Retaliatory chargebacks – what are they?

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Chargebacks are a problem for all sorts of businesses and they affect the on-line merchant the most. But I won’t cover that here because we are interested in companies that provide services in the field or in-house and who use card processing to get fast payments.

So, let’s start with – what is a chargeback?

I won’t give you the heavy handed bank version, we don’t have time but it’s when a customer pays your invoice on a credit or debit card and then calls the bank to say that they never authorised the transaction and it is fraudulent. The bank then takes that money out of your account plus fees and gives it back to your customer. You get a letter telling you that you’ve had a chargeback or ‘retrieval’ from the customer, the amount that has been taken from your account and what your next steps are.

Why do customers make chargebacks?

In our industry it is generally two things. The first and least often is a genuine mistake often called ‘Friendly Fraud’ where the customer doesn’t recognize the transaction because the invoice from the business and the name of the bank statement don’t match. So for example you are Acme plumbers but you process your payments as Heating and Plumbing Holding Company Ltd.

The second, and unfortunately more often cause is what’s known as a ‘retaliatory chargeback’. They stem from a disgruntled customer who doesn’t feel they can get anywhere pursuing the proper channels to get satisfaction or someone more malicious who is happy to engage the bank to do the dirty work for them. And the banks make it very easy to make a chargeback. It takes less than 10 minutes on the phone and there are no consequences to the customer of making a fraudulent claim regardless of the evidence providing by the merchant (that’s you).

The consequences of a chargeback

Obviously the money you earned for the service and even materials you provided are at risk. You will also have to pay the card processing fee and a chargeback fine of between £10 and £30. The bank will call you you and start asking questions about your suitability to process cards if you start getting enough of them and your merchant may increase your processing fees because you are ‘risky’. And of course there is the administration overhead of collating all the information necessary to fight the chargeback.

How often do chargebacks occur?

In my experience chargebacks are pretty rare if you are trying your best to provide a good service. I would say that less than 1% of jobs end up in a chargeback.

How to defend against chargebacks.

Evidence is key. You need to keep records of invoices and any correspondence you’ve had with the customer because basically they are saying that they have not had the service from you and it is a fraudulent charge. Once you send those details to the bank, generally it becomes obvious that you have provided a service and the chargeback will fail so you’ll get your money back. It can be a long and painful process however. If you use good software (and you know what product I’m talking about here) and keep your CRM up to date with all the relevant information, you will have a much greater success rate in defending chargebacks. In fact I cannot recall ever losing one and in the seven years of business and we did maybe 10,000 jobs a year.

How to prevent chargebacks

Ideally, you don’t want chargebacks from customers at all. While a few are inevitable, you can minimize them by making it easy for your customers to get hold of you in the event of a dispute. Talk to them and address their concerns. Try and put whatever is bothering them right – sometimes even if it isn’t your fault, have a complaints procedure on your website that spells out how a dispute will be managed and some good terms and conditions of service – you’ll be surprised how seriously customers take T’s & C’s.

To sum up.

Chargebacks are irritating, too easy to do from the customers perspective, have no consequences even if they are fraudulent and can cost you hours in red tape. But they are still no reason to stop taking credit and debit for payments as the speed and security of a card payment vastly outweighs the downsides.

2 Comments

  1. Catherine

    I made a faster payment to HSBC to a company which is fraudulent and under investigation with action fraud. If my bank claims chargeback from HSBC is my money likely to be returned?

  2. admin

    Hi Catherine, Faster Payments doesn’t have anything to do with card transactions, it’s where you transfer money from one bank account to another. As you didn’t purchase this product or service using a card, you can’t use the chargeback process to recover your money.

    There is a good article about Faster Payments here http://www.fasterpayments.org.uk/about-us/how-faster-payments-works

    You’ll have to wait to see if your bank refunds you for this but they are under no obligation to do so unless they have been negligent in some way, or they can recover the money before it has been removed from the account. I think it is unlikely, I’m afraid

    There is a good article here about getting your money back from an insolvent company
    http://www.moneysavingexpert.com/shopping/company-administration-help

    and another here about different types of bank fraud. http://www.thisismoney.co.uk/money/news/article-2807562/We-treated-contempt-Ripped-s-money-back.html

    Hope that helps.

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