Why High Chargeback Rates Can Get Your Merchant Account Canceled
A credit card refund is the repayment of a sum of money, usually to a customer who is dissatisfied with a product or service they paid for. Ideally, a customer will first request a refund directly from the merchant; however, when a customer is unable to get a direct refund from the merchant, they will contact their bank or credit card company to request their money back, which in this case is called a chargeback. Unfortunately, if your business has too many chargebacks, there are consequences.
Regardless of the disputed amount, a chargeback can cost a merchant hundreds or thousands of dollars annually once all the chargebacks are accumulated. In fact, too many chargebacks can get your business blacklisted or can even cost your business its merchant account altogether. If your business has a high chargeback rate, this may cause your merchant account to be suspended, canceled, or will badly impact your transaction cost.
What Is a Refund?
A refund is a return request for the funds used to purchase a product or service. Typically, this occurs because the customer is not satisfied with the services or goods bought. While the circumstances or reasons behind the refund request may not be your fault, the customer may still insist on getting their money back.
What Is a Chargeback?
If there is a miscommunication, delays, or disagreements between the merchant and the customer, they may refer to their bank or financial institution to resolve the matter, which may result in a chargeback dispute.
Once a chargeback dispute has been filed, the bank will conduct an investigation and review the dispute, during which a merchant may provide transactional documents that will validate or disprove the dispute. It is up to the issuing bank to determine whether or not to reimburse the customer.
Unfortunately, merchants may incur fees related to the chargeback process in addition to the lost revenue if the issuing bank makes a decision in favor of the customer, not to mention cases of friendly fraud merchants often have to contend with as well.
Why Merchants Should Beware of Chargebacks
It may not seem harmful but too many chargebacks can lead to merchant account suspension, which means your business can lose the merchant account. Each completed chargeback affects the revenue of your business.
If your business has too many chargebacks, you might have to apply for a high-risk merchant account, which results in higher transaction fees. With a high-risk merchant account, you can expect:
- Pay higher account fees
- Higher processing fees
- Fewer pricing options
- Transaction limits
- Higher chargeback fees
How to Avoid Chargebacks
Although a refund still results in revenue loss, there are no additional fees, so only the value of the product is lost, which is only minor harm to your business. By handling a refund request directly with the customer, you can demonstrate exceptional customer service, thus fostering loyalty, which benefits your business in the long run. Additionally, a refund saves your company any chargeback fees as well as the consequences of a high chargeback rate.
How to Handle Chargebacks
Chargebacks are inevitable, however, so it’s important to have a chargeback strategy for success. The first step in managing chargebacks is to partner with a reputable payment processing company you can trust who offers chargeback prevention tips to make sure your business continues to thrive.
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Mitchell Fardell is a highly experienced payment processor who has worked for First Card Payments since 2019. In that time, he has worked on large accounts, small accounts, and everything in between.
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