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How Chargebacks Work - And How to Minimize Them in Your Business
Chargebacks are one of the biggest financial risks to a business. They can reduce cash flow and profits, and they have been known to kill businesses in specific circumstances. Although some business owners see them as part of doing business, they shouldn’t be. By understanding them and having the right strategies in place, you can reduce chargebacks and ensure they do not end up crippling your business. So, how do chargebacks work, and what can you do to minimize them?
How Chargebacks Work
A chargeback, also called a payment dispute, happens when a customer requests that a charge made on their credit card be reversed. This can happen for a variety of reasons such as a customer not recognizing a charge on their account or when fraudsters steal a credit card and use it to make purchases.
When a customer notices a transaction that they are not familiar with, they get in touch with their bank to stop the transaction. The bank holds on to the money as they try to resolve the issue and understand what has happened. If a bank finds that the charge was fraudulent or rules against you, you lose the money, and it is transferred back to the customer. If you have already shipped a product, you have to bear the loss.
Use Address Verification Services
A great way of preventing chargebacks is requiring customers to verify their addresses if they are making a purchase using a credit card. If both sets of data do not match, you should not process that payment.
Prevent Fraud Before It Happens
An overwhelming majority of chargebacks are tied to fraud which means that one of the best ways to prevent chargebacks is to use available tools to prevent fraud before it happens. There is a variety of tools you can use for this including two-factor authentication, velocity checking, device fingerprinting, and using machine learning to detect fraudulent charges.
Businesses can also verify their bank accounts, so they have total control of the funds going in and being charged to their accounts in case of chargeback fraud. To do this, you have to go through bank verification and authentication which not only secures your account but also reduces fraudulent transactions. Bank account verification has become a lot easier, with verification services provided by Envestnet | Yodlee, for example, not requiring routing numbers, deposits, or bank account numbers. Their process is easy, intuitive, and seamless, allowing business owners to concentrate on running their businesses instead of dealing with fraudulent chargebacks.
Ensure Proper Product Descriptions
If a customer is not happy with the product they receive, they will issue a chargeback. It is therefore important to ensure a customer knows exactly what they will be getting by including better and more relevant product descriptions.
Have Clear Return and Refund Policies
You should ensure a customer understands the refund and return policies before they complete a purchase. Ensure you make it clear how to return an item and how to ask for a refund. Dealing with refunds is easier than dealing with chargebacks.
Chargebacks, whether legitimate or fraudulent, can be very costly for your business. Put measures in place to minimize them and try to provide the best products and customer services in addition to following the tips provided above to reduce these disputes.