If you didn’t already know, when you operate a business that accepts payment via credit cards, you will eventually have to deal with chargebacks. Hopefully, you won’t have to deal with more than one a year, but it’s going to happen. They likely won’t be a big deal, but it can be frustrating when it happens. This chapter will help you keep things in perspective.

Dealing with Chargebacks

Chargebacks are designed to help credit card customers who have been taken advantage of by unscrupulous businesses. A chargeback is the payment industry term for when you dispute a charge on your credit card. Unfortunately, chargebacks can also be abused by card holders to take advantage of honest businesses.

Chargebacks are inevitable. I always answered 90% of our support requests in less than half an hour and worked hard to take great care of our customers. But Sifter still had four chargebacks over eight years. Each time, there was absolutely no way we could have anticipated or prevented them. The customers never contacted us; they just called their credit card company. In every case, they claimed to have tried to contact us, but they never actually did.

The underlying problem in most of our cases was that the card holder had provided the credit card to an employee or co-worker and–somewhere along the way–they had miscommunicated. We didn’t do anything wrong; we simply weren’t given an opportunity to help.

The best approach to reduce your chargebacks is to proactively minimize communication problems at your customers’ end. I’ve found that the following steps can really help.

Pay for Your Own Product

You may be tempted to give yourself a free account on your own service, but I’d strongly suggest that you pay for it like all your customers do. Sure, you’ll lose a little money in transaction fees, but you’ll gain insights by seeing exactly what your customers see on their credit card statements. If your company’s address, phone number, or other information ever changes, it can be easy to forget to update the information that appears on your customers’ credit card statements. Paying for your own service helps address that, and it makes it easier to stay on top of the other tips in this section too.

Review Your Credit Card Line-Item Description

When you sign up for a merchant account, you’ll probably provide a company name without giving it much thought. You might not realize it, but this is what shows up as the line-item description on your customers’ credit card statements. Work with your merchant account providers to come up with a line-item description that people will recognize immediately. The last thing you want is for customers to dispute charges because they don’t recognize your company’s name.

Review Your Credit Card’s Line-Item Phone Number

Similar to the line-item description, your customers will see a phone number next to each line item. Make sure it’s a phone number with either a voicemail message explaining the charges or a person who can help when customers call.

Allow Your Customers to CC Others on Invoices or Receipts

From the very beginning, you should add a feature that allows your users or account holders to add at least one email address to receive copies of all their invoices and receipts. If the card holder or bookkeeper happens to be different from the account holder, they’ll still be in the loop on billing. This is handy for more than avoiding chargebacks. It makes life easier on your customers when they can automatically copy the accounting department with every receipt or invoice.

Have a Clear and Reasonable Refund Policy

If you state outright that you don’t provide refunds, people will be more likely to use chargebacks. With recurring payments, people often forget about a charge, don’t use a product for three months, and then have their card company issue a chargeback for those three months.

Make sure it’s clear what circumstances justify refunds, and make those guidelines readily available. With hosted software, refunds are virtually just a great method of customer service. I would regularly refund the last month of service to people who canceled. We had the data and we could easily tell when they last used it. If somebody’s not using it, it didn’t cost us anything.

While you probably don’t want to issue refunds right and left, I’ve come to believe they’re just a good practice to be fairly free about. It won’t break the bank, and it’s usually faster and simpler to just do it. If someone hasn’t used your product in three months and just forgot to cancel, think of that refund as a marketing cost.

Don’t Worry Unless They Become a Regular Thing

Even after taking all of these steps, you’ll probably still encounter chargebacks now and again. Unless it’s a recurring problem, you shouldn’t let them get you down–you really only need to fret about chargebacks when you receive enough that your merchant account gets uncomfortable and warns you about cutting off your account. But as long as you’re running an honest business, the chances of that are pretty slim.

Keep It All in Context

Of course, chargebacks are lost money, but often the cost of your time to dispute the chargebacks isn’t worth it. No chargeback at Sifter was worth more than $50. With the first couple, I spent at least an hour of work and several more hours of general anxiety trying to dispute the charges and get the person to reverse the chargeback so I could refund them directly.

In every case, we had done nothing wrong, and–had they asked–I would have given them a refund immediately. It would have been much faster than dealing with the credit card company’s process.

It’s tough to not dispute chargebacks on principle when it’s clear the person didn’t even try to contact you, but the cost of fighting it isn’t worth it. And, if you get enough that it is worth it, set up a process to streamline everything. If you’re not receiving enough chargebacks to be on your merchant account provider’s radar, then your time is probably better spent elsewhere. Do what you can to minimize chargebacks, but don’t get too caught up fighting them.

How we reduced chargebacks by 30% (as a percentage of sales) Jason Fried explains how 37signals made a simple change to help reduce chargebacks.