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Manage your business

5 key ways to help small businesses avoid disputes

Protecting against chargebacks so your bottom line doesn't suffer


Charles Wallace

| Jan 16, 2020

The following is part of an educational series intended to help small business owners avoid disputes by offering best practices and tips, brought to you by Chase Merchant Services.

Disputes, sometimes referred to as "chargebacks", are when purchases are rejected by the credit cardholder after the purchase. They are important because they aren't just a drag for small business owners. They're also incredibly costly and happen for a number of reasons: a consumer does not recognize the charge; the goods or service provided failed to live up to expectations or were not received; or fraud.

Regardless of the reason, when a consumer initiates a dispute, the credit or debit card charge is reversed by the card issuer and funds are deducted from the merchants' account. More often than not, that revenue never returns: according to the Federal Reserve, between 70 and 80 percent of disputes wind up as merchant losses.

Disputes are costly in other ways, too. Major credit card networks monitor dispute activity for all their merchants; if the percentage of chargebacks to transactions (known as the "chargeback ratio") exceeds 1%, merchants can face fees and penalties.

Here are five steps you can take to avoid disputes, and how to handle them when they occur:

1. Use a consistent company name

One of the most common causes of disputes is that a customer doesn't recognize the name of the business on the credit card statement, and calls to cancel the charge. This is common with a company that owns several stores with different brand names, but issues the charges through a different company name. To avoid disputes, make sure your "doing business as" name is the same as your store name so it will appear on card statements as something customers recognize.

Customers often use disputes when they don't want a product they ordered or to pay for the return postage to send it back, says Chris Ward, who runs an online store in White, Georgia. To avoid paying, some customers will dispute charges, claiming the item was not what they expected, or damaged when it arrived. "They'll claim whatever they need to make you pay return shipping," he says.

2. Carefully document the entire sale process

Ward and other merchants recommend keeping detailed records about orders, including making a video or creating other documentation when you open returned packages to prove the item was not damaged or different from the original description. By maintaining valid, legible documentation, your chances of successfully responding to a dispute will significantly improve.

Another strategy is to reach out to the consumer directly, says Erik Groset, who runs an online fantasy sports website. In this case, online merchants may have an edge since, unlike brick-and-mortar retailers, they likely have email addresses or other contact information for their customers. Although this strategy is time consuming, "Most disputed charges can be resolved amicably," Groset says.

3. Ensure a clear return policy

If your business conducts sales in person, order credit or debit card sales receipts pre-printed with your return policy. Make sure the cardholder signs the receipt at the time of the original sale.

Avinash Koduri runs a small electronics and appliance store in Herndon, Virginia. He gets three to four disputes a month, almost all of them coming from customers who bring in their cellphones to have a broken screen replaced, a repair that can cost around $100. Customers were disputing charges after leaving the store, claiming the repair was defective in some way.

Koduri says the store has implemented a new policy: customers are required to examine the phone at the time of payment, and must sign a form indicating the phone is working fine, and that the repair work is approved after the work is completed. "Now that I can submit these signed forms and before and after pictures of the completed repair I have been able to convince the bank that the transactions were approved and genuine," Koduri says.

4. Use postal service tracking

Another common issue is when a customer says they did not receive a product or service. To avoid this, ship using official tracking through a post office or other delivery service. If an item is expensive, says Ward, he often will use the signature confirmation facility offered by shippers. That way, if there is a dispute, he can generally show that the card owner signed for the goods.

Disputes are often labor intensive and time consuming to process; it generally takes three months, and supporting documentation must be sent back and forth by mail or fax. One way to avoid this problem is by using an online tool such as Chase Merchant Services' online chargeback management system. This is an electronic tool used by both merchants and Chase's team that can reduce the amount of time it takes to respond to disputes, upload documents and track the progress in real time.

5. Take advantage of new technology

Mobile technology now enables businesses to increase sales and enhance the customer experience. For example, a small businesses can take a mobile payment at the front of the store while there's a line at the back with the register.

"It's also important that your business is able to accept chip-enabled cards as soon as possible, if you aren't already." says Laura Miller, President for Merchant Services Commercial Banking Segment at JPMorgan Chase. "You will reduce the liability that you have on disputed charges to your business due to counterfeit or stolen cards."

She added that keeping your systems updated with the latest software and technology to protect customers and business owners from fraud is critical. For example, new industry standards are asking that all payments terminals comply with SHA-2, the latest encryption, and it's fundamental for keeping businesses and their customers protected and secure.