Chargebacks and High-Risk Merchant Accounts: A Complete Guide
Payments have never been more confusing than now. With all the security risks, account fees, and questionable monetization models floating around, merchants are feeling confused and uncertain about the way to accept payments without having their accounts shut down.
In this article, we’re going to review some of the basics of chargebacks and high-risk merchant accounts. We’ll also share some best practices for keeping your business afloat during these tumultuous times.
If you operate a small to medium-sized business and find yourself being hit by chargebacks, you’d be wise to learn a little more about what they are and how they work. When a customer places an order with you but later decides that they want their money back, even if they haven’t received the product or service yet (or even if the transaction was never completed), this is termed as a “chargeback.” There are many reasons customers might do this – maybe their credit card information was stolen, and someone charged them without their knowledge.
A chargeback occurs when a customer disputes the charges on their credit card. This can be an issue for any AliExpress seller, but it’s especially difficult for high-risk merchants. With all the fraudulent activity happening online, merchants require a more advanced and secure payment option to remain competitive in today’s economy. A chargeback is an event that puts your business at risk as these transactions take away from your profit margin and add unnecessary costs to your company.
Chargebacks are increasing in popularity and occurring more often. Consumers have increased sophistication when it comes to shopping online and buying products from e-commerce websites. The growing number of consumers who are afraid that they may never receive their order or product because the purchase was fraudulent or they did not receive the product that they purchased is a big problem. Chargebacks can result in a loss of revenue for both merchants and platforms like PayPal and Square, which have had to fight this issue at times.
High-risk Merchant accounts
When you start a business, it’s important to know that your company is taking enough precautions. We all love the idea of doing our thing and making money simultaneously. But there are also risks involved with running your own business, such as dealing with high-risk merchant accounts. What is a best high-risk merchant account?
A high-risk merchant account is a payment processing account for enterprises deemed to be of high risk to the banks. As high-risk businesses are more inclined to pay chargebacks, they come with the necessity of paying higher prices for merchant services.
Your bank account probably falls into the high-risk category in USA if you are a high-risk merchant account. This means that you will most likely accept payment from customers who wish to remain anonymous.
This may mean that your store is an online pharmacy, a gaming website, or an online casino and casino games portal. You might also be selling computer software without authorization, artwork without permission from the artist or owner of the copyright for said work, or any number of other products in which the seller does not have the necessary rights to distribute their product.
Are refunds and chargebacks the same?
A chargeback is temporary. Once a transaction has been charged back, the funds are removed from your account and transferred to the merchant. A refund is permanent. Once a transaction has been refunded, it cannot be charged back to your account, and any refunded funds remain in your account.
Once you request a chargeback on an item, you’re temporarily giving up ownership of that item and giving the money back to the merchant (minus charges). When requesting a refund for an item purchased online, you’re permanently giving up ownership of that item and retaining any refunds for it (minus charges).
Difference between credit card and debit card chargebacks
One of the questions on many cardholders’ minds is which is better for them, the debit card or credit card. The answer to that question depends on several factors, such as the type of transactions you make and how often you carry debt from one month to another.
Regarding credit card fraud, the cardholder’s liability is restricted to a maximum of $50. As the funds technically belong to the bank, not to the cardholder, the bank may be additionally invested in attempting to retrieve the money.
Whereas debit cards are tied to funds that live in the cardholder’s account rather than to a line of credit allocated by the bank. Cardholder liability for debit card fraud is restricted to no more than $500, considering the cardholder notifies the incident within 60 days. Otherwise, their right to recover funds depends on the bank’s judgment.
Process of chargebacks
Step 01 – Cardholder files a chargeback
The cardholder initiates a dispute by reaching the bank and requesting a refund.
Step 02 – The issuer reviews/assigns a reason code to the case
This code illustrates why the consumer is disputing the transaction.
Step 03 – The issuer investigates the complaint.
If the case is authentic, funds will be deducted from the merchant’s bank account and credited to the cardholder, who may see a provisional credit on their account. If the bank deems the case unwarranted, the conflict will merely be voided.
Step 04 – The acquirer is notified and reviews the chargeback
Any evidence the acquirer has to contradict the chargeback will be presented on the merchant’s behalf. The bank will hand the chargeback to the merchant if no such proof exists.
Step 05 – The merchant receives and reviews the chargeback
If the claim is fair, the merchant must bear the loss. However, merchants who think they can debunk the claim retain the right to re-present the chargeback to the issuer.
Step 06 – The issuer reviews the evidence and makes a decision
If the merchant’s evidence denies the cardholder’s claim, funds removed due to the chargeback will go back to the merchant. However, any chargeback expenses or administrative costs will not be refunded to the merchant.
The consequences can be devastating if you have been hit with a chargeback. For one thing, they are difficult to resolve and are always in the credit card company’s favor (making it impossible to fight their decision). It is not worth it to ignore this problem.
A chargeback is a way for cardholders to dispute charges on their credit cards. But what happens if users abuse this? They are abusing the system and costing stores, restaurants, and other merchants money. If a merchant has to charge back six customers in one month, they could be looking at a loss of $12 per transaction. This may seem like an insignificant price tag, but when you consider the number of transactions that occur every day or week (in some cases), even small losses can add up quickly. The bottom line for chargebacks: merchants need protection from potential chargeback abusers.