What Are Chargebacks in Retail? (& 6 Ways To Avoid Them)

There were 238 million chargebacks in 2023. And at an average cost of $191 per chargeback, that adds up to a lot of lost revenue.

Unfortunately, small and mid-sized businesses suffer the most from credit card chargebacks. Without dedicated fraud or chargeback teams, it’s important for independent retailers to be proactive and take steps to prevent chargebacks.

But what are chargebacks in retail and why do they happen? In this article, we’ll review the basics of retail chargebacks, why they happen, and give you practical methods to avoid them.

What Are Retail Chargebacks?

A chargeback happens when a financial institution, such as a credit card company or a bank reverses a previous transaction. Chargebacks help customers dispute purchases that they believe are fraudulent, mistakes, or not handled honestly by the business they shopped at.

Chargebacks can be disastrous for small businesses. While disputes are being investigated, the transaction funds are pulled from the business’ account by the payment network — so even if a customer’s claim is deemed illegitimate in the end, it will still affect your business’ short-term cash flow.

Worse, a successful dispute results in lost revenue and an administrative fee from the financial institution for the time taken to investigate.   

While a small number of chargebacks are inevitable in the retail industry, if they happen within a short period, payment processors may start charging you additional fees — or refuse to work with your business at all.

Why Do Chargebacks in Retail Happen?

With thinner profit margins and less access to financial resources, chargebacks hurt small businesses the most. But understanding why chargebacks happen in the first place is the first step to avoiding them.

These are the most common reasons for chargebacks in retail:

1. Fraudulent charges: If a charge wasn’t authorized by the cardholder then it may be fraudulent. The majority of legitimate credit card fraud (90%) comes from online purchases (or “remote” fraud).
2. “Friendly” fraud: Friendly fraud is when a legitimate purchase is mistaken as fraudulent by the cardholder. This happens when customers don’t recognize the business name on their statement or when a third party (like a spouse) purchases something without their knowledge. Almost 35% of businesses experienced some form of friendly fraud in 2023.
3. Incorrect and/or duplicate charges: Sometimes, a purchase shows up multiple times or the amount doesn’t match what the customer agreed to pay. This frequently happens when a cashier rings up an item twice by mistake.
4. Problems with products: If an item arrives in an unacceptable condition, doesn’t match specifications, or never arrives at all, a customer may dispute the charge. These chargebacks often happen when the seller is unresponsive.
5. Delayed refunds: If a business promises a refund but doesn’t issue it in a timely manner, a customer may initiate a chargeback to recover the funds instead.
   
   

Note: While chargebacks are meant to protect consumers, many customers use them to get around a retailer’s return policy. 

6 Ways To Avoid Chargebacks

Some credit card chargebacks in retail are unavoidable, but that doesn’t mean there’s nothing you can do. Taking a proactive stance on chargebacks can save your business money and improve your reputation with customers.

Here are our top six methods to avoid retail chargebacks in your small business:

1. Use a Secure POS System and Payment Processor

Fraud can result from security breaches in payment software. Working with a secure payment processor is the first step in preventing legitimate credit card fraud. Some payment processors may have additional fraud detection tools to help, too.

Use a modern point of sale (POS) system to ensure your transactions are accurate and secure. Make sure your POS system is on the cloud and frequently updated to ensure it follows the latest security best practices.

Related Read: What Is POS Security? 5 Ways To Protect Customer Data 

Many POS systems let you monitor your transaction data and customer behavior. Regularly auditing your sales data will help you spot any anomalies or concerning trends. You can also correlate chargebacks with specific purchases to see if there’s a pattern.

Remember, investigating chargebacks is also time-consuming and costly for financial institutions. Leveraging technology to avoid them is in your best interest and theirs. 

2. Establish Clear Return Policies and Train Employees

Many chargebacks are the result of overly complicated or confusing return policies. If a customer has to jump through hoops just to return an item, they may get fed up and opt to have their credit card company take care of it for them.

