How Do Chargebacks Affect a Business

There are so many things nobody tells you about running a business until you’re actually facing the issue head-on - one of these is chargebacks. 

These are disputes initiated by a customer seeking a full refund for a transaction they either placed and were unsatisfied with or never received. In some cases, the customer simply has malicious intent and wants to defraud your business - or maybe their credit card information was compromised and they truly didn’t place the order.

Whatever the case, it’s important that you understand the gravity of this situation and respond accordingly. So, how do chargebacks affect a business? We’ll look at the three main consequences:

  • Financial Impact: From lost revenue to the cost of goods or services, chargeback fees, and more.
  • Operational Impact: These disputes take time to manage and resolve, stealing your attention from core business activities.
  • Reputation and Relationship Impact: Disputes strain customer relationships and can harm your reputation with financial institutions as well.

All things considered, it’s worth investing in chargeback prevention and management solutions - and you’ve come to the right place. Disputifier is a chargeback company trusted by thousands of leading e-commerce businesses. 

We prevent up to 95% of chargebacks in the first place and can help you win up to 70% of disputes when they do occur. The best part? You only pay when you win! Get set up today or learn more about the implications of chargebacks for merchants below.

What is a Chargeback?

A chargeback is a transaction reversal initiated by the cardholder's bank on their behalf, designed to protect consumers from unauthorized or fraudulent transactions. This allows customers to dispute a charge on their credit or debit card and seek reimbursement if they believe the charge was incorrect or fraudulent. 

While they’re essential for consumer protection, they are often misused and create quite a headache for merchants. Here are some common reasons for chargebacks:

  • Fraudulent Transactions: Unauthorized individuals used stolen card information to make purchases.
  • Product or Service Dissatisfaction: The product or service received did not match the description, was defective, or did not meet customer expectations.
  • Billing Errors: Being charged the wrong amount, being billed multiple times for the same transaction, or being charged for a canceled service are all examples of this.
  • Non-Receipt of Goods or Services: Customer did not receive the goods or services they paid for, especially if the merchant fails to provide proof of delivery.

Card networks like Visa, MasterCard, American Express, and Discover have established guidelines and processes for managing chargebacks. 

They provide the framework within which issuing banks (the customer’s bank) and acquiring banks (the merchant’s bank) operate to ensure a standardized approach to resolving disputes while maintaining fairness in the chargeback process.

How Do Chargebacks Affect a Business?

So, how do chargebacks affect a business? There are three main areas of concern - financial, operational, and reputation/relationship implications. 

Financial Impact

The most obvious issue with chargebacks is that the funds from a transaction are immediately withdrawn from your account. This can be especially damaging for small businesses or those with tight profit margins.

But this becomes even more pronounced when you’ve already fulfilled the order or rendered services. Merchants are rarely ever able to recover these, leading to additional losses.

There are also processing fees associated with these disputes. Payment processors charge merchants a fee for each chargeback, which can range from $20 to $100 per incident. These can add up quickly and take a toll on your bottom line.

Merchants with high chargeback ratios may become categorized as high-risk, leading to higher transaction fees imposed by payment processors. You may even be forced to maintain a reserve fund to cover potential chargebacks, which ties up capital that could be used for other business needs.

Operational Impact

There are also operational issues that arise from chargebacks. They can tie up internal resources as you need to gather documents, respond to claims, and manage disputes rather than focusing your attention on core business activities.

You may need to invest in staff training to effectively manage chargeback disputes and prevent future occurrences, requiring both time and financial investment. Further to that point you may need to devote energy to implementing new policies and procedures, such as stricter return policies or enhanced verification processes. 

We mentioned lost goods and services earlier, and these can create issues from an operational perspective as well. You may end up with discrepancies in inventory management and additional costs for restocking.

Investing in advanced fraud detection and prevention tools can be necessary, but costly. You’ll need to spend time researching your options and finding the best chargeback companies that meet your needs. Don’t worry, though - your search ends here at Disputifier.

Reputation and Relationship Impact

Perhaps most importantly, chargebacks can affect your reputation and relationships with both customers and financial institutions. 

Frequent chargebacks can erode trust between the business and its customers. Customers who experience chargeback issues are unlikely to return, costing you repeat business and negative word-of-mouth.

Meanwhile, high chargeback ratios can strain relationships with acquiring banks and payment processors. Your business will be seen as high-risk, leading to increased scrutiny and less favorable terms.

In more severe cases, acquiring banks or payment processors may terminate their relationship with a business that has an excessively high chargeback ratio, leaving the business without the ability to process credit card payments.

Strategies for Preventing and Managing Chargebacks

It’s clear that chargebacks pose a threat to your bottom line, productivity, and reputation. The good news? You can learn how to prevent chargebacks as a merchant below, along with how to win a chargeback as a merchant when they do occur. 

Implementing Fraud Prevention Measures

The best thing you can do to avoid the consequences of chargebacks is to prevent these disputes from occurring in the first place through fraud prevention measures.

Invest in AI-powered tools that analyze transaction patterns and detect anomalies in real-time. These identify suspicious activities like multiple transactions from the same IP address or high-risk geographic locations so you can block fraudulent transactions before they’re processed.

