When dealing with card payment disputes, the fork in the road for small businesses is whether to continue writing off chargebacks as a cost of doing business to avoid offending buyers or take the high road.
This article will focus on chargeback management best practices for small businesses.
But before we fully throttle into those exclusive insights, let’s look at what happens to a business when a cardholder disputes a transaction with their bank or credit card issuer.
Why are Chargebacks Bad for Businesses?
If you’re wondering why companies hate chargebacks, the reason is not far-fetched. Every chargeback carries an overarching impact beyond the disputed transaction.
Here’s a breakdown of notable ways chargeback affects small businesses:
- Revenue loss. When a cardholder files a dispute, Federal law mandates the small business owner to refund the transaction amount, translating to the loss of sales revenue and the cost of the product or service sold.
- Excessive fees. With every chargeback comes high processing fees that add up quickly and strain a small business owner’s balance sheet.
- Reputation damage. Too many chargebacks can damage the reputation of a small business, making it challenging to attract and retain customers.
- Opportunity cost. Chargeback mediation is a complicated and time-consuming process that requires enormous resource allocation. For a small business owner, any time spent mediating disputes means forgoing crucial business deliverables. In the end, their chances of winning remain minuscule.
- Administrative burden. Between gathering evidence, communicating with banks or payment processors, and doing paperwork to support their claims, addressing chargebacks takes resources away from other crucial business operations.
- Sustainability threat. Chargeback threatens business operations for small businesses, as excessive chargebacks mean regulation issues and potential loss of processing privileges.
If you’re one of the small businesses accounting for chargebacks as you would a tax or a churn rate, writing them off and filing chargebacks as a cost of goods sold (COGS), I've got news for you. The remaining sections of this article will give you actionable ideas to ensure you don’t have to continue eating those bills.
How do Small Businesses Handle Chargebacks?
Did you know that 1 in 5 small firms face chargebacks compared to 1 in 10 for larger enterprises, according to a Javelin study? The same survey also revealed that chargebacks cost small firms $2,244 on average per month.
Plus, companies with unfavorable chargeback ratings had an average TrustScore of 0.5 stars lower than those without such reviews.
Chargebacks are the worst. And you must do your best to ensure card disputes do not take your business under.
Read further for a thorough evaluation of the notable chargeback mediation strategies, with the pros and cons of each option in terms of cost-effectiveness, returns on investment, and regulatory compliance.
Option 1: In-house Chargeback Management
As the name implies, this chargeback management solution involves an in-house methodology or system that a team established to handle chargebacks. That could be a set of chargeback tracking tools that records and monitors all chargeback cases, a couple of chargeback specialists that investigate and resolve chargebacks, or a set of policies and procedures on how the team must approach each case.
- Control over the process. With more control over the process, you can switch chargeback dispute gears and tailor your approach to the specific needs of your business and customers.
- Flexibility in resource allocation. Since you decide whether or not you wish to pursue each case, in-house chargeback management can be more cost-effective in the long run than paying a third-party vendor for their chargeback remediation expertise.
- Resource-intensive. Hiring a chargeback specialist or setting up and maintaining an in-house chargeback management system is time-consuming. It requires significant resources that small businesses can’t afford.
- Lack of expertise. Chargeback management demands a specialized understanding of the ever-changing rules and policies. Teams may not have the same level of knowledge as third-party vendors who live and breathe chargeback mitigation, which results in a higher risk of errors or inefficiencies.
- Compliance challenges. In-house solutions may not always comply with industry standards or regulations. The legal and financial consequences of such shortcomings are severe.
- Lack of scalability. Accommodating scalability and the ability to handle increased chargebacks means heavily investing in such systems. Your chargeback management solution should grow with your business.
Option 2: Outsourced Chargeback Management Solution
For external chargeback management, you outsource the service to third-party vendors specializing in handling chargebacks – thus, allowing your business to focus on other areas of operations.
- Better results. Due to the high expertise of dedicated chargeback teams from third-party vendors, you can be sure your chargeback dispute will be handled by someone that knows what they’re doing. Some vendors also have access to industry best practices and technologies to manage the process efficiently.
- Relatively scalable. External chargeback management solutions can handle many chargebacks at the same time, making them a good option for businesses with high transaction volumes.
- Relative cost-effectiveness. Outsourcing chargeback management is more cost-effective than building full-fledged in-house solutions from the ground up. You don't have to invest in staff, technology, and training.
- Time-saving. With a third-party vendor handling your disputes, you free up time to focus on other areas of their operations, such as marketing and sales.
- Less control & oversight of the process. With third-party vendors making decisions on cases and strategies, you give up some control over the operation of the chargeback disputes.
- Compliance risk. If the vendor has compliance issues, the potential legal and financial consequences will accrue to you.
- Communication challenges. The external vendor may be located in different time zones or have peculiar communication preferences, which can create challenges in managing chargebacks effectively.
