What's your problem? Get Back, Chargeback!

Can a small-business owner ever win the battle against credit card companies?

- Joe Keohane

Q I run a paint-and-sip studio, where people can make art as they drink, and we have a strict cancellation policy: Cancel less than 24 hours before your class and you don’t get your money back. On many occasions, after a person doesn’t show up for class and loses their money, an infuriating thing happens: They call their credit card company and say they want the charge removed. The credit card company calls PayPal, which handles my transactions. I always provide ample evidence—a receipt, emails with the customer, and so on. But nearly every time, PayPal tells me they ruled in the customer’s favor. The money gets taken out of my account, and I get hit with a $20 fee. Can I ever win?—Scott, New York City

A: Ah, the dreaded chargeback—bane of many a small-business person’s existence. Chargebacks were devised decades ago to protect credit card users against fraudsters, but today, in one of the great unintended consequences of the e-commerce age, they’ve turned many of those users into fraudsters themselves. And Scott is a victim to a particularly infuriating category of chargebacks: The finance industry calls it “friendly fraud,” because the finance industry operates from a very different definition of “friendly” than I do.

Here’s what friendly fraud looks like: A customer purchases a product or service, then goes straight to their credit card company, claims to have been misled or cheated (or to have never received the product or service in the first place), and then tries to get the charge knocked off. The card issuer examines the claim and renders a decision. If the complaint is found to have merit, the sum in question is withdrawn from the seller’s account. Win or lose, the seller is charged a fee ranging from a few cents to $30.