio, the seller can always move on to a different Payment Merchant. There are many fish in the sea, and even more Payment Merchant Services. Take a look at our Payment Merchant Directory to find a new Payment Merchant service (it never hurts to offer your customers more than 1 payment option – also a good failsafe in case one of them goes down / out of business.
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