What is a chargeback?
A chargeback is a way for Visa, Mastercard, and other card providers to protect consumers from fraud. It allows a consumer to query a charge within 6 months of the purchase to try and reclaim the money. The bank will take the money out of the business’s accounts and freeze it while they investigate the claim. The business will need to supply proof that they provided the services paid for.
However, if a business failed and no longer exists when the consumer makes a chargeback, then the bank will wear that cost. This is why banks will analyze businesses for risk on an ongoing basis. They don’t want to be stuck with the chargeback.
How do banks analyze a business for chargeback risk?
Merchant account providers will use two different methods to reduce the risk of chargebacks. Companies like Stripe or PayPal will not assess the risk upfront. Their business model hinges on the fact that it is very easy to set up. There may be an initial trial period where payments take longer to be released to your account until they verify that your company is legitimate. However, their risk analysis is ongoing, and they can decide at any time to freeze or close your accounts if they perceive a risk. This can be problematic for business owners who no longer have a way to accept payments and be left in the lurch.
Traditional merchant account providers like banks and credit unions will use underwriting to analyze your business risk. This can be a lengthy process, and they will need a lot of information about your business upfront. Even though they go through this lengthy underwriting process, a bank may also decide to close your accounts if they perceive a risk. It may not even be a risk for your business; specifically, they may have had difficulty with another business in your industry and decide to pull out of the industry altogether.
How do merchant account providers measure chargeback risk?
Banks and other merchant account providers will look at the percentage of disputes to the sales volume first and foremost. However, they will also look at the value of the disputes. For example, 2% of disputes for a business that does $100,000 is not problematic. However, 2% for businesses doing $10 million is an alarming number for a bank. Remember, they will have to cover any disputes that may occur if your business closes down. A $10 million business with 2% dispute rate means they might be on the hook for $100,000 (six months of potential chargebacks).
How can sellers make themselves less risky to banks?
It is important to remember that even if you do everything right and build a good relationship with your merchant account provider, you may still have your account closed. In this article, we can only focus on the things we can control.
The answer to how to lower your risk is simply to reduce your chargebacks.
How do I reduce my chargebacks?
The best way to reduce your chargebacks is to have a good refund policy and customer service support. By giving customers back their money if they are not satisfied, they will not chargeback.
Ensure your customer service details are clearly visible on your website. Try and have a phone number or online chat as well as an email address so customers can get in touch with you quickly and easily.
If you have a subscription service, send customers a reminder before a payment comes out with details of how to cancel their subscription and the customer service contact information. Your customer will not feel the need to resort to a chargeback.
Another great way to reduce chargebacks is to include your customer service number in your banking descriptor. When customers see a charge on their account, they will see your number and call to dispute the charge rather than just charging back.
Visa and Mastercard now offer a chargeback service that will notify you when a chargeback is filed. If you refund the customer within 48 hours, it will not become a chargeback at all. This is perhaps the best chargeback management system out there for businesses.
Other ways to reduce the risk of merchant accounts closing
Another way to reduce the risk of a merchant account closing is to have multiple merchant accounts. If you make over $1 million in annual revenue, you need to have more than one merchant account. That way, if one closes, you can quickly cover the gap.
However, a lot of credit card processing companies and merchant accounts will use the same bank. Therefore, you need to do the research to ensure you open multiple merchant accounts that use different banks to reduce the risk. Easy Pay Direct offers this service to make diversification easier. It is much simpler to have someone set it up correctly for you than to discover the hard way that you didn’t do it right.
