The Impact of Chargebacks on Small Business

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Every small business owner knows that in order to make their enterprise succeed, they’re going to have to take on many roles: manager, accountant, marketer, HR—and sometimes, chargeback specialist. Handling payment disputes isn’t one of the more pleasant aspects of running a small business, but it’s necessary.

No business can afford to write off chargebacks as an unavoidable fact of life. Chargebacks can eat into revenue and cause major problems for merchants, especially smaller ones without a lot of resources to fall back on. What do small business owners need to know about dealing with chargebacks?

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When you launch a business, one of the first things that signifies that you’re ready to step into the big leagues is when you start accepting credit card payments. Getting set up with a payment processor and acquiring bank is a major commitment to your venture, but you can reach far more customers when you accept the payment methods they prefer.

Once you have a proper merchant account set up, you can take credit card payments and begin to compete on an equal footing with more established merchants.

Payment card transactions can be more complicated than they appear from the customer’s point of view, but no aspect of the payment card ecosystem causes more headaches for merchants than the dreaded chargeback. They do serve an important role in that they reinforce consumer trust in payment card systems by providing recourse against credit card thieves and fraudulent merchants.

The downside is that the chargeback process can be abused by unscrupulous customers, and when merchants get hit with illegitimate chargebacks, the burden of proof is on them to convince the cardholder’s bank to reverse the chargeback.

In order to protect themselves from the serious consequences of uncontested chargebacks, merchants must take the time to develop and implement a plan to prevent fraud and disputes.

What are Chargebacks?

The Fair Credit Billing Act of 1974 granted consumers the right to dispute credit card transactions that were made without their authorization, or when they don’t get what they paid for. When a cardholder disputes a transaction, their issuing bank can provide them with a chargeback: a reversal of the transaction that takes the money back from the merchant and returns it to the cardholder’s account.

Every chargeback comes with a reason code that explains the nature of the cardholder’s dispute.

There are three categories of chargebacks:

  • True Fraud chargebacks, where the cardholder is disputing a transaction that was made without their knowledge or authorization.
  • Merchant Error chargebacks, where the merchant has failed to live up to their end of the purchase agreement with the cardholder.
  • Friendly Fraud chargebacks, which are chargebacks that are based on false or erroneous premises.

True fraud chargebacks typically result from credit card theft. Merchants can proactively avoid these chargebacks by utilizing anti-fraud tools and best practices. Merchant error chargebacks can occur for a variety of reasons, and they may come down to subjective disagreements between the merchant and the cardholder.

Friendly fraud chargebacks will show up with a reason code that specifies some type of true fraud or merchant error, but upon investigation it will turn out that the cardholder was either mistaken or intentionally deceptive when they disputed the transaction.

Why Are Chargebacks So Dangerous for Small Businesses?

Manage Chargeback In-House Or OutshoreThree things happen when you get a chargeback, and none of them are good for small businesses.

First, you lose the revenue from the transaction. For upstart merchants operating on thin margins, this can cut deeply into profits.

Second, you have to pay chargeback fees. These are automatically levied by your acquirer or payment processor every time you receive a chargeback, and can range anywhere from $20 to $100.

Third, your chargeback rate (your ratio of chargebacks to transactions) goes up. When this rate exceeds 1%, the card network may force you to enter into a costly and inconvenient chargeback mitigation program.

If you can’t get your rate to come back down, you can eventually lose your merchant account—and with it, your ability to process credit card payments.

Merchants who suffer this fate may be labeled “high risk,” which limits which payment providers will do business with you.

When fees and overhead are factored in, the average chargeback can cost well more than double the original transaction amount. This revenue loss, combined with the threat of carrying an excessive chargeback rate, means that when a chargeback problem gets out of hand it can quickly spell doom for unprepared merchants.

How Can Small Business Owners Protect Themselves from Chargebacks?

Keeping safe from chargebacks requires a multilayered approach that addresses the root causes of your chargebacks. To know your root causes, you first have to analyze the data from the chargebacks you’ve received to learn exactly how and why they occurred.

Some true fraud chargebacks may be unavoidable, but anti-fraud tools and strong security measures can keep them to a minimum. Merchant error chargebacks can be prevented by addressing the operational errors that led to then. In general, excellent customer service and a generous return policy can go a long way toward neutralizing disputes.

When a customer reaches out to you with a problem, find a way to resolve it in a way that makes them happy—if you don’t, there’s a good chance they’ll go complain to their bank instead.

Merchants can fight friendly fraud chargebacks—and beat them—by engaging in chargeback representment. This is when you present a disputed charge a second time, along with compelling evidence that disproves the cardholder’s claims. It’s important to keep detailed transaction records and save customer correspondence so you can fight back when necessary. 


Small business almost always means that staff resources are stretched thin. Even when you’re the owner and sole employee, chargebacks must be addressed or they can become an overwhelming crisis before you know it. While it’s always possible to educate yourself about the best ways to prevent and fight chargebacks, remember that help is out there if you need it.

By working with a reputable chargeback management firm, merchants of any size can gain insight into what’s causing their chargeback problem and what they can do to fix it.

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