The Pros and Cons of Sending Chargebacks to Collections

By on November 27th, 2018 in Industry Insights
TrueAccord Blog

Chargebacks are a form of transaction reversal that serves to protect customers and merchants from fraud committed by either party in a transaction. It is common in situations where a cardholder wants a refund on an item previously and wrongfully purchased from a merchant. It also applies in instances where a cardholder was charged for items that they never received or in cases where due to technical hitches, a mistaken charge was imposed on them.

Primarily, a chargeback serves to ensure that the funds of a cardholder are safe no matter what. While it may present a good ground for cardholders to get refunds of their cash, sometimes, it can be abused; in some cases, chargebacks as a result of buyer remorse or other types of abuses reach 40% of chargeback volume. It can spell doom to the merchant when consumers misuse this provision.

Financially, it affects the bottom line of merchants, sometimes up to 1-5% of revenue. When the customer cannot or won’t pay up, or resorts to wrongful chargebacks, it makes their financial situation worse.

Merchants are aware of the imminent risk of a chargeback when a customer is not satisfied with a good or service; thus, they go out of their way to ensure that the best is delivered to the customer, that service is impeccable, and that there are no billing errors.

As a merchant, you are going to deal with many chargebacks in the course of trading. If you are engaging in genuine business, then it comes as an imperative to guard against unnecessary chargebacks. You cannot stop people from filing chargebacks, but you can fight illegitimate chargebacks, the result of buyer remorse or abuse. Determine which issues are raising these chargebacks and address them. Always ask for the direct signature of the cardholder or employ a fraud prevention service if you deal with expensive items. Only allow consumers to ship to their billing addresses. In these ways, you can safeguard against unnecessary chargebacks from dishonest consumers.

Finally, if you are faced with chargebacks and cannot have them insured by a fraud prevention service, or represented back with your bank, sending chargebacks to collection agencies may be a great way to get paid. But what are the pros and cons of doing so?

The Pros

Improved Asset Recovery

Consumers may file a chargeback but keep the product. Sending it to collections may enhance the process of recovering all these assets from such clients, both product and payment. Collection agencies are good at what they do and can handle the task of asset recovery better than you. Their chances of recovering lost funds are better than yours, both because of their broad experience and the fact that they are, at the end of the day, a collection agency. The mere thought of being contacted by a debt collection company often drives consumers to make good on their obligations.

Guards against Chargeback Transaction Fees

When a chargeback is filed, the card company immediately charges some fees relating to processing the chargeback. The fee ranges from $20 to $150 per transaction. Even when a consumer cancels the chargeback, these fees will still have to be paid. When you have a genuine case of buyer fraud, sending the chargeback to collections may help you overturn the tables and recoup the fee in addition to the chargeback, based on the terms of service the consumer agreed to on your website.

It Deters Crafty Consumers

Some consumers are just out there to get freebies. Some can be problematic. Some pay when they want to. Entertaining such can weigh you down as a business. Sending those consumers to collections may deter them from filing illegitimate chargebacks in the future, and send a clear message to future abusers. They will know better than to practice their devious ways on your business. Doing so with the right debt collections partners will get you deterrence while protecting your brand.

Enables You to Focus on Developing your Business

Instead of focusing on your energies fighting off chargebacks or building internal teams to deal with the minutiae of accounts receivables, sending them to collections relieves you the hustle. It allows you to maintain focus on things that are essential to your business. You can focus on giving exceptional customer service to your loyal customers.

The Cons

It’s an Added Cost to Your Business

Using collections is an added cost to your business. Most collection agencies charge fees from recovered funds, with some base fee to start using their service. Fees can be as high as 40% of dollars recovered, from money that you thought was already in your pocket. While this may seem high, consider this: 40% of $0 is still $0. Other than a low monthly fee, you’d be paying out of dolalrs the agency recovers for you. If you hire a full time accounts receivables clerk, that person would be paid monthly no matter what they collect.

May Dampen Customer Relationships

Collection agencies may use not-so-friendly approaches to debt collection. Some consumers may suffer emotionally, and that may mark the end of your relationship with that customer. That is why it’s important to choose the right collections partner. Go for experts that focus on UX, high NPS, and great customer reviews on Google and the BBB. There is a wide selection of collection partners and you shouldn’t settle for one that hurts your brand or doesn’t get your business.

The above consideration highlights just some of the pros and cons associated with sending chargebacks to collections. Do you have more information on the pros and cons of sending chargebacks to collections? Please share with us below.

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