“What’s a chargeback?”
Cole Richman, owner and founder of Bottom Bunk, had to ask his payments processor that question not long after launching the online sneaker and apparel store in late 2020.
With $500,000 worth of sneakers sold on the firm’s website and brick-and-mortar locations in just its first few weeks, Richman told PYMNTS’ Karen Webster that one day he woke up to find Bottom Bunk’s bank accounts had been frozen by the merchant’s service provider.
It turns out that people were coming into the store, buying shoes and then charging back the transactions — claiming they hadn’t made the purchase.
With the accounts frozen, Richman said, and while navigating the disputes process, “we had no operating cash for more than six months,” adding that “we almost had to close our doors.”
What the company didn’t know, he said — and was never informed of by its then-payment processor — was that there are different “levels” of risk management that could have mitigated online chargebacks.
“We did not even know that this was something we should be looking out for,” he said. His not knowing almost delivered a knockout blow to Bottom Bunk right out of the gate.
A pivot to PayPal — and taking deposits across the provider’s platform — helped Bottom Bunk have the cash on hand to keep the proverbial lights on and employees paid.
Bottom Bunk, it must be said, is unique among small businesses. Richman’s push into the retail world came after a 2020 release from serving eight years in prison.
While living in a halfway house, he said he saw that a roommate was reselling shoes purchased online. Richman took the plunge, too, ponying up the $200 given by the state of California upon his release to buy a pair of sneakers, ultimately reselling them. He leveraged the profits from that sale to buy more shoes, resell them … and eventually start up Bottom Bunk (the name is a nod to the fact that, in Richman’s words, the bottom bunk is “the place of power in the cell.”)
Today, he said, “we’re a mission driven, high-end resale shoe company,” running the gamut from Air Jordans to Nike to New Balance, and some high-end clothing too.
A portion of all sales go to formerly incarcerated men and women, Richman said. There’s also a nonprofit attached to the store, which helps people accumulate life skills while they are in prison, and helps them access social programs on the outside and develop their own business plans.
“They get on their feet,” he said, “and we help teach them some entrepreneurial skills.”
Clearly, if Bottom Bunk had folded, the negative ripple effects could have short-circuited the lives of founders and employees and impacted the community at large.
Keeping the Lights On
Richman’s tale, recounted during a panel discussion with Webster and PayPal’s Sandipan Chatterjee, head of payment optimization and orchestration, offers a cautionary example of the administrative and financial burdens — existential threats, even — that chargebacks present for small businesses.
When those chargebacks mount, firms can lose their processing agreements or banking relationships outright.
On the face of it, Bottom Bunk is catnip for fraudsters. As Richman explained it, the company does about 95% of its business online, though it also has three brick-and-mortar locations. He told Webster that Bottom Bunk uses QR codes in all of its shoes — so an on-site shopper can scan the shoe with their phone and complete the purchase on their phone.
Sneakers represent a high-risk category for fraudsters, given the high demand and high resale value. A tough macro climate makes the sneakers an even more tempting target. A portion of Bottom Bunk’s business is done on consignment, where people will drop off the shoes, and Bottom Bunk sells them and takes a cut.
“But if a chargeback happens on that specific shoe,” said Richman, “we’ve lost the shoe, we’ve paid the consigner and we’ve lost the money. Chargebacks, in my business, are probably the most impactful thing, and can hurt us the most.”
SMBs in the Crosshairs
Bottom Bunk’s experience is not all that unusual, PayPal’s Chatterjee observed. All manner of businesses, he said, are busy trying to figure out how to accept digital payments and take their business online.
And now, the holidays are upon us: prime shopping season and prime chargeback season.
PayPal exists as one the world’s largest online payment systems, with tens of millions of merchant accounts in its roster and has a boots-on-the-ground perspective of card-not-present transactions and fraud.
As Chatterjee said, chargebacks are increasing, a trend borne by the pandemic and the great digital shift.
“This has been true for every single business and every single payment provider,” said Chatterjee.
And smaller firms are, not surprisingly, in the crosshairs.
But chargebacks and disputes can bedevil even the most innovative and socially-focused businesses.
“The last thing on their mind is fighting digital fraud,” he said, “and you tend not to worry about that until it hits you in the face.” Providers including PayPal can help small business owners mitigate risk and handle disputes.
Since moving to PayPal, said Richman, Bottom Bunk has only seen a single chargeback.
Asked by Webster how Richman’s business might have seen different results had he hit the ground running with PayPal, Chatterjee said, “We would authenticate users in the right manner and run every transaction through our risk engine … to prevent fraud from happening.”
That multi-pronged effort would make sure that genuine users do not face false declines. PayPal also has a disputes team that can help investigate claims.
“We have the advantage of knowing both the buyers and the sellers,” Chatterjee said, with a nod to PayPal’s status as a many-sided network. And with 20 years of data, the company has granular insight into the buying behaviors that can help establish legitimate users and avoid false positives.
Looking ahead to blunt the rising tide of chargebacks, Chatterjee said, small and medium-sized business (SMB) owners need to choose the right payments provider. They should also take a daily accounting of sales patterns that might raise red flags. Multi-factor authentication offers an additional strong line of defense.
“Businesses can also set up limits on the number of transactions a user can make at their store or on a particular card,” he said.
For the SMBs, said Richman, it’s critical to ask a provider just how the business is being protected — and how processes can be streamlined.
As he told Webster, “the perfect partner is somebody who’s going to have some skin in the game with me.”
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