Chargebacks were created as a form of protection for the consumer. The Federal Reserve created regulations guaranteeing card holders the right to a reversal. Various bank networks have their own corresponding rules. Initially, it would seem that a merchant would be more likely to provide quality products and speedy shipping if they had a threat of a chargeback or even having their merchant account turned off, however these rules are extremely one sided.

Consumers typically dispute transactions for a variety of reasons, and each one is issued a “reason code.” The most common reason code used is fraud and identity theft. Merchants are often left with little or no recourse. Visa and MasterCard may even issue their own fines for high chargeback ratios. But what happens when you have a consumer that is abusing the chargeback system? Some consumers make it a habit of reversing transactions.

Some online merchants have opted for chargeback insurance. Chargeback insurance is coverage protecting a merchant who accepts credit cards. With chargeback insurance merchants are covered in the event a consumer claims fraud, lost or stolen credit cards, and post purchase shipping information changes. Chargeback insurance can be costly and in some cases unnecessary. Chargeback disputing and prevention are key in ensuring your online business is making money for legitimate product sales.

Keeping your business safe against online consumer predators is easier and more cost effective than most may think. There are legal ways for a merchant to dispute and win a chargeback.  Ensure that your site has clear and well written terms and conditions and that your system is verifying AVS. Systems like Verified by Visa and MasterCard Secure can give your site extra security during the purchase process. In some cases, when a customer agrees to the terms and conditions on your site, it is as good as an actual signature at a store front. There are also systems that will respond to chargebacks on your behalf. This route will save you time, headache, and money.

Illegitimate chargebacks are costing business owners, and it’s time to fight back against dishonest customers and fraud. I have surveyed 50 of my online merchants and found that most of their chargebacks come from people who order items online, and then in an attempt to keep the product without paying for it, dispute it. I consider this shoplifting.

Part of the problem seems to stem largely from regulations put in place stating anyone can dispute any charge for any reason. Naturally, crooks will use these regulations to their full advantage.

Many online merchants are losing the battle against chargebacks and feel there is nothing they can do. Online merchants should not give up; not all chargebacks are final. The best option is to respond to the chargeback letter immediately. Keep in mind that if your bank still honors the chargeback, you have the right to go after the consumer plus any costs you incur as a result.

Some key tips for combating against chargebacks are:

1. Use a trackable shipping service and require signature on delivery. This provides you with documentation if a dispute should arise. If you sell e-books or other downloadable items, it is a good idea to add something tangible for tracking purposes.
2. Make sure your return policy is clearly posted on your website. Post time limits for refunds and associated fees, such as restocking fees. Also note the condition of the product.
3. Post a chargeback policy on your website. Don’t be afraid to report customers to collection agencies for excessive chargebacks.
4. Make sure to pick a gateway that has a chargeback support feature. These gateways can help you find the best way to combat chargebacks and the correct way to respond to chargeback notices.

It is better to be safe than sorry. If you have specific chargeback issues and are looking for the best way to respond to your notices, feel free to comment. We would love to help.

One example of such relates to non-swiped transactions. Manually keyed transactions typically occur when the magnetic reader on the card doesn’t work or if an order is taken over the telephone. Visa and MasterCard regulations require that a manual imprint of the card be taken whenever possible and that the cardholder signs the imprint. This will provide proof that the card was present during the time of sale or delivery.

Another example would be if there was an equipment failure. When this occurs, a manual imprint and voice authorization is required. During a voice authorization a transaction will be entered into the terminal as a “post authorization” with the 10-digit authorization number keyed, and the funds are reserved for 10 days.  If the transaction is never keyed into the terminal, then the transaction will never be processed. Again, keeping the signed manual imprint is your proof that the customer was present at the time of the sale.

