Chargebacks: What They Are, How to Handle Them, and Best Practices to Avoid Them

Understanding Chargebacks + How to Protect Your Handmade Business

If you're in the e-commerce world, you’ve likely heard the word "chargeback" at least once. They’re a frustrating, time-consuming aspect of running a business. I know firsthand—just this morning, I received one. Even with airtight policies, you’ll eventually face one, and knowing how to handle them is crucial for your business.

In this post, we'll break down what chargebacks are, how they work, provide a sample letter to submit when disputing a chargeback, and share best practices to avoid them in the first place. Trust me, handling chargebacks effectively could save you a ton of time and stress down the road.

What Are Chargebacks?

A chargeback occurs when a customer disputes a charge on their credit card statement and asks their bank to reverse the transaction. While it might sound like a refund, chargebacks differ because the customer bypasses your business and goes directly to their bank.

The reasons for chargebacks vary:

The customer claims they didn’t receive the product.
The product didn’t match its description.
They believe there was unauthorized use of their credit card (fraud).
In some cases, customers simply regret the purchase.

Real World Example:

I received a chargeback this morning. A customer claimed they didn’t receive their package despite tracking showing it was delivered. I had detailed proof on my end, but that doesn’t always guarantee you'll win the dispute. Sometimes Shopify handles it for you, but when they don’t, it’s up to you to act fast. The clock is ticking as you only have a limited time to respond to a chargeback.

How Chargebacks Work

Here’s the chargeback process simplified:

Customer Dispute: A customer disputes a charge by contacting their credit card issuer.
Notification: You’ll receive a notification, usually through your payment processor or e-commerce platform, such as Shopify or PayPal.
Response Window: You’ll be given a specific time to respond, generally between 7-14 days. It’s crucial you act immediately.
Submitting Evidence: You submit your supporting documents to prove the validity of the charge. This could include proof of delivery, transaction details, communication with the customer, and your store’s return policy.
Resolution: The bank reviews the evidence and makes a decision. If you win, the funds are returned to your account. If you lose, the funds are refunded to the customer, and you may also be charged a fee.

If you don’t win the chargeback, bless and release. I know it’s hard, but you can’t control everything. Sometimes it's simply the cost of doing business. And here’s the kicker: It’s often hit or miss to win, even if you have a clear-cut case.

Best Practices to Avoid Chargebacks

Chargebacks are time-consuming, costly, and can damage your relationship with payment processors if they happen too frequently.

Here are some best practices to help you minimize the risk:

Clear Product Descriptions: Make sure your product descriptions are accurate and detailed. Customers should know exactly what they are buying. Ambiguity leads to dissatisfaction and potential disputes.
Track Every Shipment: Always use trackable shipping methods. Having a tracking number to prove delivery can be a lifesaver in chargeback disputes. For higher-value items, consider requiring a signature upon delivery.
Spelling Out Your Terms: A well-written terms and conditions page goes a long way. Be clear about shipping times, return policies, and what to do if an item is damaged or lost. You can use this in your defense when a chargeback arises.
Good Customer Communication: Make it easy for customers to reach you if there’s an issue. A lot of chargebacks come from customers who feel like they didn’t have another option. Respond to complaints quickly and professionally.
Keep Documentation: From order confirmations to delivery receipts, keep a record of all transactions. Detailed documentation is your best friend in a chargeback dispute.
Be Proactive: If you notice something that might cause a chargeback (a delayed shipment or damaged product), reach out to the customer first. Offering a refund or replacement can prevent the dispute from escalating into a chargeback.

Sample Letter to Submit for a Chargeback Dispute

If you ever find yourself needing to respond to a chargeback, here’s a sample template:

Subject: Chargeback Response for [Order Number] – [Customer Name]

Dear [Name of Payment Processor or Bank],

I am writing in response to the chargeback dispute initiated for order [Order Number] by [Customer Name].

Below is the evidence to support the validity of this transaction:

Transaction Details: Order placed on [Date] for [Product Name].
Delivery Proof: The product was shipped via [Shipping Service] on [Date], and delivered on [Date] with tracking number [Tracking Number]. (See attached proof of delivery).
Product Description: The product was clearly described as [brief product description]. (See attached screenshots of the product listing).
Customer Communication: [Include any relevant communication with the customer].

Thank you for reviewing this information. I trust that this will resolve the matter in my favor. Please let me know if further documentation is required.

Sincerely,

[Your Name]

[Your Business Name]

[Your Contact Information]

Keep it short and stick to the facts.

What Happens If You Don’t Win the Chargeback?

Unfortunately, despite your best efforts, sometimes the bank sides with the customer. It could be due to various factors beyond your control, and it’s important to not take it personally. You may also have to pay a fee, typically ranging from $15 to $25, depending on your payment processor.

In these cases, my advice is to bless and release. You can’t control every outcome, and occasionally, it’s just part of the cost of doing business. If you encounter too many chargebacks, consider revisiting your policies and ensuring you’re doing everything you can to protect your business.

Conclusion:

Chargebacks can be frustrating and costly, but they’re an inevitable part of running an online business. By understanding the process, responding promptly, and employing best practices, you can minimize your exposure to chargebacks and protect your handmade business. And if you do lose one? Release it and move on—tomorrow’s another day.