Credit Card Chargeback Schemes and What to Do About Them

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Credit card chargeback schemes are an unwanted side effect of chargebacks, which are themselves a necessary evil to protect the consumer’s rights. Is it always fair to forcibly remove funds from a business’s bank account and return them to the consumer? Probably not. However, as a consumer, do I want that type of swift and immediate protection when I see an unauthorized charge on my credit card? You bet.

Banks and credit card processors will just about always return funds to the consumer and typically affect a business chargeback fee. The business is then left to sort out the details of the dispute.

Does anything positive come to businesses from chargebacks with the headache that ensues? 

Believe it or not, yes.

The existence of chargebacks benefits a business owners by forcing them to follow sound business, customer service, and communication practices in order to prevent and reduce credit card chargebacks.

Chargeback fraud consequences: By 2022, 66 billion transactions will produce 33 million disputes, Mercator Advisory Group says.

The existence and ease of chargebacks is a negative reinforcement that encourages businesses to take extra care to prevent chargebacks due to sheer misunderstandings. It encourages businesses to state payment terms for goods or services and also encourages good client relationships. Additionally, it helps reduce risk by forcing good record-keeping and having insurance.

That being said, chargebacks do not stop people from committing fraud against small businesses. On the contrary, chargebacks give criminals an easy way to steal. However, with some knowledge of the most common schemes, you can avoid the majority of these fraudsters. 

Intentional Fraud

The worst kind of chargeback is intentional fraud. Criminals purchase an item, wait for it to be delivered, and then request a refund, claiming they never received it or it was damaged. How can you prevent this type of fraud? Make sure you have clear documentation at every stage of the delivery process, and you may also want to invest in shipping insurance.  

Lump-Sum Chargebacks

Another type of chargeback occurs in good faith but still exposes business owners to greater risk. The so-called “lump sum” chargeback is when you bill a lump sum for goods or services that could have been broken out into smaller items or service units.

Say, for example, you own a gym and want to offer an annual membership at a discounted cost. Sounds great for both you and the member, right? Not quite. You may get your annual membership fee upfront, but the patron can at any point decide to cancel their membership and demand a refund for the entire amount. Of course, you might refuse (after all, you’ve delivered six good months of service, and they signed a contract), but the patron can still initiate a chargeback.

When the bank returns funds to the consumer, it’s essentially floating a loan, assuming it will be able to recoup those funds from you, the business. So now you’re looking at losing next month’s membership fees and the funds you would have been able to keep from the six months prior. 

The solution? Even though it’s tempting, do not bill for services more than 30 days at a time. Consumers are finicky creatures, and the best New Year’s resolutions could be your worst nightmare in summer.

Chargebacks are an unfortunate part of doing business, but they are necessary to protect consumers, and they help businesses maintain good business practices. If you see chargebacks negatively affecting your bottom line and you set your pricing, remember, you can always increase your prices to help account for this normal part of doing business.

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