How to Legally Protect Your Business Against Chargebacks as a Service Provider

Picture this: you’re a service provider that offers a very specific service for people.

For this example, let’s pretend that you’re a makeup artist. 

Your client comes to your studio, gets their beautiful makeup service for a special event, leaves your studio singing your praises and even posts about how great you are on Instagram. 

And then days later, one of your worst nightmares as a service provider happens…

You receive a chargeback from said client. 😩

And if you aren’t familiar with the nightmare of chargebacks, first: consider yourself lucky. And second: let me explain…

Before I get into those details, let me first say that this is completely legal. Chargebacks are a real thing and 100% valid. Someone taking advantage of them, however, is NOT cool – which is why I’m writing this post so you can avoid that!

If you’re not aware of what chargebacks are, how they work and how they can affect you as a service provider, you run the risk of losing lots of money in the future. 

Unfortunately, dishonest chargebacks are super common and they’re something that you want to actively protect yourself from.

The GOOD NEWS is that I’ve made that super simple for you. Before I share that, let’s dig into the specific details of what a chargeback is exactly, how they work and how they differ from refunds.

NOTE: This blog post is specifically for those with service based businesses. If you have a product based business, CLICK HERE to read how chargebacks can be handled for your business specifically.

First things first, let’s talk about what a chargeback even means. People often think that a chargeback is the same thing as a refund, but they are VERY different. 

I’ll dive into those details more in a minute, but for now, a chargeback is a process where a consumer disputes a transaction made with their credit or debit card and requests a return of their from the card issuer or their bank.

The ability to request a chargeback can be a great thing in the instance of fraudulent charges, but the sad part is that people abuse chargebacks and misuse them and that’s where business owners see the brunt of it. 

Chargebacks were initially designed to be a consumer protection mechanism to provide a resolution for unauthorized or fraudulent transactions, billing errors or purchases not delivered as promised, but as the online business industry has grown, chargebacks have too… and not in the way they were intended. 

How Do Chargebacks Work?

When someone initiates a chargeback, the card issuer or bank will investigate the claim and determine whether or not it's valid.

Although there is an investigation before chargebacks are issued, in most cases it can be difficult to obtain tangible proof of validity, so oftentimes their financial institution will be on the side of their customer, believe that their claim is true and approve the request.

And this is where you as the business owner start to experience negative impact from chargebacks. 

Before I get into how you are affected by chargebacks as a business owner, let’s quickly touch on how chargebacks are different from refunds.

How Chargebacks Are Different Than Refunds

As mentioned earlier, a chargeback and a refund are two VERY different things and although they both involve returning money to a consumer, they are completely different processes and have key differences including:

• Initiation

First and foremost, the biggest difference between a chargeback and a refund is how the request is initiated.

For chargebacks, the request is initiated by the consumer and involves contacting their card issuer or bank to dispute a transaction.

A refund, on the other hand, is typically initiated by you (the merchant) in response to a customer’s request for a return or reimbursement.

So essentially, a refund is mutually agreed upon, whereas with a chargeback, you have no say in the request at all as the business owner.

• Decision-making authority

With a chargeback request, the final decision to approve the request lies in the hands of the card issuer or bank. As mentioned earlier, they will investigate the dispute and determine whether the consumer's claim is valid.

With a refund, you have way more control over the process and can decide whether or not to issue a refund based on your own policies and the circumstances of the request.

Additionally, as a business owner, you have the ability to offer alternatives to refund requests, such as issuing gift cards, coupon codes or goods that are equivalent to the original purchase. 

• Financial responsibility

In the instance of a chargeback, the financial burden falls on you as the business owner if the dispute is upheld. Not only will you pay for the lost revenue and overhead of the transactions, but additional fees are also typically included with chargeback requests.

Overall, if a chargeback is granted for one of your customers, the transaction can be debited from your account without any notification or warning and you have zero control over it.

With a refund, however, you typically don’t experience additional fees and don’t experience as much financial backlash that you do with chargeback requests.

So, back to how you’re affected with chargebacks…

How Chargebacks Differ for Product Based VS Service Based Businesses

Chargebacks cost businesses up to  $150 BILLION per year (insane right?! 🤯) and digital goods sellers have 10x more chargeback exposure than physical goods sellers – which really just means that if you’re selling things online and people receive their purchase in the form of a digital asset (such as a course), you are at MAJOR risk.

But this doesn't mean that service providers aren’t at risk as well. 

