Wednesday, January 20, 2010

Preventing Chargebacks

One of the things most vexing and costly concepts for new businesses are “chargebacks”. Chargebacks are when a customer’s banks forcibly requests a return of funds. In a nutshell, its when bank is the one asking for a refund vs. a customer to business transaction. What’s the big deal about this? Well, it’s a bad thing for multiple reasons. Each Chargeback returns the amount that was transacted, plus a fee from your payment processor (which varies from provider to provider). It’s not uncommon for each chargeback cost to reach up to $30 each. These obviously directly impact your revenue and with their random nature, it inhibits your ability to accurately forecast revenue. Even worse, if you have lot of chargebacks, your merchant account provider can suspend, or even cancel your account. If this is the only way you get revenue, you could find yourself without a way to bill customers.

How can you best prevent chargebacks? The easiest way is to provide your customers an easy way to contact you regarding billing questions. Refunds are one of the most common types of chargebacks and by providing your customers with an easy way to contact you regarding a refund, you can avoid having to pay to avoid the chargeback fees. By quickly responding to refund requests, you save your company the cost and the risk of handling additional chargebacks that could be avoided. Another way to prevent fraud-based chargebacks is by requesting the “CVV2″ numbers, which provide another way to ensure the credit card number you’re transacting is correct. A clear terms of service on your site also helps as it makes it clear what services your offering, and when a customer is entitled to a refund. These are just a few ways to avoid chargebacks. For some other helpful tips, the 37 signals team has a great post on their approach to avoid chargebacks.

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