You rely on your customers to keep your cash flowing.
To a bootstrapper, cash flow is critical.
But what happens if a customer decides they want their money back?
Customers—credit card holders—have the right to dispute a transaction after it’s been made if they claim they have a good reason.
The transaction is reversed if the bank or institution that issued the card (the issuer) agrees with the customer’s reason for the dispute. It puts your money back onto the customer’s credit card.
This reversal of the transaction is called a chargeback.
Chargebacks take your cash away after it’s in the bank. Then they assess extra fees on top of that.
You may not even know the customer is unhappy until you are notified of the chargeback and the money is taken from your account.
Chargebacks can damage your business in several other ways, too.
What can you do?
Let’s discuss this situation.
We’ll get clear on what you must do to reverse a chargeback.
Even better, let’s also talk about how to avoid chargebacks before they happen. This is the best course of action.
What Happens When You Get a Chargeback?
A chargeback can be damaging, especially early in a bootstrapper’s history.
Financial loss
When a chargeback is issued, you lose:
The revenue from the transaction.
The goods or services already delivered.
Associated costs of the goods or services.
Additional fees assessed due to the chargeback.
Cash flow disruptions
Chargebacks that disrupt your cash flow make managing expenses, investing in product development, or paying for marketing difficult. This slows growth and threatens your business.
Increased processing fees
If you have a high number of chargebacks, your business is considered high risk.
The payment processors punish you for this additional risk with higher processing fees, which eat into your margins.
Reputational damage
Excessive chargebacks, usually at a rate of more than 1% of your total transactions, damage your business’s reputation with payment processors and banks.
If the payment processors terminate your use of credit cards as payment, your business could cease to function.
Harm to brand and loss of customer trust
Having frequent chargebacks means your customers aren’t happy.
If chargebacks continue, it’s a sign they’ve lost trust in your brand. They don’t like how you’re doing business. This makes it hard to attract new customers.
Resource drain
You can fight chargebacks, but doing so drains the time and resources you need to develop your product, provide excellent customer service, and grow your business.
You don’t want to lose the revenue and fines that accompany chargebacks, but the administrative costs of fighting them are significant.
How Can You Protect Yourself?
You need effective, proactive strategies to minimise the risks of chargebacks.
These strategies must be built into your business from the beginning. They amount to running your business in a transparent and customer-focused way.
This good business approach is essential for you and your customer, who does have the right to file a dispute against you for cause.
Clearly identify your business name on the credit card statement. Maybe your customers don’t recognise you and think the charge is fraudulent.
Provide clear and accurate product descriptions. Make sure your customers know exactly what they’re getting. If they think something is wrong with your product, they may dispute the transaction.
Make your return, cancellation, and refund policies clear and prominent. Ensuring the customers don’t feel trapped in the transaction reduces the instances of chargeback disputes. Check out our refund policy generator for help.
Offer excellent customer service. If your customers feel well taken care of, they are much less likely to dispute the transaction without talking to you first.
Make it easy to contact you. This is an effective way to defuse any potential chargeback situation. They may solve their issue before resorting to a dispute if they can communicate with someone.
Early on, when possible, use automated chargeback prevention services to eliminate the problems associated with excessive chargebacks. For instance, chargeback alerts allow you to refund an unhappy customer before they can dispute the transaction. Once refunded, no chargeback is possible.
How Do I Fight a Chargeback I’ve Received?
Certainly, cardholders have the right to dispute a transaction.
But you have the right to defend yourself against a chargeback imposed by the bank.
The process is a bit complicated and strictly regulated. The basics are these:
You are notified of a chargeback by the issuing bank. In that notification is a Chargeback Reason Code. This code tells you why the customer complained. You will fight back against the reason given by this specific code.
Gather all your evidence. If you have an automated system, all the necessary transaction details should have been collected and made available. You’ll need all the evidence to bolster your argument against the chargeback reason code.
Write a compelling rebuttal letter. Here is where you make your argument—including all the evidence—that the transaction was legitimate and the chargeback should be overturned. Keep your rebuttal clear, concise, and professional. And persuasive.
Strictly adhere to all submission deadlines as listed in the chargeback notification. If you miss a deadline, you can assume you lost the fight.
If possible and appropriate, you might communicate directly with your customer to smooth things out. Resolving the dispute amicably lets the customer contact their bank and call off the chargeback.
IF YOU LOSE: Consider changing your business practices, making your operations more transparent, your communications more understandable, and your customer service the best it can be.
IF YOU WIN: Use this experience to better protect yourself from chargebacks in the future. Examine your protection strategies and fortify them.
Looking Forward
If you need further clarification on this whirlwind tour through chargebacks, you can contact us.
We can also set you up with a free demo of ChargebackStop, which prevents chargebacks before they happen, especially for indie hackers and bootstrappers looking to scale quickly.
