Five ways businesses can respond to the chargeback apocalypse

The Covid-19 pandemic has disrupted just about every aspect of global business, and payments are no exception. Airlines, which have been among the hardest hit, are now even facing numerous class action lawsuits over their refusal to issue refunds to travelers who are unable to travel as planned due to canceled flights and government travel restrictions.

Not surprisingly, growing numbers of consumers are turning to chargebacks in an effort to get their money back for products and services they have paid for but haven’t received, or for which they no longer want because of the pandemic.

Credit card networks give cardholders the ability to charge back payments in an effort to protect them from fraudulent charges and merchants who fail to deliver the products and services they’ve promised.

Historically more annoyance than impediment or even existential threat to business, chargebacks in certain industries, such as travel, have skyrocketed. In fact, according to consultancy Aite Group, from mid-March until the end of April, cardholders disputed three times as many purchases as they did pre-pandemic.

As a result of this trend, some merchant account providers and third-party payment processors are imposing painful holdbacks that prevent businesses from accessing large amounts of funds from credit card payments.

Here are five ways business can address the challenges caused by the apocalyptic chargeback environment.

Utilize alternative payments

Consumers don’t just prefer credit card payments because they’re so efficient. Credit card issuers generally offer their customers a host of protections that can come in handy when they find themselves in a dispute with a company.

While most businesses that accept credit card payments will not be able to eliminate their use of them, the pandemic-driven increase in chargebacks gives certain businesses reason to consider alternative payment methods, such as ACH, wire transfers and even Bitcoin. These methods might be especially appropriate for larger transactions as well as payments for non-refundable products and services to be delivered in the future.

In other cases, companies might find that the use of escrow is appropriate. Escrow employs a thirdparty to hold and distribute funds based on highly-specific contractual terms.

Embrace refunds

While many businesses are fighting for survival, there’s often a strong argument to be made that in at least some cases, proactively refunding customers is the most sensible move available.

Fighting chargebacks can be difficult and time-consuming, and even when doing so is possible, forcing customers to pursue them in the first place can negatively affect customers’ perceptions of the business and dent future sales. So while issuing refunds when they might not legally be required to is a tough pill to swallow, it’s not surprising that numerous companies have opted to take this approach.

A number of American auto insurance companies, for instance, have been issuing partial premium refunds to customers who are driving less because of the pandemic.

Even though the short-term impacts of refunds can be significant, it gives companies the chance to generate goodwill at a very difficult time, increasing the likelihood that customers will continue to do business with them when the world returns to normal.

Make customers an offer that’s harder to refuse

A willingness to issue refunds to customers doesn’t have to be a total capitulation. Some businesses may find that they have opportunities to craft creative deals under which customers can choose to forgo refunds in exchange for delivery of products or services in the future under more attractive terms.

For example, some professional sports teams in the US have offered season ticket holders the option to receive future credits instead of refunds, with those choosing credits also receiving bonus credits.

Up-sell insurance

In some industries, such as travel, it may be possible to offer customers the ability to buy insurance that would protect their purchases. Airlines and online travel agencies, for instance, often up-sell trip cancellation insurance at the time of purchase. While such insurance might not cover pandemics, the current pandemic is a reminder that unforeseen events can occur.

Post-Covid-19, it’s possible that more consumers will be willing to consider purchasing insurance, so companies that might be able to offer it should explore their options, especially since upsold insurance can be a source of significant incremental revenue.

Be ready to fight back

The customer isn’t always right and where customers are reasonably believed to be taking advantage of the pandemic to wiggle out of legitimate payment obligations, companies often do have the option of fighting back. That’s because, subject to a legally-binding agreement with appropriate terms, a customer’s success in charging back a credit card transaction does not eliminate her obligations under the agreement. Put simply, a credit card issuer’s dispute department is not a court of law and while it has the authority to reverse a charge, it can’t void a contract.

If a company and its customer enter into a valid agreement under which payment obligations are noncancellable and non-refundable, the company will likely have the ability to take legal action against the customer if she uses a chargeback to reverse a payment and thus becomes in breach of the terms of the agreement.

Obviously, taking legal action against customers might not be viable depending on the amounts in dispute, and doing so is a nuclear option with potentially huge reputational consequences. But in extreme cases, it might be the only option that could prevent customers from skipping out on payment obligations.