What Club Leaders Need to Know about Chargebacks

Club Automation

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April 17, 2020

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category

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April 17, 2020

During the global COVID-19 outbreak, many clubs and gyms of all kinds have been forced to close their facilities and face unique financial challenges, especially around cash flow and processing payments.

The industry will recover strongly, but one of the realities that clubs will likely face in the coming weeks is a spike in chargebacks. Many clubs and gyms either don’t pay attention to chargebacks or rarely experience them. The reality is that chargebacks are a two-sided pain point. Not only do you lose that money from the paying customer, but you also get hit with chargeback fees on the payment processing side for the dispute happening.

Below, we’ll go over some details about what a chargeback is, what the dispute process looks like and how you can best protect yourself against losing that revenue.

What is a chargeback?

A chargeback is any transaction that has been disputed by your customer for being unauthorized or incorrect. All a customer needs to do to start a chargeback dispute is contact their bank or financial institution and let them know those funds should not have been withdrawn. Usually, customers have 90-120 days from the date of purchase to start the dispute.

Why do chargebacks occur?

The most common reasons you’ll see as a club are:

  • No Credit Issued – The customer requested a refund or return of funds that was never executed; make sure you refund members according to your membership agreement or online terms.
  • Non-Receipt – The transaction isn’t recognized because a receipt of payment was not provided to the customer.
  • Improper Authorization – The customer denies authorizing the transaction to take place or authorization was completely revoked by the customer to allow the business to continue drafting payments.
  • Duplicate Processing – The customer only authorized one transaction but was charged more than once for the same thing.

What does the chargeback process look like?

These steps should help paint the picture for chargeback processes:

  • The customer will contact their bank or financial institution to reverse the transaction.
  • The issuing bank or financial institution investigates based on information provided by the customer, and if they deem the transaction invalid, the issuer overturns the transaction and files a chargeback.
  • The funds are withdrawn from the payment processor and transferred back to the customer (conditional refund).
  • The payment processor receives all details about the chargeback (date, amount, chargeback reason code) and forwards it onto the merchant (your club). This will be in the form of a physical letter to your business address and, often, an accessible and interactive report in your payment processor’s online portal.
  • You review the information and determine whether you want to accept the chargeback or fight the dispute to uphold the original transaction.
  • If you choose to fight the chargeback, you must provide the requested documents within the designated timeframe (usually 14 days) to the processor. Depending on the chargeback reason code, evidence that your transaction was legitimate could be in the form of:
  • Signed membership contracts with terms of use
  • Receipts
  • Communication records
  • A rebuttal letter explaining the situation
  • The processor sends all documents to the issuer, who then decides to rule in favor of the customer or your business.
  • If the customer wins, they keep the conditional refund, your business loses the money from the original transaction, and you’ll be charged a chargeback fee.
  • If your business wins, the issuing bank reverses the conditional refund and returns the money to the payment processor and, therefore, you. Depending on the processor, you may still be charged a chargeback or dispute fee for the process even taking place.

What happens if I see a massive increase in chargebacks right now?

Regardless of COVID-19 occurring or not, having too many chargebacks initiated against your business can be damaging. The only change is that processors have a stronger eye specifically on health clubs and gyms right now since most have closed their doors in some way.

Generally speaking, if the ratio of chargebacks you experience in a given month is greater than 1% of your total transactions (whether by transaction count of volume), your organization will be considered a higher risk, which could lead to:

  • Delayed funding from the processor
  • A funding hold or rolling reserve
  • Complete pause in processing
  • Account suspension

VISA is the main culprit behind monitoring the chargeback threshold, and they can take aggressive steps to make sure your club gets back on track.

Note : VISA is decreasing the chargeback threshold to 0.9% effective October 1.

The way payment processors underwrite you is all a game of risk. If your business or industry experiences a lot of fraudulent activity, high refund rates or chargebacks, you are considered higher risk by processors, who need to make sure they financially protect themselves, too. If the processor needs to recover funds from a chargeback dispute from your business, and you don’t have enough money in your merchant bank account, the processor could ultimately be liable for those funds.

Can I prevent chargebacks from occurring?

Here are some proactive practices you can use to help mitigate the risk:

  • Contracts – The best way to ensure the customer is authorizing the transaction is via contracts, specifically membership contracts. This documentation includes some of the most important information: customer name, payment type on file, transaction amount, frequency of the transaction, end date of the membership, and cancelation terms. If you have all of that in place with a signature from the customer, that is the ultimate defense against chargebacks.
  • Receipts –After every transaction, it is best practice to print or email a receipt to the customer.
  • Communication – Maintaining good business relationships and being communicative with your customers under all circumstances lessens the likelihood of chargebacks. You’d be surprised how many chargeback disputes stem from damaged relationships or spiteful customers who are looking to recoup a buck for a service they already rendered. The more proactively and collaboratively you can connect with your customer base from the day they walk into your club to the day they have a negative experience, the best position you put yourself in to secure recurring revenue and prevent issues like chargebacks.

We're Here for You

Feeling overwhelmed at the thought of navigating stressful chargeback processes? We hear you, and we've got you covered. We offer a service that involves proactively updating card account information and providing comprehensive member billing support to make your life easier. Reach out and book a consultation below.

And for daily content updates like this, check out our Rapid Recovery Toolkit.

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