A chargeback happens when a customer disputes a transaction through their bank and gets their money back on their card. They might do this if they see a double charge, don't receive their merchandise, or find suspicious charges. This situation is called a chargeback. 

Chargebacks and retrieval requests are standard in credit card transactions, though too many disputes against your business may hurt your standing with your credit card processor. As a business owner, you can take preventative steps to lower the chances of these happening.

Why is it important to take preventative action?

Your chargeback rate (or chargebacks-to-transactions ratio) is typically calculated by dividing the total chargeback cases received per month by the number of total transactions processed that month.

If your chargeback rate begins to exceed a certain threshold, then you’re in danger of becoming a high-risk merchant. High-risk merchants are vendors that have been deemed as more susceptible to fraud or represent higher levels of financial risk to their bank. As a result, they may pay higher payment processing fees and are often unable to open a merchant account with many providers.

If your chargeback rate remains above a certain level for too long, card networks and processors may refuse to do business with you, making it impossible to accept card transactions altogether.

Preventing chargebacks

There’s no foolproof method to avoid chargebacks, but we've compiled a list of some of the best practices for preventing them.

Best practices for receiving card present transactions

Card present transactions refer to transactions where the cardholder and card are physically in your business at the time of the sale. During a card present transaction, the cardholder will swipe, insert, or tap their card at the payment terminal. Contactless payments, such as Apple Pay and Google Pay, are considered card present.

• A billing descriptor is the information that appears next to a charge from your business on your customer's bank statement. The Lightspeed Payments team will establish your billing descriptor to be descriptive and easily recognizable, preventing confusion.

• If you receive a decline on the first payment attempt, do not repeat the authorization request. An unauthorized transaction can easily be returned as a chargeback.

• Make sure your sales receipt clearly identifies your business name, location, phone number, and what was purchased. This information will help jog a customer's memory of their purchase and provide them with a means of contacting you if they have questions.

• Make sure your sale/return policies and terms are readily available, actively communicated, and are easy to understand and comply with. If resolving an issue with you is easier than filing a chargeback, then customers are unlikely to seek resolution elsewhere.

• By confirming a customer's identity and/or requiring a signature when a customer picks up their order, you'll have evidence to prove that a sale is legitimate. If you check a piece of identification, do not keep that information once their identity is confirmed. As for signatures, collect them on individual slips for each order rather than collecting them on a single list for all orders. This prevents customers or fraudsters from seeing the names and orders of other customers while they sign.

• Make sure your employees understand and consistently practice the preventative measures above that apply to them.

Best practices for receiving card not present transactions

Card-not-present transactions most commonly refer to sales where the customer is not in the store at the time of payment, such as online or phone orders. These types of transactions are considered to be higher risk than card present payments because you can't verify the legitimacy of a transaction in the same way you can with an in-person transaction.

• Be wary of multiple transaction attempts from a single IP address, as fraudsters may be testing various cards to determine which ones are valid.

• Even though this is not sophisticated fraud, fraudsters may still attempt this tactic. Always check delivery addresses and card addresses as a rule.

• This approach is similar to the one above, except that a fraudster may have shared a card number with other fraudsters, or may be delivering to various locations.

• Fraudsters might test transaction thresholds by attempting lower dollar amounts. Be cautious and aware of multiple cards used in the same order.

• Especially on phone orders, this should raise suspicion.

• Trust your instincts if something feels off, particularly with unusually large orders.

• Multiple instances of different and incorrect expiration dates could indicate a fraudster attempting to guess the number. This suggests they may not have the original card in their possession.

• By confirming a customer's identity and/or requiring a signature when a customer comes in-store to pick up their order, you'll have evidence to prove that a sale is legitimate. If you check a piece of identification, do not keep that information once their identity is confirmed. As for signatures, collect them on individual slips for each order rather than collecting them on a single list for all orders. This prevents customers or fraudsters from seeing the names and orders of other customers while they sign.

If you’re concerned about your chargeback rate and have already carried out the preventative measures outlined above, contact our Lightspeed Payments support team to discuss your options and what else might be done to reduce the number of chargebacks being filed against you.