When you start a new business that relies on credit card payment processing (as most modern businesses do), you’ll need to become familiar with chargebacks. They aren’t pleasant elements of finance, and they aren’t especially common for most types of businesses, but you still need to be aware of their existence, effects, and potential repercussions.
Square offers this concise description of a chargeback: [pullquote]“A chargeback happens when a customer disputes a charge from your business and asks the card issuer to reverse it.”[/pullquote] Essentially, your credit card-paying customer is asking for a refund directly from the card issuer. One of the benefits of owning and using a credit card is to protect yourself from unauthorized transactions, so this feature is important for protecting consumers. However, when it’s used, it can create problems for both the issuing bank and the merchant bank and can result in tangible financial losses for your business. The below information about why chargebacks happen, the ramifications and how to avoid the, is vital for running a healthy business.
These are some of the main reasons chargebacks happen:
So what happens when a chargeback is filed? Usually, chargebacks follow these steps:
There are a few ramifications to experiencing a chargeback. First, you’ll likely face a fee from your payment gateway and/or merchant bank. According to Chargebacks911, “There are a few different factors that help determine the cost of the fee, including the acquiring bank, the processing agreement and the kinds of goods or services which the merchant offers. On average, the fees typically fall somewhere between $20 and $50.” One or two chargebacks won’t hurt you, but over time, these fees can really add up.
If your business experiences repeated, consistent chargebacks from your customers, your merchant bank may close down your account—so watch your chargeback rate, and keep it low.
These strategies can help you avoid chargeback-related losses:
Chargebacks can be a headache and are practically unavoidable. All businesses will have to face chargebacks at some point. However, if you prepare your business properly, you can limit the number of chargebacks you face as well as the nightmares that come along with them.
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