Chargebacks – how can small businesses avoid them?

Many businesses have moved online and adopted card payments since 2020. With this change, small businesses are having to deal with customer chargebacks more frequently.

But with the right strategies, small business owners can reduce the number of chargebacks they receive, mitigate their risks, and resolve them quickly. Read on to find out how.

What is a chargeback?

A chargeback is a type of payment dispute where a customer is refunded their money by their bank after flagging a transaction as fraudulent.

The reason a chargeback can cause problems for small business owners is because they’re usually unaware it’s happening until the money leaves their account. The customer contacts their card company directly and they issue the refund.

There are two reasons customers can successfully claim a chargeback: for a fraudulent and non-fraudulent transaction.

A fraudulent transaction is when a customer’s card is used without their knowledge for something they did not purchase. A non-fraudulent claim is when a customer buys something but there’s an issue with the order like a cancellation or a failed delivery.

Small business owners must then dispute the chargeback themselves if they feel the purchase was incorrectly refunded.

Section 75 consumer credit act – why it matters

SMEs need to understand what the law says about chargebacks and why they exist.

Section 75 is a UK consumer protection law that protects people making purchases with credit and debit cards. Although it doesn’t directly relate to chargebacks, the implications are important to understand.

When a purchase is made between £100 and £30,000, the card supplier is jointly liable for any breaches of contract or misrepresentation related to the purchase.

So, when a customer successfully invokes Section 75, it will trigger a chargeback.

How to avoid chargebacks

The reason chargebacks present an issue for small business owners is because they’re not always done for the right reasons.

Sometimes customers can claim a chargeback if they don’t think a product is going to arrive, if it’s different to what they were expecting, or if they think the price is incorrect.

There are times, however, when these reasons aren't correct, and a small business owner has to take the time to dispute the chargeback while not having the money from the sale or the product.

There’s also the intentional abuse of Section 75 where someone fraudulently claims a chargeback and keeps the products.

Businesses experiencing frequent chargebacks can have difficulties with cash flow because they suddenly have less money than expected.

SMEs can use several strategies to avoid chargebacks with customers.

Clear communication

Clear explanations about your products and payment process can help reduce the chances of your customers mistakenly claiming a chargeback.

Consider how you’re communicating these things to your customer:

• product descriptions – make sure your product descriptions are detailed so there aren’t any surprises for your customers
• pricing – the final price of the purchase should be clearly stated, including a breakdown of shipping costs and any extra fees
• shipping information – explain clearly how long it’s likely to take for the product to arrive
• return policy – make sure it’s easy to find and written clearly. If they understand your return policy they’re more likely to resolve it with you, rather than their card provider

By making these things clear, you manage your customer’s expectations and reduce the chance of customer disputes.

Great customer service

Being easy to contact and helpful with your responses can reduce the risk of chargebacks. If a customer knows they can contact you about an issue, it’s more likely you’ll resolve it without the sale being cancelled.

This goes for complaint management too. Engaging with feedback on social media, review platforms, and email can stop issues before they escalate into a chargeback.

Usually, customers initiate chargebacks because they think it's easier than going through the company. Customer service that makes people feel their concerns will be addressed should help prevent unnecessary chargebacks.

Recognisable billing descriptors

A billing descriptor is how your business will appear on a customer's bank statement. Make sure that it’s instantly recognisable as your business otherwise it could lead to confusion.

When someone doesn’t recognise a transaction on their statement, their response could be to contact their bank and initiate a chargeback.

Fraud prevention

If someone makes a fraudulent chargeback against your business, you’ll need to dispute the claim to show that the purchase was legitimate.

The following things can be used as evidence in your defence if you suspect someone is fraudulently claiming a chargeback against you:

• shipping method – using a shipping method that offers tracking and requires a recipient's signature shows that the delivery was successful
• transaction records – maintain detailed records of your customer transactions including invoices, receipts, shipping information, and customer correspondence

It’s also worth taking precautions with abnormal orders that:

• have a much higher total cost than usual
• have multiple orders from the same customer

These are signs of potentially fraudulent transactions that could result in a chargeback dispute.

More useful guides for small businesses

• Best business savings account
• Best business bank account
• Best card readers for small business
• What’s public liability insurance?

Have you had issues with chargebacks in your business? Let us know in the comments below.