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How can I protect myself against merchant account chargebacks?

The methods for preventing and fighting chargebacks are as specific as the businesses that employ them. The approach that business "A" uses to prevent and fight chargebacks may work great for them, while the same approach may not work at all for business "B". Do a search on "preventing chargebacks" on any Internet search engine and you'll be presented with hundreds of lists showing different ways to prevent chargebacks. These lists are certainly useful in their own right, but the best way to prevent and fight chargebacks for your business probably won't be listed.

Every business is different. When creating a chargeback prevention plan for your business don't scour the Internet looking for random lists of ways to prevent and fight chargebacks. Instead, learn the motivations behind why YOUR customers issue chargebacks and use this information to formulate a plan to deal with these motivations. Customer motivation invokes chargebacks - by dealing with the customer's motivation to place a chargeback you prevent the source of the problem by killing the root instead of hacking at the branches.

If you process credit card transactions it is inevitable that you will eventually receive a chargeback. A merchant account chargeback refers to the process that takes place when a credit card transaction is disputed by a customer or an issuing bank. An example of a situation where a chargeback may occur is if a customer orders an item online but it is never delivered. In this situation the customer can call the issuing bank of their credit card and ask that the charge be removed from their account. The issuing bank will remove funds from the merchant's direct deposit account (usually their checking account) and credit the funds back to the customer's available balance. The issuing bank will then mail the merchant chargeback notification paperwork informing them of the chargeback and the reason for it. Enclosed in this paperwork will be instructions for the merchant about how to dispute the chargeback with the goal of reclaiming the funds from the sale.

Effectively employing methods to properly protect yourself against chargebacks will not only help you win chargeback disputes if and when they occur but it will also deter customers from issuing chargebacks in the first place. There are countless reasons for a customer to issue a chargeback but it is the customer's motivation for issuing the chargeback that is most important. Knowing and understanding the basic motivations that cause a customer to issue a chargeback is the first step to employing effective measures to minimize and fight them.

We've classified a customer's basic motivation for issuing a chargeback into the following general categories:

Fraudulent
A fraudulent chargeback is issued by a person with no legitimate basis for placing the chargeback, whose sole intention is to defraud the merchant involved. People issue fraudulent chargebacks in the hopes of taking advantage of the system thereby obtaining free product or services at the cost of the merchant. Unfortunately, fraudulent chargebacks can be a somewhat common problem - probably because the people responsible for them tend to issue them numerous times.
The good news about fraudulent chargebacks is that they are the easiest chargebacks to stop before they're ever issued. People that place fraudulent chargebacks are usually not first-timers, they know how the system works and they know what to look for in a merchant that makes them an easy target. If they come across a merchant that seems diligent and well versed in preventing and dealing with chargebacks, these dishonest customers will move on to an easier target.
The best deterrent to a customer looking to place a fraudulent chargeback is to prominently display signage regarding chargebacks and chargeback policies. Basically, the best way to let these types of customers know that you're aware of them is to tell them directly. Place a "Chargeback Policy" notification at checkout (on the counter or web page) detailing what is done to prevent chargebacks and how chargebacks are dealt with when they're issued. This conveys, in no uncertain terms, to would-be dishonest customers that you've been around the block more than once and that you're not an easy target for their costly game.

Dissatisfaction
A chargeback issued out of dissatisfaction is issued by a customer who feels that they did not get what they paid for. So called dissatisfaction chargebacks common in service-related industries because the quality of service offered is subject to interpretation. If a customer feels that the service that they were provided is insufficient, but the merchant maintains that it is not, the situation will likely result in the customer issuing a chargeback. Thoroughly outlining service and/or product offerings prior to performing work is the most effective way to circumvent chargebacks resulting from a customer’s dissatisfaction with the service provided.

