Welcome back to our weekly FAQ! This week our topic is about charge-backs from clients, how the process works and what you can do about them. As a former Bank Auditor for 15 years, I have witnessed first-hand countless charge-back investigations and it is not always a cut and dry process and is something you need to be prepared for as a business owner.
1. What can I do to avoid charge-back?
Unfortunately, there is nothing you can do to prevent a client from submitting a charge-back with their bank.
2. I have a no charge-back disclosure on my website, I will win any charge-back, right?
No. Having a disclosure on your website is not enough to automatically win a charge-back investigation. Unless the client explicitly agrees to not submit a charge-back by checking a box, or signing something, legally, this is not enough to guarantee a "win" for your business. Also, did the client even use your website?
3. I also have a disclosure in my contract stating the client agrees to not submit a charge-back.
The banks do not review contracts for legal compliance, they are not lawyers and do not have the authority to research the legal factors that apply to your specific contract. Many factors come into play regarding contracts with this clause. For example, does your state law allow this clause in your contract? Does your client even fully understand what a charge-back is? The bank's job is to determine if fraud occurred, if it was an unauthorized transaction, if the charge was for an incorrect amount or if they canceled their subscription but their card was still charged.
4. If a website disclosure and a contract do not guarantee my protection, what can I do?
You simply have to accept that charge-backs are inevitable. But, if a client submits one, contact them and try and rectify the situation with them directly. The client could have made a mistake and selected the wrong transaction, they might not have recognized the business name and assumed it was fraud. This can happen when a business has their DBA name tied to their transaction descriptions [for whatever reason], but they know you by another name. The client may have been too embarrassed to contact you if they were unsatisfied and simply needed clarification, a little extra help understanding what they signed up for or a different package/service.
If none of these situations apply, or further communication does not work, you can take the client to smalls claims court for breach of contract.
5. Why do businesses always get the short end of the stick and lose so many charge-back disputes?
Regulation E [the regulation the applies to charge-backs], is a consumer regulation. It does not apply to the business side of these situations. The banks can "technically" conduct a brief overview of the paperwork submitted from each side and simply side with the customer due to the fact that this regulation is designed for consumers only.
6. Why do they debit the money from my account before the investigation is complete?
Once a dispute is submitted by the client, the bank will automatically debit your account for the amount disputed. They do this to mitigate the business from spending the money, the business withdrawing all of the money in their account and closing it or being forced to debit the account and put it in the negative if the account does not have a balance to cover the charge-back.
The bank will then place the funds in a GL for safe keeping until the investigation is complete. The customer does not automatically receive the money back the moment they submit a dispute. Depending on who wins, the bank then credits that persons account.
7. Can multiple charge-backs harm me in any way?
Yes. Banks review accounts often for several reasons, including risk for the bank. If your business has a large number of charge-backs, your account can be flagged as high risk and can be subject to closure.
8. But, I have no control over clients who decide to submit a charge-back?
That is correct, but this is all the more reason to ensure you are very clear about your requirements, the contract between you and the client, the services they are paying for, etc. Communication and understanding are key when you are working with clients.
Frequent charge-backs can also affect your business's credit report.
9. How can consumers get away with claiming fraud if it truly was not the case?
Fraud is not the only reason a charge-back can be submitted. The following situations qualify for a charge-back investigation:
- Fraud/unauthorized transaction: This does not automatically mean your business did anything fraudulent. The client's card could have been stolen or skimmed and another person conducted a purchase. Or a friend/family member used their card without their permission.
- Unauthorized amount [The client only agreed to pay $200, but the transaction was $300]
- Service/subscription canceled but the client was still charged
- Duplicate charge: The client was charged multiple times
- Product/service not received
- Product/service received was not as described
- Credit [return] not processed to the clients account by the merchant
I know this information does not sound very promising for businesses, but the golden ticket here is communication, clear, concise and descriptive information so the client truly understands what they are buying, conducting your due diligence on the client. We all have those gut feelings about clients sometimes, even me! Take a moment and ask yourself if you feel like this would be the type of client who you feel would put you in a situation like this. And, PROOF - PROOF - PROOF! Yes, even the best proof does not guarantee a "win", but the more proof the better especially if the client "wins" the dispute you will hopefully have enough proof to take them to small claims court for breach of contract.
Have a contract!!!! I die a little inside when I hear business owners say they don't use contracts, they didn't feel like one was needed or the client is a friend and I trust them. None of these are valid reasons. There are no valid reasons. Even the best people in the world can put you in this situation. Don't risk your financial security, time and business risk for something you truly cannot guarantee 100% will never happen. Not only does it protect you, but it does protect the client as well!
Lastly, if your client agrees to have their payments automatically withdrawn from their account, make sure you have them sign a withdrawal/ACH authorization form.
We as business owners, put our blood, sweat, and tears into our business we cannot afford to not dot our I's and cross our T's. Use a contract and get everything in writing.
**The above is for educational and informational purposes only and does not constitute a client-consultant agreement and is not legal advice.