Debt Collection for eCommerce Startups: A Guide

Online purchase dynamics have revolutionized today’s payment methods. What was once the occasional electronic online payment is now the norm regardless of whether customers are acquiring services or items. One-click purchases, credit card number storage, or financial landing pages for quick purchases facilitate low-friction buying. But this can also contribute to an increase in losses for eCommerce businesses.

Whether due to identity theft, buyer’s remorse, fraud, or children using their parent’s virtual wallet, chargebacks, and returns are frequent and relatively uncomplicated for customers as there’s no need to discuss things with the business.

Losses are part of any business, but reversals, chargebacks, unreturned merchandise, and unpaid bills can add up. And they can become a real nuisance if left unchecked. Dealing with debtors can be challenging for any business but are crucial if your business is a startup. If clients won’t pay for merchandise or have not registered a viable payment instrument with your eCommerce business, what are the alternatives to reducing potential losses?

Startups and Cash Flow

Startups can fail for a lack of cash flow, so timely payments are vital to any new endeavor. Clients that do not pay, despite your best efforts, can be a determining factor in your startup’s success or failure.

What Causes Losses?

Most successful online businesses will build a customer base of happy returning clients that purchase and pay. But some losses are to be expected. The problem is what causes these losses. Are they intentional or due to something else?

Regardless of what business you are in, a certain percentage of losses will be due to identity theft and fraud. Scams and credit card fraud are daily occurrences. In these cases, you will not be dealing with real customers but with dishonest people using their information. 

Children using parents’ credit cards or individuals experiencing buyer’s remorse will account for other losses, especially if merchandise is not returned.

How Much Loss Is Sustainable?

Unfortunately, some loss needs to be calculated into your business model. You’ll need to consider your profit margins and how much you will be paying in commissions to payment service providers. Many payment services will charge less than one percent for chargebacks and under 0,5% in Automated Clearing House or ACH payments. Nonetheless, even the smallest of losses will accumulate over the long term.

Loss Prevention as a Deterrent

Most eCommerce payment methods will invest quite a bit of effort into preventing fraud-based loss before a transaction is finalized, so this aids in reducing potential business losses. Security steps and multi-factor identification can significantly reduce fraud attempts before a purchase is finalized. But are your payment methods so restrictive as to cause you to lose potential customers? 

A percentage of fraud-related loss is authentic, but some loss that appears on the surface to be fraudulent may actually be a misunderstanding. Good customer service can help resolve issues, retain customers, and receive payments due.

Some businesses may also seek to insure against losses and chargebacks. Service providers can simply interrupt service if a client doesn’t pay. 

But what about post-loss debt collection? Resolving any kind of issues with clients may not only help you keep customers but recover owed money as well.  

What to Do About Chargebacks?

Chargebacks are payments that were initially charged to a credit or debit card and are returned to the card because the customer has filed a claim to dispute them. They are approved for various reasons. In the U.S. chargebacks are government regulated. Regulation E of the Electronic Fund Transfer Act manages charge reversals for debit cards, while Regulation Z of the Truth in Lending Act governs credit card charge reversals.

Chargebacks can be initiated by the bank or the merchant, although merchants will usually incur a fee if one occurs. Federal regulations obligate card issuers to offer chargebacks for 60 days from the billing date.

The chargeback can present a real problem for startups. Chargebacks were introduced for consumer protection against fraud. As much as a third of chargebacks are due to buyer’s remorse where a client changes his or her mind about a purchase or from a family member using a credit card without the holder’s knowledge.

Chargebacks can be a serious issue for most startups because new businesses depend on cash flow. The first step to take is to contact the customer to determine if the purchase was legitimate or if fraud was involved. When purchases are legitimate, the customer is liable for payment. If the customer is not forthcoming with payment, this can be referred to a professional debt collection agency.

What to Do When a Customer Doesn’t Pay

When default on a debt occurs, it’s important to begin by directly contacting the customer. This will facilitate resolution if the problem is connected to a misunderstanding. Direct customer feedback can help you resolve service issues, and most customers will appreciate the time and attention invested.

If you are unable to resolve a payment issue with personal contact, try charging the payment a second time after a few days, especially with credit card payments. Or if your client has more than one payment option registered you may want to try another method. ACH payments are more complicated when it comes to trying to charge a second time.

No luck? You are having difficulty collecting payment for an outstanding invoice? Begin a claim with your payment service provider. Payment services will require proof of the order and of your mailing or courier service. Check with your payment service provider to determine what kinds of evidence are necessary. This type of action can prevent chargebacks, so you can recuperate payments due.

Debt Collection Efforts

If your initial efforts to recuperate payments due fail, you might want to consider using a debt collection agency to recover your losses. It’s important, however, to select the right debt collection agency, as many use very aggressive tactics and have given debt collection a bad reputation. 

Outsourcing debt collection will also permit customers to relate complaints to a more neutral third party before making a payment. This can be an invaluable tool if customers have rejected your attempts to contact them or will not talk with someone from your company. A neutral third party can also be an advantage when dealing with victims of online payment fraud.

How to Select a Debt Collection Agency

Debt collection agency efficacy can vary dramatically, so how can you choose the best agency that will not further damage your business?

·      Consider the debt collection agency’s reputation.

Remember that you are hiring a third party to represent your business and your interests. The success of your startup depends on your brand’s credibility and reputation, so whatever choices you make need to protect this. Aggressiveness, rudeness, or intimidation tactics used by a collection agency will reflect on your brand. Search for a collection agency that is customer oriented. You want an agency that works with clients and not against them. This will aid in protecting your brand’s reputation and may even help in retaining customers.

·      Check the debt collection agency’s recovery methods.

A reputable debt collector may ask you to inform your customers that they will be contacted. You will need to furnish the debts that require recovery, and the recovery agency should offer up-to-date information as to how your debt recovery is proceeding.

·      Check the debt collection agency’s success rates.

If a debt collector does recover funds owed, there’s no point in working with them. Make sure the company you are considering is good at recovering the monies owed.

The Bottom Line

Make a good faith attempt through customer service to determine any issues that may be obstructing payment. If customers are not forthcoming with payments, consider contacting a reputable debt collection agency that is sympathetic and customer-oriented to collect any money due. Both your brand and your business may depend on it.