The customer is not always right
For the past 35 years, my father has been a small business owner. His company, which provides communications services to other small and medium sized businesses in the southwest, employs anywhere from 4 to 8 technicians depending on the number of active accounts.
Two months ago, he nearly became a former small business owner.
It began with $14,000 removed from his merchant bank account, plunging his operations into the red, and effectively halting all business transactions, including payroll. This unexpected debit was the direct result of a “chargeback,” wherein a customer who purchases goods or services using a major credit card is repaid for their transaction through the business’s bank account.
The chargeback in question was initiated by a customer who had used his Visa card to purchase a communications system from my father more than five months prior, became dissatisfied, and decided to dispute the purchase with Visa rather than contacting my father to resolve the issue.
The policies legitimizing the chargeback process are spelled out, albeit in legalese, in Visa’s Core Rules (as well as other major credit cards) and are designed to protect consumers against inaccurate and unfair credit billing and credit card practices under the Truth in Lending Act and its amendment, the Fair Credit Billing Act. However, chargebacks are increasingly not due to merchant errors, shipping problems, or faulty products (which comprise an estimated 5% of all chargebacks), but ‘friendly fraud’, wherein cardholders take advantage of consumer protections to manipulate this process to their advantage.
Chargebacks can be disputed at significant cost to the business owner — which in the case of my father, represented more than 10 hours spent crafting a response and locating key documents, and missed paychecks (for him, and for his employees) throughout the dispute investigation, as payroll funds remained inaccessible in an escrow account.
If the customer’s bank agrees that the argument is valid, the customer is repaid in full for the transaction through the business’s bank account — and in addition to the loss of revenue from the previously cleared payment, the business owner is also responsible for a non-reversible “processing fee” ranging from modest to enormous (most merchants pay between $20 and $100 per chargeback).
The rules and regulations governing chargebacks are confusing, and the dispute process involves up to six different entities with different motivations, including the customer, merchant’s business, merchant’s bank processor, credit card network, credit card issuing bank, and the merchant’s bank.
In the era of increasing identity theft and Internet fraud, it makes absolute sense to have appropriate consumer protections in place. Unfortunately, there are no equivalent protections for business owners — particularly small business owners — where one significant chargeback may spell the end. It has been estimated that up to 86% of chargebacks are fraudulent. This is not good for business, as the costs born by the business owner are eventually passed along to the consumer.
In America, we place the highest value on the customer — hence the motto, “the customer is always right.” However, this mentality can be damaging to businesses, as it favors abrasive, abusive, or unethical persons who take advantage of existing protections rather than working with the merchant to resolve the issue.
Given the potential drawbacks of credit card transactions for small business owners, why not abandon them in favor of alternatives? Quite simply — there are none — at least for the moment. In the past decade, we’ve seen the almost full disappearance of cash in favor of electronic transactions, which are managed not by consumers and businesses, but by merchant banks and credit card companies. Businesses feel great pressure to provide fast and efficient service to maintain their customer base, and “one-swipe” electronic transactions are part of the game. The rules and governing these electronic transactions are numerous, convoluted, and largely hidden until experienced firsthand when things go badly awry.
Luckily for my father, the work he put into his response paid off, and the bank ruled in his favor. Ironically, this decision process was also hidden, and the customer’s bank (who made the final determination) has yet to issue a formal notification to him. Instead, four days after filing his response, the funds were released back into his account as mysteriously as they had left.
Business owners can take steps to minimize chargebacks, the most significant of which is providing excellent customer service. Clear and transparent services, products, and fees communicating exactly what customers will pay, the associated guarantees or warranties, and terms of the refund/return policy are the best protection against ‘friendly fraud.’
Finally, most of us, regardless of whether or not we own a business, are consumers — so should you find yourself dissatisfied with a purchase, stop short of a call to your credit card company, and make every effort to resolve the issue directly with your merchant. He might be someone you know!