How to Protect Your Business Against Chargebacks

February 20, 2024
minutes to read
Warren More
Table of Contents

Running a small business is tough, and among the many challenges you may experience, chargebacks are a common but often misunderstood issue that can significantly impact your bottom line. In this comprehensive blog, we'll delve into the intricacies of chargebacks, their impact on small businesses, and how to prevent them. Moreover, we'll provide real-life Australian examples and statistics to illustrate the significance of this issue for small businesses.

What is a Chargeback?

A chargeback is a transaction reversal initiated by a customer's bank or credit card issuer. It acts as a dispute mechanism, allowing customers to contest a charge on their credit card statement. Chargebacks are designed to protect consumers from fraudulent or unauthorised charges, but they can pose a substantial challenge to small business owners.

In Australia, the prevalence of chargebacks is a growing concern, with an estimated 1.7% of total transactions ending in chargebacks and 86% of those being fraudulent, according to the Australian Payments Network. This highlights the importance of understanding chargebacks and their potential impact on your small business.

Who is Responsible for Chargebacks?

The responsibility for chargebacks typically involves the customer, the merchant (the small business owner), and the payment processor. However, small business owners generally bear the brunt of the financial burden. In Australia, the Australian Competition and Consumer Commission (ACCC) enforces consumer protection laws, which outline the rights and responsibilities of both consumers and businesses in chargeback disputes. When a chargeback is raised, the merchant usually ends up returning the funds and then covering the cost of any related chargeback fees.

Example: If a customer disputes a $200 transaction by raising a chargeback, the merchant will have to cover the $200 refund and also a fee for handling the chargeback, usually in the range of $30-$50 per chargeback.

Common Causes of Chargebacks

In Australia, the primary reasons for chargebacks align with global trends and include:

  1. Fraudulent Transactions: Customers claiming they didn't authorise the transaction, which is an issue present in approximately 86% of all chargebacks in Australia.
  2. Product or Service Discrepancies: Dissatisfied customers asserting that the product or service didn't match the description or expectations.
  3. Processing Errors: Mistakes in billing, duplicate charges, or incorrect amounts.
  4. Unauthorised Subscription Renewals: Customers not aware of ongoing subscription charges.
  5. Customer Dissatisfaction: Unhappy customers who couldn't resolve issues directly with the business.

Example: Let's consider an example from Australia. Sarah, a small business owner in Sydney, runs an online clothing store. A customer, Alex, receives a damaged item and is dissatisfied. Instead of contacting Sarah for a refund or exchange, Alex contacts his bank, initiating a chargeback. This scenario illustrates the need for open communication and an adequate return and refund policy to prevent chargebacks.

How to Prevent Chargebacks

Preventing chargebacks is crucial for protecting your business's financial stability and reputation. In Australia, small businesses can implement strategies to reduce their risk:

  1. Clear Payment Descriptors: Ensure your business name appears on customer statements in a recognisable and consistent manner, making it easier for customers to identify charges.
  2. Excellent Customer Service: Promptly address customer concerns, offering refunds or exchanges when necessary to resolve issues directly and prevent chargebacks.
  3. Robust Refund and Return Policies: Clearly communicate your return and refund policies to customers, making it easy for them to resolve issues directly with your business.
  4. Diligent Accounting Practices: Maintain accurate records of transactions and customer communication, which can be invaluable when disputing chargebacks.

According to the Reserve Bank of Australia, implementing clear and concise payment descriptors can reduce chargeback instances by up to 25%.

How to Dispute Chargebacks

Disputing chargebacks is an option for small business owners. It often involves providing evidence to demonstrate that the charge is legitimate. This can be achieved by maintaining comprehensive records and documentation to support your case. To dispute a chargeback, you can follow these steps:

  1. Gather Documentation: Collect all relevant transaction records, customer communication, and proof of product or service delivery.
  2. Understand the Reason Code: Identify the reason for the chargeback to tailor your response effectively.
  3. Submit a Compelling Response: Craft a well-documented and persuasive response that addresses the reason for the chargeback with clear evidence.
  4. Follow Time Limits: Adhere to the strict timeframes for responding to chargebacks to avoid losing your right to dispute.
  5. Communicate with Your Payment Processor: Keep your payment processor in the loop, as they can provide valuable guidance and support throughout the process.

Are Chargebacks Tax Deductible?

Small business owners in Australia may have questions about the tax implications of chargebacks. Typically, chargebacks are not tax-deductible, but it's essential to consult with a tax professional to ensure compliance with Australian tax regulations.

Can You Get Chargeback Insurance?

Chargeback insurance is available in Australia, offering an extra layer of protection for your business. It can cover losses resulting from chargebacks, allowing you to focus on your business operations. Considering the potential financial impact of chargebacks, exploring the benefits and costs of chargeback insurance is a wise decision. 

Riskified is one such product that can help reduce chargebacks in the e-commerce industry. Its advanced technology leverages machine learning and data analytics to assess and verify real-time transactions, effectively identifying potential fraudulent activities. This tool has gained popularity for its ability to not only reduce chargebacks but also enhance the overall security and efficiency of online transactions, making it a trusted ally for businesses looking to protect their revenue and reputation.

Chargeback FAQs

Can I prevent all chargebacks?

While it's challenging to eliminate all chargebacks, you can take steps to reduce your risk significantly.

How long does it take to resolve a chargeback in Australia?

The resolution time can vary, but it often takes a few weeks to several months, depending on the case's complexity.

Can I dispute a chargeback without professional help?

Yes, you can dispute chargebacks independently, but seeking expert advice may improve your chances of success, especially in complex cases.

Key Takeaways

Understanding and preventing chargebacks is a vital aspect of managing a small business successfully, especially in the context of Australia's financial landscape. By following best practices, providing excellent customer service, and having a clear grasp of the chargeback process, you can protect your business's finances and reputation.

If you're a small business owner in Australia seeking further guidance on handling chargebacks or have additional questions about the Australian market, don't hesitate to reach out. We're here to assist you in navigating the world of chargebacks and safeguarding your business in the Australian business environment.

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360  AFSL 241167 (Regional Australia Bank).  Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you.

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