Chargebacks can present businesses with a serious challenge. They can have an impact on revenue, drain resources, and impede growth.
Despite this, many merchants see chargebacks as unavoidable costs and chargeback management as “too much effort”. If chargebacks get out of control however, they can lead not only to financial losses but tarnish your reputation.
In this chargeback guide we’ll examine how the chargeback process works. We’ll also offer up some steps you can take to safeguard yourself from chargebacks, as well as how to fight potentially illegitimate chargebacks.
How does the chargeback process UK work?
Essentially, chargebacks are disputed transactions. They are initiated by a cardholder, who disputes a charge on their debit or credit card, with the result that the charge is refunded. The bank “charges back” the amount of the disputed transaction to a merchant, and returns the cash to the cardholder, without requiring the approval of the merchant.
When a cardholder disputes a charge, the bank looks at the transaction details, and if it believes the dispute could be valid, files a chargeback, and provides the customer with credit.
Chargebacks were introduced in the 1970s, to provide protection to consumers whose credit cards were stolen, or to prevent them from being overcharged by merchants. Unfortunately, however, chargebacks are not always legitimate, with customers misusing the system, either wilfully or by mistake.
Reasons customers may have for initiating the chargeback dispute process
There can be several reasons for initiating the chargeback process, from undelivered items to fraudulent transactions. Understanding the reasons for chargebacks can help you take steps to reduce them. Here are some reasons customers may have for commencing a chargeback process and some ways to prevent them from happening:
Faulty or undelivered items: To help you in case of a dispute always keep shipping receipts and track any shipped products.
Unauthorised mail or telephone transactions: If you accept orders via telephone gather as much information as possible from customers and always ask for their address and CVV2 number.
Invalid card or account number: Make sure your systems are configured to reject invalid or expired credit cards. Chargebacks can happen if your system can’t locate a valid credit card number.
Duplicate processing: System errors can lead to a card being charged twice. It can also happen online if a customer presses the “pay” button twice.
Human error: This can occur if the credit card is processed manually, so avoid manual processing.
Tips for preventing a chargeback dispute process
Use a business name customers will recognise. Customers often initiate chargebacks when they see a payment they don’t recognise. While your customer may know your product, they may not be aware of your company name, especially if this differs from the name your business is most commonly associated with (i.e., Google vs Alphabet).
Print your phone number on customers’ billing statements – that way if customers don’t know what they’re being charged for they can contact you.
Install fraud tracking mechanisms and use fraud services including CVV2. Use strong credit card verification steps for transactions known for high credit card fraud.
Have a clear refund policy that indicates when customers can dispute charges for goods and services.
Make sure you have a written contract or agreement outside GoCardless to fall back on in the case of a chargeback.
Effective chargeback management can help you fight fraudulent chargebacks
If you suspect someone has initiated a fraudulent chargeback, take the following steps:
Contact the customer to ask why they disputed your charge and find out if you can resolve their problem. You could also advise a customer that it’s against the law to initiate a fraudulent chargeback. If you can’t resolve the issue, you may need to get legal advice via Citizen’s Advice or contest the chargeback through the small claims court.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.