Chargebacks cost small businesses billions of dollars per year. Worse yet, some chargebacks are from customers that are simply trying to get their money back while not having to pay for goods. Talk about having your cake and eating it too…

Using chargebacks to essentially steal money from retailers is commonly referred to as “friendly fraud” and it’s a major issue for small businesses. In fact, some experts believe that by 2025, friendly fraud will cost retailers $25 billion or more per year. Indeed, Juniper Research has found that friendly fraud is increasing by 20 percent per year. 

While big box retail chains and online behemoths can suck up the losses, chargebacks could push small companies out of business. Fortunately, small business owners don’t have to stand by idly as the costs pile up. 

Instead, through proactive chargeback management, they can fight friendly fraud and potentially bring it under control. In this article, we’ll look at how small businesses can fight friendly fraud.

Before jumping into how to fight chargebacks, however, it’s important to understand why friendly fraud occurs. This will help you better formulate strategies to fight chargebacks.

So Why Do Chargebacks Occur?

When a customer files for a chargeback, they skip the retailer’s return policy and instead ask their issuing bank to issue a refund. More often than not, the issuer grants the customer the refund, takes the money from the retailer, and gives it back to the customer.

Sometimes, chargebacks are perfectly legitimate. It’s possible that someone stole the customer’s credit card information and made an illegitimate purchase. In this case, credit card fraud has occurred, and the customer is typically entitled to a refund.

Or, a merchant may have accidentally double-charged a customer for one purchase. It may have been a perfectly honest mistake, but in this case, the customer is entitled to a refund. 

In other cases, it’s not a matter of credit card fraud, but instead it’s forgetfulness on the customer’s part. A customer may have forgotten about a purchase or may not recognize a retailer’s name. 

For example, let’s say a customer purchases a gizmo from your online store “Acme Gadgets Online.” However, your online retail business is organized under another company, “Turkey Cheese Industries,” which is what turns up on your customer’s credit card statement. When the customer sees Turkey Cheese Industries, they don’t recognize the charge and thus initiates a chargeback.

In this case, it’s a simple misunderstanding. The customer made a legitimate purchase from Acme Gadgets Online and is willing to pay for their gizmo, but simply doesn’t recognize the Turkey Cheese name.

Chargebacks also occur when customers can’t navigate your official return policy. Maybe they can’t find the directions on your website, or it involves a step that they simply don’t want to take, like calling your customer service department. Instead of requesting a refund, they may file a chargeback.

Many other things can result in a customer filing a chargeback. Chargebacks aren’t always friendly fraud. Either way, small businesses need to keep a close eye on chargebacks and proactively manage them. 

Why? Let’s see how chargebacks can impact your business.

Why Every Small Business Should Proactively Manage Chargebacks

First, let’s get the obvious out of the way: chargebacks cost your company money. Besides revenue from the sale, you’ll often lose your products too. This impacts your inventory and adds more strain. On top of all this, payment processors hit merchants with a chargeback fee, usually $15-30.

LexisNexis found in their study “The True Cost of Fraud” that in regard to chargebacks, retailers ultimately lose $2.40 for every dollar of nominal losses. The financial impact adds up quickly. Worse yet, outside of the immediate financial hit, there are many other risks.

Indeed, the biggest risks may be long term. If your business suffers too many chargebacks, you may be designated as high risk. Your company may also be put in a chargeback monitoring program and fees go up until you get chargebacks under a set threshold. Payment processors will also require that merchants set aside more money in reserve (to cover chargeback costs), or could simply ban you from accepting payments all-together. 

For most retailers, the inability to accept credit card payments could be a death blow. Managing chargebacks and successfully fighting them is important for small businesses. So how can a small business owner do that? Let’s dig in.

How Small Businesses Can Fight Chargebacks

Fighting chargebacks can be difficult, but there are steps you can take to reduce the burden of fighting friendly fraud and also increase your chances of successfully disputing specific chargebacks. 

The first thing to remember is that not all chargebacks are valid. If you believe that’s the case with a specific chargeback, you owe it to yourself and your company to fight it. Even if the customer has a valid reason to request a chargeback, you should see if there’s a way to resolve the issue without looping the banks and processors in.

The Clock is Ticking So Move Quickly

You’ll only have a certain amount of time to dispute a chargeback and submit documentation. This process is referred to as representment and offers you a chance to dispute the chargeback. If you’re successful, you’ll get your hard-earned money. Through representment, you submit evidence that the charge was legitimate and that the customer got his or her products or services.

Miss a deadline, however, and you may lose the dispute. If you don’t do anything, the customer is likely to get their chargeback. Even if you do dispute the chargeback, the burden of proof remains on you.

There are various deadlines you’ll need to keep your eye on. A chargeback management platform will help you organize your dispute efforts and keep you apprised of upcoming deadlines. 

Just remember, if you miss a deadline, you may have no recourse. Ultimately, it’s better to submit things well ahead of schedule.

Contact the Customer

A good second step is to contact the customer trying to get a chargeback. Some estimates state that 80 percent of customers will first talk with their bank rather than a merchant when they file for a chargeback. 

By initiating contact yourself, you may be able to find out what’s wrong and find a way to rectify the situation. Whether it’s a simple matter of a confusion, a defect, or an unwieldy return process you may be able to resolve the issue without getting charged back.

Make sure you document interactions with customers, for example, by using email or recording the call. And as the process moves forward, stay in touch with the customer. 

Clear, up-to-date communication can go a long way towards resolving issues and soothing tensions. And even if the situation gets tense, maintain friendly communication.

Documentation Should Be Thorough and Specific

Earlier, we mentioned the need to act quickly. While prompt action is necessary, you should be careful not to cut corners. Your documentation needs to be as thorough as possible. This includes receipts, communications, shipping information (such as tracking numbers and signatures), and other fulfillment data.

The more details you offer, the better. Often, the biggest factor is whether or not you can prove that the customer received the product. If you can prove that, your chances of successfully disputing the chargeback rise considerably. 

Besides tracking info, email correspondence may also help. Obviously, if the products were sold in person, you may not have tracking info available. However, you may have signed receipts or other compelling evidence. 

It may also help to submit your company’s return policy. This is especially true if you can prove that the customer received the product. With proof of receipt and your return policy laid out, you can show that the customer had other options.

Ultimately, gathering the right documentation and evidence is essential for fighting friendly fraud. As you sell to people, consider methods to gather such evidence. For example, you might require customers to sign a receipt for in-store purchases. For deliveries, you might require the shipping company to collect a signature.

The more evidence you gather, the better.

Double Check Everything

Deadlines are important and there’s a lot of information you need to gather. That said, you need to eliminate as many mistakes as possible. By working ahead of schedule and not waiting until deadlines arrive, you’ll give yourself some breathing room; use it to double check everything.

Do you have all the documentation necessary? Is it organized? Is there any evidence or information missing that could help your case? Double check as much as possible.

Use the Right Chargeback Management Tools

Does the above sound like a lot of work? For better or worse, disputing chargebacks does require a solid amount of input on your end. Unfortunately, if you don’t fight chargebacks, you could lose a lot of money and put your business at risk. 

That said, you can now use chargeback management tools to make the whole process easier. These tools will help you stay apprised of important deadlines and make it easier to organize evidence. With the right tools in hand, you can reduce the resources spent fighting chargebacks while also increasing positive outcomes.