5 common reasons for chargebacks

While chargebacks help provide customers protection, they can be a significant headache for businesses. As a consumer getting your money back is a rather simple process. However, for businesses it’s a totally different story.  For businesses chargebacks mean that they are dealing with the bank, not the customer. Therefore, companies can’t contest a chargeback if real issues with the product or service occur. In addition, chargebacks have the potential for fraudulent activities.

When a customer requests a chargeback, the bank withdraws or withholds funds from your business account. At that point your business has a short time period to provide the bank with evidence and contest the chargeback. If you supply proof the transaction was legitimate like proof of delivery, copies of customer communications, etc., the bank releases the funds back to you.

Chargebacks for different payment methods

The most common form of chargeback is a credit card one. Failing to provide proof to reverse a credit card chargeback can result in additional fees, which typically range from $15 to $100. Although the most common chargebacks occur on credit cards, they aren’t the only payment method where they happen.  Bank transfers, automated clearing house (ACH) and other forms of electronic funds transfers (EFT) can also be charged back. ACH payments are becoming a popular payment method, especially for B2B transactions, and there is a significant difference between ACH and EFT when it comes to chargebacks.

While ACH chargebacks can still lead to lost income, they don’t have additional fees associated with them (unlike credit cards), and the rules for customers are much stricter. For example, using ACH, customers can only request a chargeback if there is a problem with the payment itself, not due to issues related to the product or service.

Even with the benefits of using ACH payments, chargebacks on them are a major source of frustration. To prevent them, it’s essential to understand the common reasons behind them:

  1. Transaction error

Everyone makes mistakes sometimes. Often, chargebacks result from a business error related to processing the payment. Common examples include:

  • Processing errors – the transaction was incorrectly billed, or an error occurred during the processing order.
  • Double charges – the customer was charged twice for the same service or product.
  • Authorization issues – the customer didn’t authorize the charge before it happened. Most customers will contact the business before initiating a chargeback and if handled correctly, these mistakes should lead to a refund, not a chargeback. If customers are met with good customer service and see a simple path to getting their money back, they’re much less likely to call the credit card company or the bank to ask for a chargeback. Refunds don’t result in additional fees and businesses should help facilitate them as fast as possible when an honest error occurs.
  1. Customer dissatisfaction

Another common reason for chargebacks is dissatisfied customers. This could be due to:

  • Not receiving the correct items.
  • The product not doing what it’s supposed to.
  • The product arriving damaged or defective.
  • The product not arriving at all.

To prevent chargebacks from customer dissatisfaction, you should ensure accuracy during the order and delivery processes. You can do this by delivering a high-quality product that matches the marketing material provided and working with reliable delivery services.

Again, it’s always important to have a good customer service team that swiftly resolves issues and provides a replacement or refund.

  1. Cancelled subscriptions

Customers may initiate chargebacks to cancel the recurring payments. This could be because:

  • They forgot or were unaware a free trial or promotional rate was ending.
  • The cancellation policy was unclear.
  • They made a mistake when trying to cancel the subscription.
  • An error on the business’s side prevented the cancellation.

With so many subscription services out there, chargebacks can become a serious issue for businesses.  To prevent chargebacks, make sure to explain the billing, refund and any promotional offers clearly to all new customers. Also, send advance notice of any contract renewals and instructions if they wish to cancel.

  1. Fraud

Chargebacks can also be abused to defraud your business out of revenue. These can be separated into two general scenarios:

  1. The customer’s card or financial details were stolen and used to buy goods. In this case, the customer is the victim of fraud by a third party.
  2. The customer acts dishonestly to obtain products or services for free by charging back the money spent. In this scenario, the customer is perpetrating fraud against your business.

The second scenario is often called “friendly fraud,” with the customer claiming they didn’t make the transaction. It is “friendly” in the sense that the business may believe the customer is, in fact, a victim of legitimate fraud (first scenario).

To protect your business against fraud, you need structures in place to prove the purchaser intended to buy the product or service. Examples of evidence you could use include:

  • For in-person purchases, checking the card and getting the cardholder’s signature on the receipt.
  • Verifying the billing address matches the address associated with the credit card.
  • Tracking deliveries and requiring signatures when goods are received.
  • Requiring customers to enter the complete card details for online transactions.
  1. Affiliate fraud

A different type of fraud to be wary of is affiliate fraud which is when a marketer inflates the impact of their work to increase their compensation. Chargebacks are a common way of faking new transactions following marketing spends.

The marketing fraudster uses stolen credit card information to make a series of fraudulent purchases. Once they receive their fee, they hit the company with a wave of chargebacks all at once. It’s critical to do your research when hiring new affiliates to ensure you’re entering an agreement with a legitimate vendor.

Protect your business from chargebacks

Chargebacks can quickly grow from a nuisance to a real problem for your business. However, eliminating mistakes and providing good customer service can go a long way to minimize your chargeback exposure.

Of course, there’s still the issue of fraud and deliberate chargeback abuse. Using a digital payment platform is an excellent way to track all your payments and store the necessary evidence to prove a transaction’s legitimacy. With all transactional data and information stored on a single platform, you can quickly provide the bank with all the information required to prevent fraudulent chargebacks.


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