In fact, I received a call from a client of mine just this week who is a chiropractor aka a service provider, telling me they just received their first chargeback and it was for over $1,000.00!!

If you’re a service provider of ANY kind, whether it be in the beauty industry (i.e. makeup artist, nail tech, med spa, etc.) online business world (i.e. copywriter, virtual assistant, etc.) home maintenance (i.e. lawn care, house cleaning, etc.) and MANY more, you want to make sure you have the right policies in place to protect your service based business from potential chargebacks. 

When it comes to chargebacks for service based businesses, there’s a few elements that are unique to your services compared to that of physical or digital goods making the process of a chargeback a bit more challenging, including:

• Tangibility of Transaction

With product based business, there’s the physical and tangible nature of the products that people receive. Chargebacks for product based businesses often happen when customers may claim they didn't receive the product, received a damaged item or the product didn't match the description.

With service-based businesses, on the other hand, the service someone receives is intangible, so the reasoning for the chargeback is often much different. In this instance, a customer may claim that they were dissatisfied with the quality or outcome of the service you provided.

• Evidence of Purchase

Product based businesses often have the advantage of being able to provide concrete evidence of the transaction, such as shipping receipts, delivery confirmations or tracking numbers. This documentation can help significantly in defending against chargebacks.

Service based businesses, however, don’t have this advantage and may have a harder time providing tangible evidence to dispute a chargeback.

If we’re sticking with the makeup artist example from earlier, the only real evidence of the service are photos you took of the customer after receiving their service, their payment or the review they provided afterwards.

• Return Policy

Product based businesses often have a defined return policy and process in place for handling customer returns and refunds. In the case of a chargeback, they may request that the customer initiates a return and follows their established procedure.

Again, service-based businesses typically don't have this option since they are providing a SERVICE – which is usually intangible. This may require that in the case of a chargeback, you have to rely on negotiation and customer support to resolve the issue.

How Chargebacks Affect Business Owners

When most people think of chargebacks, they only think about the selling price of the product or service they purchased.

“Oh, that was only $100! That’s not a big deal for them.”

You’d be surprised at how many people really do think that way. 

But what they’re not considering are all of the other fees and additional costs associated with chargebacks that can add up to be over 200% of the transaction value. 🤯

Yes, you read that correctly… over TWO HUNDRED PERCENT.

So, if you’re a makeup artist that charges $250 for a service and someone were to request a chargeback, the additional fees and costs associated with that one request could equal up to $750.

That means if you received 4 chargeback requests on a $250 service, you could potentially find yourself in a pool of over $3,000 of fees and costs.

And as a business owner, I’m willing to bet that $3,000 means a lot to you. (It sure does to me!)

If this scenario is the LAST thing that you want to experience in your business, having protection in place is KEY. 🔑

How to Protect Yourself Against Chargebacks

What’s so crazy about the work that I do is that the action you need to take to prevent any major issues, like chargebacks, is actually very simple. 

It just requires a little extra effort to make sure you have all of your legal ducks in a row. But it really isn’t that complicated – at least not when you use the resources I’ve created!

Through my work, I’ve found that many people avoid the legalities in their business because they simply don’t know HOW to do it and they don’t want to spend hours of their time on Google figuring it out. 

That’s why I’ve dedicated my entire career to learning this stuff for YOU and creating simple ways (we’re talking plug and play templates) for you to protect yourself as a business owner so you can continue living in your zone of genius and do what you love – while also profiting from it! 💸

To help you protect your business against chargebacks as a service based business, I have specific templates that you can use to ensure that you have the correct Terms and Conditions in place that include a chargeback clause!

Simply click which applies to your industry from the following list, grab the contract you need and easily implement into your business to prevent the nightmare of chargebacks:

• Copywriting
• Coaching
• Brand and Website Designer
• Virtual Assistant and other freelancers
• Social Media Managers
• Health and Wellness Professionals

Don’t see your industry listed? Don’t worry – I’ve still got you!

This Professional Services Agreement has you covered!

These templates already have a built in chargeback clause which is the thing that can help you dispute potential chargebacks in the future.

When this is setup, if a customer attempts a chargeback, you can send their financial institution a copy of the agreed-upon terms and in most cases that little document will settle the dispute in your favor. 👏🏼

Moral of the story: take the extra steps to make sure your service-based business is legally backed so that you can win like the boss business owner that you are. 🏆