Managing Partner, Apostolo & Co.
Reader,
If we’ve never met, I’m John Apostolo, and I’m the founder and Managing Partner of Apostolo & Co, a small digital business transformation consulting firm. Over the past few years, APO&CO has grown from only building Squarespace sites to a full service digital transformation partner, and I’m excited to tell you about our next chapter today.
My firm, like many small professional services firms today serving small business, accepts credit cards as our primary payment method. They get us paid faster, allow us to charge substantially more for our services, and provide a simple accounts receivable experience for both ourselves and our clients. They are absolutely 100% necessary to survive today.
However, last year, a combination of things happened (that may include a RayBan store in Rome and a botox clinic outside DC) that prompted me to dive deep into the world of credit card chargebacks. I didn’t like what I found.
Intro to Chargebacks
When a customer is has an issue with a credit or debit card transaction, then can contact their bank and open a chargeback. Chargebacks were established to protect consumers from fraud through the Fair Credit Billing Act of 1974, have expanded far beyond the original scope.
Originally a tool to protect against having to pay high interest on unauthorized transactions, the application of chargebacks has broadened to include disputes over service quality, delivery, and product satisfaction. These new kinds of chargebacks, generally called disputes, are not required by federal law - they are an invention of credit card companies. These include reasons such as goods not described, defective product, wrong description, missing parts, damaged during shipping, etc.
The law from 1974 says that banks (the same banks that would be charging the interest) must promptly investigate a customer’s fraud claim. That means the same bank that is making thousands of dollars in interest, fees, points, etc from a customer now must make a decision on whether that same customer (who may go to the bank across the street if they are upset) or a little website designer they’ve never heard of should win a dispute. It’s not exactly a balanced court.
Here’s another wrinkle: all major payment processing companies, as a condition of your signing up, will require you to provide an account and routing number of a bank in the US and authorize them to remove funds from that amount if your merchant account ever goes negative from a chargeback. If you get a chargeback, funds will likely be taken from your bank account.
This is obviously very scary. Here are two things that make it worse:
First, remember how banks have been expanding the chargeback and dispute process to make cardholders happy. Well, they also give cardholders extra time to decide they would like to dispute a payment, in some cases up to 450 days. That means that a client can, in some cases, dispute a charge they paid a year and a half ago, and the funds would be taken from your bank account immediately.
Once those funds are removed, now the bank will investigate. This “prompt” investigation usually takes 60-90 days. After that time, the bank will hand down it’s resolution and you’ll either get your money back or the customer will keep it. In 2021, the average merchant had a win rate of only 42%.
Further, Visa estimated that over 75% of chargebacks are what’s called friendly fraud, where the cardholder knows the payment is legitimate but disputes it anyway. These are usually because the cardholder is looking for flexibility with their statement balance (when you file a chargeback, you get an immediate credit and don’t have to pay interest on that payment while it’s investigated) or just because a “savvy” cardholder knows the can.
Here are some stats: