Independent business owners must constantly seek out business expense line items to minimize in order to keep costs low and preserve margin in an era of increasing local and global competition. Despite this constant pressure, however, a business owner can’t simply skimp on the quality or range of services offered to clients and customers without negatively impacting revenue. Therefore, independent business owners are wise to look to other areas of the business where cost cutting is possible without harming the customer’s experience.
Lowering chargebacks is a great way to save money without negatively impacting your product or service quality. Chargebacks, put simply, are when your customer (or someone purporting to be your customer) calls the number on the back of their credit card (their “issuing bank”) to complain about the good or service that you provided, and request a refund relating to that purchase. That refund request, whether valid or invalid, is called a chargeback.
As the independent business owner, once a chargeback has been initiated, it's your responsibility to respond to the chargeback notice and affirmatively prove that the charge was legitimate and the service or product was adequately provided in order to avoid the customer receiving a full refund. Regardless of whether you win, this process is cumbersome and expensive. Therefore, reducing chargebacks is a worthwhile goal for any independent business, but doing so does require taking some affirmative steps. Here are three easy ways your business can lower chargebacks:
1. More secure payments via chip card-enabled point-of-sale (POS) terminals. When payments are made securely, the independent business owner doesn't see as many chargebacks. Why? The answer is simple: it becomes tougher for hackers and thieves to obtain payment information, lowering the chance of credit card fraud. In 2012, a study conducted by J.P. Morgan estimated a whopping 50 percent of chargebacks are directly related to credit card fraud.
For example, a hacker gets a hold of an innocent consumer’s credit card information and goes to town snapping up everything from groceries to gas to designer goods. After the consumer’s credit card limit is wiped out, they don't want to be held responsible for items purchased by a fraudster. The consumer seeks recourse through their issuing bank, and at that time the bank initiates a number of chargebacks to seek reimbursement by the business. Helping to limit fraud on the front end is an easy way to minimize chargebacks.
A great technique is to adopt EMV or “chip card” technology. New chip card-capable terminals have been rolling out across the country, pushed in large part by Visa and MasterCard. The reason that Visa and MasterCard are so aggressively pushing this technology is that it's far more secure than conventional payment methods. Instead of transmitting a customer’s actual credit card number over the internet when a payment is swiped, using a chip card-enabled POS terminal allows a new code to be delivered for payment every time a credit card or mobile wallet application is used. This means if a hacker grabs this information once, he or she cannot use it over and over again for fraudulent purchases.
2. Reduce handling of credit card numbers via mobile swipers. Many chargebacks occur because of "skimming" fraud. For example, if you owned a plumbing company and your field technicians accept credit cards, your company might currently use a system in which the technician writes down the credit card number and brings it back to the office or calls it in. That means that there's now a paper record or phone record of that credit card floating around for a rogue employee or hacker to get a hold of.
By contrast, mobile payments — i.e., payments made via cell phone-attached swipers — provide far fewer opportunities for rogue employees or hackers to access credit card data. That’s because the employee simply swipes the credit card in front of the customer, and returns their card immediately to them. The credit card data is then immediately encrypted by the swiper device and transmitted securely. Consumers who use mobile payments often prefer to receive their receipt and any documents associated with the purchase via email. This cuts down tremendously on operating costs for paper products such as receipts, in addition to dramatically reducing access points for credit card data to be compromised.
3. Avoid chargebacks via notifications. Fighting a chargeback is an incredibly costly and time-consuming endeavor for an independent business. And in some businesses, there will always be the 1 percent of customers that will not be satisfied, no matter what. That’s particularly true in service-based industries with historically high chargeback rates such as magazine subscription sales or debt collection, where the customer may change their mind about their willingness to pay long after the transaction was initiated.
Knowing that these chargebacks will always exist, and that it can be more costly to fight them than to simply refund the money, some independent businesses simply choose to do the latter. Consequently, independent businesses in a high-chargeback industry can sign up for pre-chargeback notification services like Ethoca or Verifi, which will notify them immediately any time a customer contacts their issuing bank requesting a refund, providing the business owner with a 72-hour window in which they can contact the customer to work out the issue, or simply issue a refund and avoid the whole chargeback situation entirely. Other businesses simply choose to sign up with a high risk credit card processor that integrates these services into its product, and have the refunds automatically get issued to customers who have initiated a chargeback request.
Independent businesses face constant pressure to reduce costs without compromising service or product quality. Unfortunately, there are very few areas where that's actually achievable. Minimizing, preventing and avoiding chargebacks, however, is one such area that many independent businesses haven’t yet explored. Reducing chargebacks not only saves a business the direct costs associated with the chargeback (including processing fines and issuing refunds), but it also saves valuable employee time and energy which are otherwise consumed by responding to chargeback inquiries.
Rich McIver is the founder of Merchant Negotiators, a merchant services comparison company which provides detailed reviews and advice for independent businesses seeking to obtain better credit card processing.