Chargebacks are the term used to describe situations where a financial institution (such as a credit card company) takes back the funds from a retailer to recoup the loss on a disputed or fraudulent transaction. The resolution process for chargebacks is lengthy, complicated, and structured to benefit the consumer—not the merchant. When this happens, not only does the business lose the funds from the transaction in question, but they’re usually also charged additional fees for resolving the chargeback. In some cases, chargebacks may be justified, as in the case of defective merchandise or purchases lost in shipping. However, some cardholders intentionally try to “cheat the system” through chargebacks. Merchants providing services rather than goods are especially at risk for this phenomenon, called “friendly fraud,” since chargebacks are structured to favor of the consumer. While there’s no way to prevent all chargebacks, EMV compliance minimizes their occurrence in beauty, fitness, and wellness businesses. Here’s how Vagaro features such as cancellation/no-show policies and EMV chip card readers can minimize chargebacks and create a “paper trail” to help fight back.
No-Show & Cancellation Chargebacks
The biggest reason that chargebacks occur in salons, spas, fitness centers, and gyms is the fact that many clients don’t think they should be charged for no-shows and cancellations. One way to create a “paper trail” to help you in the event of a chargeback is to create a “No Show/Cancellation” policy that’s transmitted electronically to the client upon booking. To make certain you’ve got documented acknowledgement of your policy, use Vagaro Forms to require clients to validate they’ve received and accepted your no-show/cancellation policy. This way, you’ll have date and time-stamped verification from the client. Unfortunately, even with a policy in place, clients may still file a chargeback, but with a written policy and client acknowledgement, you’ll be better equipped to successfully contest them.
“Friendly Fraud” & Buyer’s Remorse Chargebacks
The nature of a service being “not as described” is a gray
area many customers try to leverage in a chargeback. What you’re delivering
isn’t necessarily the result of the service, but the process of
completing the service. This could mean anything from a haircut not looking
like the celebrity photo brought in to the appointment, or a 90-day training
regimen not yielding the results a client had envisioned. But the biggest losses
for service industry chargebacks stem from “friendly fraud,” where a client simply
doesn’t want to pay for a service they want. By extension, “buyer’s remorse”
chargebacks also fall under the category of “friendly fraud.” Examples of “friendly
fraud” and buyer’s remorse chargebacks might include a hair extension service costing
hundreds of dollars, which the customer decides they’ll “get back” after they
leave the salon. In fitness industries, this might mean a customer purchasing a
gym membership, not using it, and then six months down the road filing a
chargeback for the months they were members but didn’t use the facilities.
“Friendly Fraud” Steals Your Revenue…
For small business owners, chargebacks can hit especially
hard. Not only are the funds from the transaction “taken back” by the credit
card company (sometimes weeks or months after the service), but merchants are
then charged additional fees to investigate and resolve the chargeback. Chargeback
fees usually cost $25 per filing, regardless of the cost of the disputed
transaction. That means that whether the chargeback is filed for $10 or
$1,000, the merchant is hit with at a fee of $25 or more! What’s worse—even if
the chargeback is resolved in your favor, it’s unlikely that you’ll be refunded
that fee.
…And Time!
Likewise, chargebacks rob small business owners of the asset
they deal in that’s most valuable: time.
In general, from the time you’re notified of a chargeback being filed, as a
business owner, you have a 5-7-day window to respond. For service-based
professionals, finding extra hours in the day to spend on the phone with a
financial institution is a burden that takes more money out of their pocket by
taking their time away from clients. Resolving a chargeback can take up to 120
days, during which you’ll be out the money for the transaction and the
chargeback fees. To say nothing of the lost revenue of allocating client time
to spend fighting the chargeback!
Chargebacks Hurt Small Business Owners
Chargebacks were originally designed to protect consumers from unscrupulous merchants. Unfortunately, “friendly fraud” is on the rise, as many customers have learned how to effectively “game the system.” According to a 2016 study, 80% to 90% of successful chargebacks are resolved in favor of the customer. In fact, fewer than one in five chargebacks are resolved in favor of the merchant. This unfortunately means that even if you do everything right, a chargeback might still be found in the filer’s favor. Another side effect of chargebacks is that they put your merchant account at-risk. In addition to the usual rates charged by your merchant services provider, credit card issuing institutions charge NABU fees (Network Access and Brand Usage), also called “pass-through” fees. Each chargeback filing increases the likelihood of the issuing institution raising the rate of NABU fees charged to your business.
EMV Helps Prevent Traditional Fraud
First, small business owners can greatly reduce the chances
of a chargeback with EMV-compliant
solutions. EMV compliant payment processing
cuts down on the likelihood of a fraudulent transaction happening at your point
of sale. Simply using EMV-compliant chip
card processing hardware immediately reduces the likelihood of being held
liable for a fraudulent card being used in a transaction. Make sure to dip
instead of swipe, and you’ll minimize chargebacks related to traditional fraud.
Counteract “Friendly Fraud”
In recent years, chargeback fraud (“friendly fraud”) has
been a growing problem for small business owners. Unfortunately, the structure
of chargebacks hasn’t yet evolved to keep pace with the increase of “friendly
fraud.” In fact, recent studies estimate that “friendly fraud” accounts for over
50% of all chargebacks! This places an
undue burden on small business owners to take proactive steps to minimize chargebacks
and create a “paper trail” to help fight them. Luckily, Vagaro’s automation helps
you by creating a digital record of every step of an appointment and organizes
these files in one easy-to-access place. While there is currently no way to
prevent chargebacks even when using the deposits feature, Vagaro’s automated recording
significantly reduces the chance of a resolution in favor of the customer in
the case of “friendly fraud.”
Minimize Chargebacks Checklist
- Create a cancellation/no-show policy and make sure it’s attached to automated messages associated with bookings.
- Use Vagaro forms to create client validation of your no-show/cancellation policy.
- Update client files with each visit. That way, in the event of a chargeback, you’ve got all the up-to-date information and documentation you’ll need to fight it.
- Include documentation of client communications (text messages, emails, etc.) in the Customer Notes field.
- Relax, you’re using Vagaro! Our automated tools create a digital “paper trail” for every touch point of a customer’s payment and booking, so you won’t waste valuable time trying to locate all the paperwork you’ll need to contest a chargeback!
Ready to get proactive about chargebacks with EMV chip card processing? Add VMS and Online Shopping Cart to your software, and make sure that if “friendly fraud” happens at your business, you’ve got everything you need to fight back!
Header Image: Mia Montemayor via Vagaro
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