Why Chargebacks May be the Biggest Threat to Small Businesses

Business owners are intimately familiar with how fragile their operations are. Even if everything is going well at the moment, they have to stay alert for any hidden threats to their operation. Even chargebacks that might seem small at the beginning can have substantial hidden costs that can threaten the whole operation with closure. It is vital that businesses prevent such from happening.

What are chargebacks?

With more and more dependence on cards and online transactions, the frequency of customers opting to physically go to the store and then use cash for purchase has reduced significantly. After all, it is safe to pay by card and allows one to keep track of their spending. So, you simply just can’t avoid having a card-paying facility with your service. But this results in another issue of chargebacks.

Chargebacks are simply the approved claim of a dispute filed by the cardholder for any charge that is placed on their card. The cardholder simply has to notify the bank about the dispute, and the business will get a pending dispute notice. A business can either accept the claim by the cardholder or appeal them to the bank. If you approve the dispute or your appeal is denied, you will get a chargeback.

Now, you might be thinking, ‘Is it not the right of a customer to ask for their money back when they are unsatisfied with the product or service?’ And you would be right. But it really does not mean that every chargeback claim must be authentic. Sure, many of the claims can be genuine, but there is also a sizeable portion of the chargeback that a business has to incur due to the fraud attempts. And one of the most common ways for criminals to get away with it is by process of what can be termed as ‘friendly fraud chargebacks.’

What are friendly fraud chargebacks?

In simplest terms, these are the approved claims that are based on false premises. Criminals use a credit card for the payment and then claim that they have not received the product from the supplier. This is a major issue in the eCommerce business, especially for small businesses, and sadly the cases of friendly fraud chargebacks are only on the rise. In fact, it has been observed that after a successful friendly fraud chargeback, criminals would more than likely target the same business again in the next three months.

The impact it has on the small businesses

Small businesses are often the most common target for such criminal activities. Not only because they do not have much protection from such friendly fraud chargebacks, but there is also the threat of them losing the reputation and the image in the market they have worked so hard to build.

Once hit by a chargeback, even with a genuine one, the business would be impacted not just one but in three different ways.

First, they will lose the revenue from the transaction as they would be compelled to return the whole amount or at least a large portion back to the cardholder. It is certainly not a piece of good news for businesses that are operating with a tiny margin for profits. This could have a far-reaching effect on the businesses, even when they are handling a genuine request.

Secondly, there is a chargeback fee that will be levied upon the business by the payment processor with every chargeback the business has to handle.

And finally, the chargeback rate is not consistent, and it would result in the business having to pay more with every chargeback. Businesses that entertain more than what can be considered optimal chargeback rate would be labeled ‘high risk,’ – a label every business should avoid at all costs. Not only would it impact the average chargeback fee the business would have to pay, but it can also have an impact on the company’s credit standing. After all, why would any financial institution want to work with a risky business unless there are some perks involved in the deal?

Running a business is not an easy task, something that is evident by the fact that the majority of start-ups fail in their first year. So, it is vital that business owners look for threats at every corner, and chargeback can be a fatal one. It would be best for small businesses to be prepared for this sooner rather than later.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.