Preventing chargebacks is important for every business that accepts payment by credit card, but not all businesses are equally impacted by chargebacks. Banks and payment processors categorize businesses as high, medium, or low risk, factoring in information about the industry, ownership, and other details of the business. This risk assessment can determine the cost of chargeback fees and the number of chargebacks that business's merchant account is allowed to incur within a given span of time—their chargeback threshold.
Every merchant wants to know how to stop chargebacks, but the methods can be a little different depending on how and why those chargebacks are occurring. Prevention strategies that work for low-risk businesses aren't necessarily as effective as those for high-risk businesses.
However "risky" your business is, chargeback prevention is of utmost importance. Aside from the loss of revenue—which can run more than double the amount of the original transaction being disputed—exceeding your chargeback threshold poses very real dangers for a merchant.
Some payment processors will move your account into a higher risk category, charging you more fees, or you could lose your merchant account entirely, forcing you to sign up with an expensive "high-risk" payment processor if you want to keep accepting credit cards.
How Low-Risk Businesses Stop Chargebacks
Merchants that sell their products in a card-present environment—where the customer physically hands you their card and you process it in front of them—make up the bulk of the lowest risk tier. Some online retailers that sell physical goods at a low volume may also be considered low-risk.
Low-risk doesn't mean chargebacks never happen, of course, and if you want to stay at that low-risk level, here are some chargeback prevention tips that might be relevant to your business:
Most online retailers will fall under the medium-risk category, as well as card-present retailers who sell products for which a strong secondary market exists, like jewelers, high-end fashion shops, or ticket vendors.
Here's how medium-risk businesses can stop chargebacks:
Businesses are considered high-risk when they carry high rates of fraud or losses. This often means a card-not-present transaction environment, and ephemeral products like online subscriptions with recurring billing. Some industries, like travel or gambling, are considered inherently high-risk.
You might also be classified as high-risk if you have a chargeback rate higher than 1%. Other individual factors may also come into play.
But even high-risk businesses have ways to stop chargebacks:
Dealing with chargebacks might make you feel like you need therapy sometimes, but that's not the professional help we're talking about. Sometimes, effective chargeback prevention is just more than a small business can take on by themselves. That's when it makes sense to outsource those efforts to a chargeback management company.
A good chargeback management company will have the expertise to handle both prevention and representment and will have staff on hand at all times to issue immediate responses to chargeback notifications. Outsourcing can be costly, but for merchants who are about to cross their chargeback threshold, they can be well worth every dollar spent.
Want more guidance? Download our eGuide, Chargeback Prevention: Tips for Low-, Medium- and High-Risk Businesses today.