In the case of a service business, create a detailed service outline with a customer prior to performing work so that each party is clear on what will be provided and in what timeframe. The "I told you so" approach where a general service policy is thrust in front of a customer once a dispute erupts does not work. A service policy that a customer did not see prior to work being started isn’t worth much in the eyes of an issuing bank. A customized service plan signed by the customer, on the other hand, will probably win you the chargeback dispute, or better yet, keep the customer from issuing a chargeback in the first place.

Chargebacks resulting from dissatisfaction are also common among businesses where customer purchase products before they are able to see or handle them. Businesses types such as e-commerce, catalog and mail-order companies are prime examples of this category. Poor product descriptions are most often the cause of a customer's dissatisfaction with a product. Without a thorough product description a customer will formulate their own idea of what a product will be. Of course, their interpretation of a product may be a little more grandiose than the product actually is. Hence, when the product arrives the customer becomes irritated and dissatisfied and may issue a chargeback.

Vindictive
Vindictive chargebacks are somewhat similar to chargebacks issued out of dissatisfaction with the main difference being that vindictive chargebacks are issue by customers who a driven by emotion. Customers driven by negative emotion most often issue vindictive chargebacks and their reason for issuing the chargeback may or may not seem reasonable. Unreasonable expectations coupled with a bad attitude fuel the majority of vindictive chargebacks. Customers that issue this type of chargeback are seeking retribution from the merchant on a personal level. They've gone beyond wanting their money back; instead, they want personal satisfaction. Vindictive chargebacks are not a pretty thing, but they are an unfortunate reality in the marketplace and any merchant that has ever had to deal with this type of chargeback knows that it's the worst.

Not all customers that issue this type of chargeback are vindictive from the beginning. Through the improper handling of an honest chargeback, a merchant can drive a customer to be vindictive. Procedure, patience and policy are the best defense against vindictive chargebacks.

Misunderstanding
A chargeback issued as the result of a misunderstanding is issued by a customer that is unclear about the details of transaction. The most common reason for a customer to issue a chargeback as the result of a misunderstanding is when the customer does not recognize a merchant's charge on their credit card statement due to an obscure DBA (doing business as) name. A chargeback issued as the result of a misunderstanding is the easiest type of chargeback to correct because the customer will often withdraw the chargeback once the misunderstanding is addressed. Regardless, the chargeback process still requires a good deal of time and effort and this type of chargeback can be easily avoided with a little planning and foresight.

Honest / Valid
An honest or valid chargeback is issued by a customer that has tried to rectify the situation with a merchant but is unable to come to a satisfactory conclusion. The customer has what they believe to be a legitimate reason for wanting to issue a chargeback, after exhausting other options, the customer issues a chargeback as a last resort. Naming this type of chargeback "honest" or "valid" seems to imply that the customer is always in the right when issuing this type of chargeback. In fact, this may not be the case at all. A valid chargeback may very well be issued by a customer with totally outlandish reasons for doing so. The point is that the customer truly believes there reasons to be valid and they have tried to rectify the situation with the merchant prior to the chargeback. As the name implies, the motivation behind this type of chargeback is honest and valid in the eyes of the customer issuing. This type of chargeback is the toughest to prevent and the type that a merchant almost always ends up fighting for. In order to win a dispute with a customer that has placed a valid chargeback you must have plenty of documentation supporting your side of the situation.

I thought about including a general list of items detailing common methods used to fight chargebacks but this would be totally contradictory to the point of this article. Besides, hundreds of such lists already populate the results pages of most search engines. These lists can be a great tool to help you formulate a chargeback prevention plan for your business but they shouldn't be the beginning. Before you think of ways to prevent and fight chargebacks for your business you must first learn the reasons that motivate your customer to place them in the first place. Once you've got this information you're well on your way to creating a successful chargeback prevention plan.

Summary
To find the most effective way to protect your business against chargebacks you have to put yourself in your customer's shoes. Determine the motivations particular to your business that would drive a customer to issue a chargeback and devise ways to deal with the motivations that lead to chargebacks. Once you know why customers issue chargebacks you can put methods in place to prevent them.

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