Create simple return policies and train employees on how to process them on your POS system. For in-person retailers, you could print a version of your return policy on receipts. For online orders, you might set up a specific FAQ page about what is and isn’t allowed. 

While no one wants to give up revenue from a returned item, a legitimate return will cost you significantly less than a chargeback. 

3. Use Secure Payment Methods

Investing in modern card readers that support chip and pin and contactless payments is an effective way to reduce fraud and chargebacks. Contactless payments are more convenient for customers and one of the most secure payment methods, because it’s almost impossible to steal the data.

To add a layer of security, you could require additional authorizations for purchases (like signatures or PINs) for in-person purchases. This ensures that even if someone has a stolen card, they would be unlikely to use it. 

At a minimum, work with payment partners that comply with the Payment Card Industry Data Security Standard (PCI DSS) guidelines. PCI lays out a framework that all businesses need to follow to stay compliant and keep customer data safe.

4. Offer Great Customer Service

One of the most effective ways to avoid a chargeback is also one of the easiest: make sure your customer service is responsive. Customers are more likely to initiate a chargeback (and succeed) if they feel they’ve exhausted normal channels of communication. 

Make your staff available so customers can ask questions about products and charges. Throughout the dispute process, be as friendly and understanding as possible — both to prevent a chargeback and to protect your store’s reputation.

A modern POS system will help you answer customers’ questions by keeping a detailed history of transactions. The best systems will also let you filter purchases by customer email, credit card number, and more to quickly find specific charges. 

Remember, most customers who contact you probably don’t want to escalate to a chargeback. A friendly face might quickly resolve the situation and could even result in them coming back to your business again.

5. Ensure Your Business Name Shows Up on Customer Credit Card Statements

A common reason customers initiate a chargeback is simply because they don’t recognize the merchant name on their credit card statement — and it’s easy to see why.

Imagine you make a small $15 purchase at a company called “John’s Gift Shop.” Then, a few weeks later you see a $15 purchase on your statement from “EBUY GIFTS”. You rack your brain trying to think of a business by that name but you draw a blank. Without any listed address or description on the charge, your only conclusion is that it must be a scam!

Work with your payment processor to make sure your merchant name is close to the name of your business, especially if your company or oing business as (DBA) name differs from your store. 

6. Follow Online Sales Best Practices

Online sales are a great way for small businesses to expand their reach, but they also increase security risks. The majority of fraud occurs through online purchases as it’s much easier to use stolen card information remotely than in person.

In addition to straightforward fraud, having an inaccurate or confusing website leaves you more open to chargebacks. For example, if your item descriptions or shipping policies aren’t accurate, a customer could rightly say that they were misled.

However, by ensuring your website follows a few best practices, you can significantly reduce your risk of chargebacks.

• Create accurate item descriptions: Describe your items accurately so customers have clear expectations of what they’ll receive.
• Require CVV codes for payment: Make customers provide a card verification value (CVV) code (the three or four-digit number on the physical credit card) to add a layer of security for online purchases. 
• Set clear shipment expectations: Let customers know exactly how long it will take for products to ship to them, and set up automatic shipment notifications (including tracking numbers) to keep them in the know. 
• Keep inventory updated: Connect your in-store inventory management system with your online store to ensure stock levels are accurate.
  
  

Minimize Your Risk of Chargebacks With a Trusted Retail POS Solution

Preventing chargebacks is important for your bottom line and your business’ reputation. Frequent chargebacks are signs of larger issues like poor customer service or unclear return policies that will put off potential customers.

Investing in the right technology is also an easy way to prevent common sources of fraud and friction in the customer experience. Modern POS systems like POS Nation come with many convenient features that help independent retailers avoid chargebacks, such as:

• Built-in secure payment processing
• Real-time inventory management
• Contactless payment support
• A customizable user interface for quick returns

…and more.

Schedule a demo today to learn how POS Nation can improve your customer experience and help you avoid retail chargebacks.