The dreaded Chargeback - a topic that some know very little, or (unfortunately) too much about. It’s something that every business can face, so I thought I would share with you a bit of information on what it is, how to handle it if you are faced with one, and how to avoid them if possible.
What is a Chargeback?
To put it simply, a chargeback is when a customer contacts their bank to dispute a charge on their bank card. This ultimately results in a refund to their card (if the dispute is won), and a withdrawal of the funds from the company that took those funds, to send them back to the customer.
This option exists to protect customers from getting charges they did not authorize, or know about.
A customer can dispute a charge on their bank card under a few categories
- Subscription canceled
- Product not received
- Product unacceptable
- Credit not processed
Shopify has a great guide which walks you through each of these in more detail - feel free to check that out here!
This is really important information to know as a business owner, as any customer has the ability to place a chargeback against an order on your shop. Especially as a dropshipping store, where shipping times can be long, and product quality is not always handled directly by you.
Not to fret though, as a business owner not all chargebacks result in a refund taken from you - so let’s run through the process in a bit more detail.
Here is what typically happens:
- A customer sees a charge on their card they want to dispute (one of the reasons above)
- They contact their bank and dispute the charge
- The bank files the chargeback, and sends the customers the funds they are disputing
- The bank then reaches out to the processor of those funds, and files the chargeback with them.
- The processor then reaches out to you (as the store owner) and passes on details about this. They typically will withdraw the funds from you that are being disputed, and put them into a “pending state”
- There is sometimes also a chargeback fee associated with handling a chargeback (for example, with Shopify Payments they charge a $15 fee each time you get a chargeback).
- Once the payment processor informs you of the chargeback, they usually give you an option to submit feedback / evidence to support your case. As an example, if the customer is claiming they never received their order, you can provide tracking information showing the order was delivered, etc.
- Now that the customer has put through the claim on their end, and you have submitted evidence against it, the bank will review both sides and make a decision on who wins the chargeback.
If you win the chargeback, those funds are sent back to you, and the payment processor will also typically send you back any chargeback fees they took as well.
If you lose the chargeback, those funds that are in a pending state get sent to the customers bank, and you are out the funds from that order, and likely the product you sent out too.
Keep in mind, this decision is entirely made by the bank who files the chargeback- and not something Shopify, Oberlo, or any other party have any control over.
Tips for Handling Chargebacks
What to do if you’ve received a chargeback
If you have already received a chargeback, your best bet is to first reach out to the customer. Send them an email or call them if possible, and ask see if there is any way for them to reverse the chargeback. Perhaps they want a partial refund, or a new item sent out if it was damaged. Or maybe they didn’t recognize the charge, forgetting they purchased something from your shop - in which case you could easily resolve it by passing on their order details to them.
Either way, it’s always best to reach out to the customer to see if there is a way for them to remove the chargeback, and resolve it together.
If they do not respond, or do not want to cancel the chargeback, it’s important to gather all the evidence you have against it. The evidence will differ based on the type of chargeback you receive, but you could collect things such as:
- Tracking/ shipping information
- Any proof of contact with the customer (emails, messages through social channels, etc)
- Proof of trying to reach out and resolve the issue with them (as per the first step I shared)
- Proof of customer using the product (as an example, if the customer is claiming they have not received their item, yet they have a post on social media wearing the item - sometimes you need to get creative in finding evidence!)
- Provide any policies you have listed on your shop that support your case (refund policies, shipping policies)
- Any signatures you have from them, or proof of acceptance of purchase
After you gather that, send it off in your response to the chargeback, and give the bank time to make it’s decision. Heads up, it can sometimes take banks 90 days to review and decide on a chargeback ruling
How to protect yourself from future chargebacks
If you have not received a chargeback yet against any of your orders, it’s still important to be well versed in how to avoid them / better protect yourself. As a business grows, and more customers / orders start rolling in, your chances of receiving a chargeback can increase. Here are some things that I found have helped me prepare myself for this type of situation.
- Review the risk analysis.Shopify offers you a risk analysis of each order. They have a system in place which reviews the customers order, and let’s you know if anything seems note worthy of further investigation. The system will rate the order as Low Risk, Medium Risk, or High Risk.
Pay attention to these warnings, and take extra precaution in fulfilling orders that are risky. Even a “Low Risk” order can receive a chargeback, so take these warnings as you wish. A breakdown of Shopify’s fraud analysis system can be found here.
Essentially, any order you do not feel comfortable fulfilling - it might be best to cancel and refund.