While you’re at it, put address verification (AVS) in place to verify the billing address provided by the customer matches the address on file with the card issuer. 

Another simple measure is to require the card verification value (CVV) for all transactions. This ensures that the person making the purchase has physical possession of the card.

If you’re really struggling with fraud, especially with higher-value orders, consider implementing multi-factor authentication. A customer will be sent a code via email or phone that they must enter to complete the transaction, adding another layer of security.

It’s also worth looking at encryption and tokenization as a means of protecting sensitive payment information. This reduces the risk of data breaches and unauthorized access going forward.

Improving Customer Service and Communication

In the event your chargebacks are the result of dissatisfied customers and not fraud, it’s time to step up your customer support and communication.

Clearly outline your return and refund policies on your website so that customers know how to proceed, reducing misunderstandings that can lead to disputes.

Make sure customers understand the terms of subscription services including billing cycle and cancellation procedures. Send reminders before auto-renewals to prevent unexpected charges.

To prevent issues with failing to meet customer expectations make sure your product descriptions are thorough and accurate. This includes high-quality images, specifications, and any applicable terms and conditions. Display all costs, including shipping and handling fees, upfront. 

Send detailed order confirmation emails that outline what the customer purchased, the amount charged, and expected delivery dates to help customers recognize legitimate transactions on their statements. Keep customers informed about their order status, especially if there are any delays or issues.

If you receive a customer complaint, do not ignore it just because you’ve already done your part in fulfilling their order/service. Instead, see how you can remedy the situation so that both parties are happy to prevent a simple complaint from evolving into a chargeback.

Maintaining Thorough Documentation

Even if you put the best prevention strategies in place, disputes may slip through the cracks. This is why you need to go above and beyond in maintaining thorough documentation to make your case anytime you’re hit with a chargeback.

Keep track of order confirmations, billing information, and shipping details. Use trackable shipping methods and obtain delivery confirmations, especially for high-value items. Having proof of delivery can help resolve disputes regarding non-receipt of goods.

You should also maintain a log of communications with customers, including emails, chat logs, and phone call records. This will help show an effort to resolve issues and verify the legitimacy of transactions.

For digital services, maintain logs showing the customer’s usage of the service, login times, and activity. This proves the customer engaged with the service post-purchase.

Effective Dispute Management

It’s imperative that you understand how long a merchant has to respond to a chargeback. What happens if merchant does not respond to dispute in time? Simple - you lose! Most of the time you’re given just a few weeks, or at most, a month. So act fast anytime a dispute makes its way to your door.

Prepare compelling evidence to contest chargebacks effectively. This includes transaction records, proof of delivery, customer communications, and any other relevant documentation. This is known as representment.

Present your evidence in a logical and organized manner. Clearly explain why the transaction was legitimate and address the specific points raised in the chargeback claim.

Maintain a professional and factual tone throughout your rebuttal. Avoid emotional language and focus on the facts. We have a chargeback response template that can help you with this.

Work closely with your acquiring bank during the dispute process. They can provide guidance on how to strengthen your case and ensure all procedural requirements are met. 

In some cases, you may need to go through pre-arbitration, and the subsequent arbitration. Be aware of the role these phases play in the chargeback process and the costs/implications associated with each.

Protect Your Revenue and Enjoy Peace of Mind With Disputifier’s AI-Powered Chargeback Tools!

Knowing how chargebacks affect a business, this is not something you can overlook. You need to put measures in place to protect your revenue, your reputation, and perhaps most importantly, your peace of mind.

That’s where Disputifier comes in, the #1 AI-powered chargeback solution in the industry. Our system uses advanced algorithms and trusted chargeback alerts from ETHOCA and Verifi to prevent fraudulent transactions in real time, minimizing the risk of chargebacks before they occur.

It even features order-not-delivered mitigation tools, preventing confusion and subsequent disputes associated with late or failed deliveries. The best aspect is that it’s 100% hands-off.

But, when an issue does come up, Disputifier will fight it on your behalf using our customized responses and management process. We fight thousands of chargebacks a month so we have tons of data on what works, allowing you to feel confident you’re optimizing your win rates. 

What happens if you lose a chargeback with Disputifier? You don’t pay! That’s how confident we are you’ll find yourself winning more and more chargebacks with our service.

But how often do merchants win chargeback disputes with Disputifier? Up to 60-70% of the time! In comparison, the industry average is just 10-30% depending on the level of risk associated with your business. 

So, start your free trial today and see for yourself why Disputifer is an invaluable asset in your business. It’s time to stop stressing about chargebacks for good!

Parting Thoughts on How Chargebacks Affect a Business

So how do chargebacks affect a business? These disputes can take a serious toll on your financial health, operational efficiency, and reputation. Fortunately, you now know how to avoid these consequences by preventing disputes in the first place and fighting them effectively when they occur.

Looking for additional resources on dispute management? Our blog has insights on merchant chargeback insurance, chargeback vs dispute, chargeback for services not rendered, what is a compliance chargeback, and more.

By leveraging advanced tools like Disputifier’s AI-powered chargeback solutions, you can protect your revenue and streamline your dispute management process. 

So what are you waiting for? Secure your business today with Disputifier and enjoy peace of mind knowing your chargeback challenges are handled.

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