What Are Chargebacks? Excessive Chargebacks?

A Chargeback occurs when a credit card consumer gets their bill and disputes a charge because they claim to never received the service/product that they were charged for, or that never ordered the service/ product in the first place.  The consumer then calls their credit card company and their bill is fixed instantly, because the Consumer’s Card Company wants them to keep spending by feeling secure.

On the business owner’s side that processed the order: The purchase amount is debited from the business owner’s account and a ‘chargeback’ fee is applied. Usually $10-$50 per incident depending on the POS (Point of Sale) Company.

Now the business owner has to comb through their records for a signed credit card receipt to prove that the consumer did purchase the product/service. Or a delivery docket of some kind.

A business owner contacted me the other day that got his Merchant Account terminated by [other company].  The reason cited was that he had ‘excessive chargebacks’. When they say ‘excessive’ they mean over 1-2% of your total credit card volume. 1-2% is a buffer for life happening and not so nice customers.

SIDENOTE: When I was in restaurant management, the company that I worked for did in excess of $100k/mth in credit cards with $20-$30avg sale amounts.  We would see up to and over 10 chargebacks each week.  That’s about 1.2%.  Drunk people claiming they were never there once they got their bill 30days later from their consumer card companies.  Or, regular patrons who didn’t think that they were there 3 times that particular week, and after getting their bill 30days later.  So we had to find the signed copies and send it in to get the chargeback fee back, and the money for services rendered back- lots of time and headaches.

Usually excessive chargebacks are an indication of two things:

1 Either the owner or an employee is involved in fraud with people’s credit cards

2 Or, there are poor business practices and that is the reason the customers are disputing the charges on their cards with their consumer card company.

Unfortunately for this gentleman, it was neither.  His business model was providing online gaming through an e-commerce platform.

And credit card companies don’t deal well with innovative business models or grey areas in regards to consumer disputes- they want people to keep spending online.

So guess who gets penalized?  The small business owner.

Result for Mr. Smith:

1 I told him that if he has more than 1-2%, then I can’t help him, because he will run into the same challenge with the providers that I use.

2 His only other option was to get HIGH RISK MERCHANT ACCOUNT help, which is not something I do.  But I know people who work in that industry.

Or OFFSHORE MERCHANT ACCOUNTS which run in the 8-10% for rates and you have to incorporate in Panama or somewhere ridiculous.  And these companies hold back a huge percentage of your sales volume as collateral and stagnate it for 6-8mths before releasing the funds to you.

A lesson to be learned in protecting yourselves from chargebacks?

If you are a traditional store retail model, then have your employees trained to keep meticulous account of signed receipts.  Keep reading the latest debit & credit card scams, look constantly for good fraud prevention tips and train your staff.  Look out for suspicious behaviour.

Have everyone put certain things in the exact same spot every time and right after the transaction, so you don’t misplace things because ‘something came up’.

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