- Gather additional verification. If you are on the fence about whether it is a legitimate order (especially in the event the order is for a high dollar amount), reach out! Contact the customer over email or phone and chat with them to confirm the purchase. Ask them for a photograph of their credit card, showing their name and last four digits (covering the rest of the digits) if needed. Grab an ID from them too!
Though not all customers will feel comfortable sharing this personal information with a store owner, if they are purchasing a high value item, you can assure them it is standard procedure for your shop to gather extra verification before accepting orders. Most customers are okay with this, knowing you are trying to protect them and their order.
This way you have proof of authorization for the order, as well as evidence verifying the customer to that payment method. You can keep this info handy incase it is ever needed in a chargeback dispute.
Small tip, if you are selling items in person - grabbing a signature from the customer authorizing the order is always a good idea as well.
Use a chargeback protection app! One other thing you may want to look into is Signifyd- it’s an app you can install on your Shopify store, and they work as chargeback insurance essentially. You get the app to review your orders, and it will give you the "go ahead" to fulfill them or not. Then if down the line, a chargeback was to come through, I believe they cover those costs 100%. So if you are looking for extra protection in these situations, it might be a good idea to explore an app like this!
Be transparent. I can’t stress this enough, make sure you are clear about your store policies with customers, as this can save you a lot of headache in the long run. Have an easily accessible shipping policy page, and add the shipping details to the product page and checkout if possible. Have an easy to reach contact section - and answer your customers as promptly as possible. Have clear return and refund policies. Pass this information to customers any chance you can - have the this information available in the footer of your site, send details on this to customers in their order confirmation emails, and update them on shipping details throughout the process. Being transparent about policies, and keeping the customers up to date on their purchases can help alleviate chargebacks from rolling in, whilst also providing you evidence you can use in the event of a chargeback.
All this to say, make sure to check over your orders for any risk warnings associated with them, only fulfill the orders you feel comfortable with, and do extra digging if needed. Make your policies clear to customers, and inform them of these whenever possible. Lastly, protect yourself further with apps like Signifyd.
I know chargebacks can be a scary thing to come across, but as long as you are prepared they don’t have to be! Chargebacks are not a common occurence, so you may never run into one on your shop - but you can sleep sound knowing you are ready to tackle one if a chargeback happens to stumble your way.
Chargeback Tips & Facts
To wrap this up, I also wanted to provide some additional details about chargebacks that I think are important to note. Here is my list of extra tips and facts to remember!
In most cases, chargebacks are ruled in the customers favour - but not always! Following the proper steps can better your chances of winning the chargeback.
Having a high chargeback rate on your shop can affect your payment gateway, and them accepting you as a client. With Shopify Payments for example, they allow a 1% chargeback rate. If your shop exceeds the 1% chargeback rate, the Shopify Payments team may reach out to you about this - ultimately leading to removal from their gateway if not fixed. It’s just something to be aware of, and keep in mind.
Different gateways have different procedures and fees, so be familiar with what regulations are in place with your payment gateway
IMPORTANT: Chargebacks can happen on any order - even partially refunded orders. What I mean by this is if you refund a customer a partial amount of the order, the whole order amount is still eligible for a chargeback.
Let’s take this situation as an example - a customer orders something from your shop. They are unhappy with the purchase and reach out to you looking for a refund, threatening a chargeback. Or perhaps they have placed a chargeback already, and you reached out to see how you could resolve this. In either case, a refund is wanted. You agree to refund them 90% of the order- let’s pretend the order was for $100. You send them $90 of the $100, thinking the issue is resolved. Not so fast - the customer could pull a fast one and still place a chargeback against that order. In this event, it would still be for the full $100 - so they could have received a $90 refund from you, and now also win a $100 chargeback dispute, totalling their funds to be $190.
Because this exists, always make sure if you are refunding a customer to refund them for the full amount. If a refund is issued for the full dollar amount, there is no way a customer can dispute the charge.
This also applies to when a customer says they want a refund, but for you to send them funds through an alternate payment method (etransfer, cheque, etc). Don’t do this either, as they could receive funds from you outside of this payment transaction, and also dispute the charge through the initial payment method.
- Shopify Payments has options to further protect yourself against chargebacks. Under Settings>Payment Providers, there is an option to Edit your settings for Shopify Payments, and there are two options you can enable for extra verification:
- There is a certain window of time for placing a chargeback - so a customer cannot place a chargeback against an order from over a year ago, as an example. Each bank, payment gateway, as well as chargeback reason may differ with this, but I believe it is about a 60 to 120 day window from date of order.
All in all, I hope this gave some insight into the world of chargebacks, and how to protect yourself against them. If you have any tips and tricks you have found helped in past situations, please do share those with us below! I think we can all learn from our past experiences - and better prepare ourselves as merchants for situations like these.