What is a Chargeback and Should I Worry?

Nov 19, 2018

In the simplest of terms, chargebacks are when cardholder banks force merchants to reverse transactions. This can appear similar to a traditional refund, but it’s not. The difference is that a customer is not asking a merchant for repayment of an item or service they bought. Instead, the credit card company’s bank takes the funds from the business’ account based on the consumer’s request. Though chargebacks are investigated, in many cases, banks find consumers’ complaints valid. Then, the bank takes the money from the merchant’s bank account, and refunds the customer. The consumer is not obligated to return the purchase when a chargeback is deemed legitimate.

The chargeback system was put into place in the 1970s as a way to protect customers from fraud and unauthorized charges. Chargebacks serve many purposes. They aim to help merchants stay transparent and sell quality goods, they make consumers feel secure when using credit cards, and they give them ways to combat criminal fraud. Once these measures were put into place, consumers became comfortable using credit cards, and their use began to soar.

However, consumers overuse chargebacks, often initiating refunds from credit card companies for goods and services they received and wanted. The chargeback mechanism was not set up as a way for consumers to circumvent merchants and get refunds through banks. The intent of the system, instead, was for consumers to initiate chargebacks when their credit cards were lost, stolen, or they were the victims of identity theft.

Too many chargebacks are bad for business. They are indicators to banks and processors that a merchant is selling sub-par products and services, has a flawed business models, or is engaged in something questionable or even illegal.

There are many consequences too excessive chargebacks:

  • Every time a merchant gets slapped with a chargeback, it gets charged with a fee that can range between $20 and $100 per transaction. The fee stands even if the consumer cancels the chargeback.
  • If a chargeback was initiated due to friendly fraud, for example, the merchant also loses the future potential revenue from that item.
  • When chargeback ratios get too high, banks and merchant service providers can freeze merchant accounts. Businesses cannot accept and process credit and debit card payments while their accounts are frozen, preventing them from conducting business.
  • If chargeback levels remain high, the acquiring bank can terminate a merchant account, resulting in the business ending up on the MATCH list. This means a business is blacklisted and is unable to get a new with another processor for about five years.
  • Merchants fortunate enough to not have their accounts terminated, still face significant hardships. They will be forced to get high-risk merchant accounts, which carry higher processing fees, stricter terms, and transaction volume limits.

Though merchants have the right to dispute fake chargebacks, they often don’t find out about them until it’s too late. If they find out in time, developing an effective argument for the chargeback claim takes time and considerable resources. Merchants often get the most satisfaction when they call on a professional to help dispute a chargeback. However, many don’t have the financial resources to do this.

Additionally, winning a chargeback dispute does not positively impact a merchant’s chargeback-to-transaction ratio. A win can help a merchant regain revenues, but, it does not reduce its risk of a shutdown merchant account.

Instead of fighting chargebacks, merchants do better reducing the risk of real and fake chargebacks. Offering prompt and attentive customer service, providing high-quality goods and services, and thoroughly attending to transactions won’t encourage consumers to file chargebacks. This will result in a reduction of friendly fraud.

Merchants also should take actions to identify fraud and work detect those types of transactions that have the highest chargeback potential. Stopping these criminals from making purchases also decreases the risk of resulting chargebacks.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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