- Cost intensive. The opportunity cost of hiring a specialist vendor or onboarding the incorrect technologies leads to a negative return on investment, draining your resources.
Automated Chargeback Management Solution
An automated chargeback management solution is software that helps businesses automatically manage and respond to chargeback disputes. The system automatically alerts you when a cardholder initiates a chargeback, categorizes chargeback reasons, and generates responses to challenge the chargeback.
These solutions can also help identify chargeback patterns and trends to help businesses prevent future disputes, saving you time and cost. Chargeback automation improves management procedures by automating duties, including chargeback alerts, tracking, and response templates.
It’s crucial to note that while an automated chargeback solution offers superior benefits and more than 40% cost reduction, all chargeback automations are not built the same. Choosing the right option for your business model is equally vital.
Types of automated chargeback management solutions
There are two main options you can choose from when it comes to chargeback automation. Below we evaluate these options with their respective pros and cons.
- Fully automated chargeback solution
Fully automated chargeback management solution is an utterly hands-off system where you onboard a SaaS product like Chargeflow, the world’s first fully automated chargeback solution, to handle all chargeback-related issues.
- Optimum operational efficiency. The system automates time-consuming and manual chargeback tasks, such as notifications, tracking, and responses, helping you regain time to focus on building your business. You also have big data to streamline operations and plan revenue.
- Cost-effectiveness. Automating chargeback management processes reduces chargeback-associated costs like chargeback fees, lost revenue, and administrative expenses. And since you only pay for cases won and not by contract, you save money as well.
- Comprehensive risk mitigation. Chargeback automation gives you robust data to pinpoint loopholes, identify dispute trends and risk centers, and proactively manage cases to minimize the risk of future disputes.
- Enhanced return on investment. By generating the most formidable representation case, automated chargeback management solutions give you quick and accurate tools to increase your win rate, fend off criminals and retain legitimate customers.
- Ease of doing business. By winning disputes on autopilot, you keep your brand reputation intact, have better relationships with your stakeholders, and plug sales cannibalization gaps.
- Reliance on technology. Automated chargeback management solutions rely on technology, and if you onboard the wrong solution and the software malfunctions, it may lead to missed chargebacks or inaccurate data.
- False positive. Depending on the solution you onboard, the system could flag legitimate transactions as chargebacks, unnecessarily initiating disputes. That can lead to increased workload and costs for businesses.
- Hybrid solution
For a hybrid chargeback management solution, the team complements third-party chargeback services with in-house efforts. They select transactions and chargebacks to dispute while relying on a full-service company for the actual disputes.
- Oversight and control. You could potentially reduce your costs by choosing specific cases to pursue without losing the advantages of technical know-how and maintaining greater oversight.
- Implementation cost. You might need to onboard multiple programs, giving your team additional bills to pay.
- Training and requirements. Using the hybrid option means you have more tools or will need to work with more agencies, and managing and coordinating those with partner programs can be difficult.
- Unreliable results. Some chargeback specialist companies use offshore unskilled or semi-skilled labor, which often compromises efficiency and turn-around time and negatively impacts win rates.
Recover chargebacks by autopilot. Learn more here.
How big a problem are chargebacks?
Chargebacks can be a significant problem for merchants and businesses that accept credit card payments, as they typically result in a loss of revenue, additional fees, and increased administrative costs. In addition to the financial impact, chargebacks can also harm a merchant's reputation and credibility with customers and card issuers. Too many chargebacks can lead to the suspension or termination of a merchant's account, which can make it difficult to continue accepting credit card payments.
Do merchants lose money on chargebacks?
Every time a consumer files a chargeback, the business loses money in the form of fees ranging from $20 to $100 per transaction. These fees and administrative costs are non-negotiable even if the chargeback is proven meritless and later canceled.
What are common reasons for chargebacks?
Some of the notable reasons cardholders file chargebacks include items arriving damaged or defective, sellers not providing goods or services on time, buyer regreting buying an item, and criminal fraud. It’s also crucial to note that up to 80% of all chargebacks are a result of friendly fraud, meaning consumers disputing legitimate transactions.
How do you prevent chargebacks?
To prevent chargebacks, ensure your return, refund and cancellation policies are clear, confirm customer orders before processing, provide excellent customer service, use a clear billing descriptor on buyer statements, delay billing to pre-empt fraud, obtain proof of customer authorisation, and use requisite customer authentication rules.
Who pays for chargebacks?
The merchant or business that sold the goods or services in question bear all chargeback liabilities. When a cardholder initiates a chargeback, the bank or card issuer requires the merchant to reverse the transaction fund to the customer's account. Additionally, the merchant may also be subject to additional fees or penalties, such as chargeback fees, processing fees, or fines. These fees can vary depending on the type of chargeback and the policies of the bank or card issuer.
Is chargeback a refund?
While chargeback and refund involve payment reversal, they are not the same thing. A chargeback is a return of funds to a customer's card account after they dispute a card payment on their statement while a refund is a repayment of a sum of money.