The Expert Podcast

What is a chargeback on a credit card or dispute and how can you reduce these as a merchant? What are the real costs because it costs you more money than you think as a merchant? If you're a consumer, how do chargebacks affect you? If you're familiar with chargebacks and you just want to get to the good part about how to prevent them and how to reverse them in some cases, you can jump ahead about two minutes in the video. We're going to give you a little brief on what chargebacks are first.

A chargeback is a process where a consumer—somebody who buys something on a credit card—can dispute the charge under a number of premises. They could say, "Look, this is a fraudulent charge. I never placed this charge. Somebody stole my credit card number." They can call it defective merchandise. They could say that they bought this product and it didn't work when they got it. They could say that they bought the product and never received it, that it was never shipped or never arrived. Or they could say something like it didn’t match how it was described. I received the product, but it wasn’t what it was supposed to be.

There are different chargeback codes that consumers use. When a merchant receives a chargeback or dispute notification, they’re given the information from the consumer: the date of the charge, the amount, the reason code the consumer has given, and usually a little narrative. The consumer will write out a little story—“I bought this thing and it was supposed to be green, but it was blue," or "I bought this service, and they didn’t follow through.” Whatever it is, the consumer has filed a dispute.

Now, the merchant responds to that dispute and the financial institution makes a decision on who’s right and who’s wrong. In the meantime, the minute a consumer files a dispute, the money comes out of that merchant’s bank account immediately, pending the disposition of the case. So, if you’re a merchant and you get a chargeback, that money’s coming out of your account today. And there’s usually a chargeback fee that’s added on top of it—25, 30, or even 50 bucks—so you lose more than what you sold.

For example, if you sold a $400 surfboard, shipped it, and somebody files a chargeback, you lose the $400, the surfboard’s gone, and you lost another $25. So, you’re really in the hole, and that’s what’s called financial damage of chargebacks. There are unseen variables too—there are even more losses than that. You probably have to pay a commission on that sale, you probably have to pay taxes on that sale, and you probably have to pay for overhead to process that sale, maybe even for shipping.

In addition, you now have a chargeback response expense. Somebody has to spend an hour doing research and writing back to that financial institution. The costs are much more than the penalty levied against your merchant account. It’s easy to see the direct fees, but there are several additional costs associated with the chargeback that harm your business’s profitability.

So, how do you avoid this? Well, first, if you are a merchant, you want to avoid getting a chargeback in the first place. For every $100 lost as a chargeback, the actual cost is $240. Lost Prevention Magazine has a document you can download on the hidden costs of chargebacks that will explain it even more. But here, we’re going to talk about what to do if you get one and how to improve the probability that you’re going to get it reversed.

All hope is not lost if you get a chargeback. Don’t give up—you want to respond, no matter what. Even if you think you’re going to lose, you want to respond. We’ll talk about why and how to create a response that maximizes your chances of winning. We have some clients we work with that win 70% or 80% of their responses to the chargebacks. They only lose about 20%, and that’s important because if you lose too many, you can start having money frozen in your merchant account. They’ll keep a reserve account because they think you’re going to get more chargebacks, and they’ll start putting your account on hold. If you have too many, they’ll cancel your merchant account. Now, you’re out of business.

Here’s what you want to do. First, once you get a chargeback, you want to assign somebody to that response. It needs to be a person of responsibility—it can’t just be a clerk or receptionist, somebody who doesn’t know about the inner workings of your business. You want someone in a position of authority. That person may reach out to some administrative people to gather information, but you want somebody as a point leadership position to craft the response.

The first thing you want to do is write a narrative of the facts—no opinions. “On this date, Joe Schmo ordered this product. This date and time, here is the amount, here’s what they selected.” If you have a customer agreement or something they checked off, get copies of all that. You want to get copies of your terms and conditions and look at the relevant parts of it. You want to get your shipping information. On this date, the product was shipped to the customer; it shows being delivered on this date. It was shipped via USPS, and here’s the tracking number. Just gather up all the facts.

Next, you want to look at your customer contact records to see if that customer has ever been in contact with you before or after the transaction. Are there emails, customer chats, phone calls, or voicemails? You want to gather up all the communications from that customer and put those in your investigative file.

Next, research the data. What was the IP address that it was ordered from? You want to document that. What was the shipping address? Do you have copies of any customer IDs, warranty cards, or email addresses? Put all that in your customer file.

Now you want to do an internal or external investigation. Is it truly a case of credit card fraud? Do you believe that somebody used that customer’s credit card number? If it was fraud, how do you do that? Backtrack their IP address. Does it backtrack to their neighborhood, or is it backtracked to China? Does it backtrack to another part of the country? That will give you an idea.

Then, what you want to do is see if any of the communication from that customer indicates that what they’re saying in their chargeback is false. What you’re trying to do is see if there’s anything in that chargeback narrative that’s a false statement by the customer. If it’s friendly fraud and the customer is trying to get something for free, you want to know that. If the customer truly has been neglected or got the wrong thing, you want to fix the problem and serve your customer well. But if the customer is trying to get over on you as a business, you want to know that as well. You want to know how to deal with that person—are they acting in good faith or not?

If the customer truly got the wrong product, you can offer to replace it, or you can offer for them to send it back if it’s been damaged. You want to get photos and documentation. You may be able to file an insurance claim. But you also want to look to see if any of those facts are true. Check out their social media. If you sold them a surfboard, is there a picture of them on Instagram surfing on that surfboard two weeks after you shipped it? Is there a picture on Facebook of them bragging to their friends about their new surfboard?

Then, you want to send a letter to the customer. Make sure you get good legal advice on doing this and how to word it. You want to tell them, “We’re doing an investigation. It seems like you have some issues. We’re glad to help. Here’s what we found so far. We found that on this date, you ordered it, on this date we shipped it, and it was delivered on this date. Looks like you called us up a couple days later and asked a question about how to adjust the temperature on the product or whatever.” So, it seems like you got it, and you want to send back a response. Don’t accuse them of anything, but just show what data you have.

Here’s why: many customers that submit a friendly fraud chargeback don’t believe you’re going to do anything about it. They just figure you’re going to roll over and play dead and just eat the loss. If they see that you have documentation, and you put in your wording of your letter, “It seems like some of the statements don’t seem to match up,” you now have an opportunity to reply. Give your side of the story, and give them an opportunity to write back. Many times, if you send them that letter—which kind of lays out that some of their statements aren’t true—and you dispute the chargeback with the merchant, they may be the ones that roll over and say, “Well, I don’t want to push this any further because I might get in trouble.”

Most friendly fraud chargebacks count on the fact that the merchant is not going to do anything. They figure that you’ve done it before and won’t respond. You want to be the merchant that does something. Is it going to take time? It is. It’s going to take you an hour or two to put all this together. Once you’ve put it all together, you want to also prepare a report to send to the merchant account—the bank that handles your credit card, the one that sent you this dispute notification or chargeback notification.

Put the facts on the first page. Make a bullet point of all the facts and attachments, and make sure it’s on the first page. Resolution requested: We request this chargeback be overruled. We request that this chargeback be reversed