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Why Has No One Told Me About Chargebacks?!

Why Has No One Told Me About Chargebacks?!

by Ted LamphereAugust 20, 2013

This blog was founded on the premise of exposing topics no one else bothered to tell entrepreneurs.  VentureBreak exists to share insights and tips regarding the world of startups.  As such, it seems fitting we discuss the topic of chargebacks.

Chargebacks are a Financial Kick in the Pants

If you haven’t already, you will probably soon come across a phenomenon called a chargeback.  To dumb it down, a chargeback is a credit card refund.

Instead of going through the proper chain of command and returning the product or service they found unsatisfactory, customers will simply file for a refund with the credit card company.

The chargeback process is fairly complicated – you can learn about it here.  But what you really need to know about the chargeback process can be summed up like this:  the credit card company will take the funds from your account without giving any warning.  You’ll wake up one morning and your bank account will suddenly be hundreds – if not thousands – of dollars short.  Unless you fight the chargeback, there is nothing you can do to stop this financial loss from happening.

To add insult to injury, you’ll lose more than that profit opportunity.  The original product or service that was sold probably won’t be returned.  Therefore, you lose all potential for a future profit.

As if all that wasn’t bad enough, it gets worse.  Each chargeback comes with a fee.  Depending on your merchant processor, the fee can range anywhere from $20 to $100 for each chargeback.  And a separate chargeback is filed for each transaction that is reversed.

[quote_center]Sometimes the hits will just keep coming[/quote_center]

Sometimes the hits will just keep coming.  If the dollar amount of your chargebacks in an arbitrary time period (say, a month) exceeds 1-2% of your total sales, you’ll get a massive fine from your merchant processor (usually $5,000).  If they stay out of control, you’ll get a second fine – this time around the $10,000 ballpark.

And, if things get so out of control you exceed 3% of your total sales, your merchant processor will simply terminate your account.  Then, you’ll be blackballed and forbidden from getting another.  This means you’ll either have to stop accepting credit card payments or go out of business.  In reality, not accepting credit card payments essentially means you will go out of business.

Why No One Talks about Chargebacks

[quote_right]Business owners shouldn’t feel shame when they fall victim to some professional criminal.[/quote_right]

It really is a shame the business community doesn’t talk about chargebacks more often.  Perhaps it is an issue of pride.  A business that receives a chargeback feels scummy – like they are dirty.  They couldn’t land the whale, make the sale, keep ‘em happy.

In reality, it is nothing like that.  Well, it could be.  If you are providing cheap, low quality products then you probably will get slapped with quite a few chargebacks.  And they definitely will be a result of something you did wrong.

But the majority of chargebacks are a result of fraud.  Detecting and preventing fraud is extremely difficult.  Therefore, business owners shouldn’t feel shame when they fall victim to some professional criminal.

What You Can Do About Chargebacks

There are several things you can do when it comes to chargeback prevention:

  1. Don’t be afraid to talk about your situation.  Get help from other entrepreneurs, business owners and startup champs.  Compare chargeback prevention strategies.  Shop around for better merchant processors.
  2. Make sure your customer service is top notch.  Shoddy products, slow-to-respond customer service, difficult-to-understand return policies, and slow delivery services all lead to chargebacks that are totally preventable.
  3. Don’t charge the card until the item has been shipped.  Always require a signature upon delivery.
  4. Take advantage of all the tools available from your merchant processor, Visa, and MasterCard.  Each company has several ways of helping you deter criminal activity.
  5. Become familiar with the top indicators of fraud.  Visa offers this list of suspicious behavior.  If you observe any of these things, proceed with caution – the purchase could be unauthorized.
    • [arrow_list]
      • New customers – criminals are always looking for a new mark.
      • Larger-than-normal orders that could be broken up and resold for profit.
      • An order that includes several variations of the same item (like one of each color).
      • Big ticket items have maximum resale value.
      • Rush or overnight deliveries might indicate the criminal wants to get his stuff fast before anyone notices what is happening.
      • Several transactions that come within a short time span and all have similar account numbers could indicate the card numbers were stolen via hacking software.
      • Multiple orders placed on different cards but shipped to the same address raises a red flag.
      • Multiple orders on the same card but shipped to different addresses is bad too.
      • Multiple orders placed from the same IP address.

      [/arrow_list]

If you have been a victim of a chargeback, sound off in the comment section below.  Let’s create a community of learning!  If you haven’t had a chargeback yet, stick around.  Learn something from the pros.

Ted Lamphere is a business advisor.  If you would like to contact him, look Ted up on Twitter or Google+.

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Ted Lamphere