Getting an imprint of the credit card in the above situation would assist greatly in the event of a dispute or a chargeback. Visa requires that merchants keep all sales receipts for up three years and MasterCard requires you to keep receipts for 180 days. When a Retrieval Request occurs, your sales imprint will come in handy. A Retrieval Request is when the cardholder’s bank requests a copy of your sales draft. If you obtained an imprint of the card, you will be better prepared. So next time you are asked if you need an old fashioned knuckle buster, your answer should be yes.

Merchants may be required to provide the following:

• Two years of tax returns for the guarantor
• Six months of processing statements. If you have not processed before, you will be required to provide six months of bank statements
• If you are an internet based account, you will need to make sure you have a clearly visible return policy
• It helps to have a tangible product – I once had a loan restructuring company create a package with a welcome letter and question kit to send to all his customers once they purchased his services.

There is always a way to get a merchant account for any business type. Some business types such as Adult, MLM, Telecommunications, Escort Services, Internet startup companies and Travel may require higher rates, and in some cases a reserve account. The amount you may be required to put in a reserve account varies, based on your volume and business type. Most merchant services providers typically are looking to protect themselves against chargebacks. A consumer can dispute a charge for up to 180 days after the purchase, so processors create reserve accounts in case a chargeback does occur. In my experience, banks like your chargeback ratio to remain under 1%. Otherwise, merchants can be fined and have their merchant account turned off.

There are always offshore options. Offshore processing may be the only option for some business owners and can be costly with rates as high as 10%. Typically, merchants have to pay wire transfer fees as well as high transaction fees. To learn more about these and other options, contact your merchant services provider.

The best way to deal with any chargeback is to prevent them from happening in the first place.

Tips for preventing chargeback claims:

• Use a clear DBA (Doing Business As) name that customers will recognize on their billing statements. An unrecognized DBA on a billing statement is one of the most common causes of chargebacks.

• Put your phone number on your customers’ statements. If they don’t recognize your business name or have a question about the charge, they are more likely to call you to resolve the matter than calling their bank to file a dispute.

• Respond to chargebacks as quickly as possible. A limited amount of time is available to resolve a chargeback. If you miss the window of opportunity to respond, you forfeit your rights through the chargeback process.

• Never accept an expired credit card.

• Obtain authorization for the full amount of the sale. You should never accept declined transactions or split them into smaller amounts.

• Be suspicious of high-ticket sales requested to be sent next-day air or if a runner will be in to pick up the purchase at a later time.

• Use the fraud services offered by the processing bank including AVS (Address Verification) and CVV2.

• Work closely with customers to resolve matters regarding merchandise quality and service issues.

• Balance each batch to the host or to your order tickets to help prevent duplicate charges.

• Call the customer about suspicious orders to ensure the order is legitimate. If you can’t reach the customer, you may have intentionally been given incorrect contact information.

• Verify the customer’s name, address and phone number with the card-issuing bank. By calling the Voice Authorization Center for address verification, you can verify the address and also provide proof that you verified the address.

• Look closely at orders with different shipping and billing addresses. Oftentimes customers have orders shipped to their work or to gift recipients, however it’s not a bad idea to contact the customer to make sure the order is not fraudulent. Be especially wary of orders with domestic billing addresses and foreign shipping addresses; they are usually fraudulent.

• Always get signed proof of delivery. Provide a shipment tracker log that shows that the customer received the order.

• Charge the customers’ account when their order is shipped. If you know there will be a delay in delivery, wait to process the credit card, or only charge the card as you fulfill the order.

• Clearly state your return/refund policy on your website. Make it a requirement that customers read the policy before their order is processed.

• Provide accurate descriptions and images of your products and services.

• Be cautious of foreign orders.

Customer Service is Paramount

Unfortunately, online merchants are at a disadvantage when it comes to chargebacks. Without a credit card to swipe or a signed receipt, verification of a sale is always risky business.

But that doesn’t mean you have to leave it to chance. New tools and software programs help to reduce fraud and consumer disputes.

Verified by Visa and SecureCode are great tools that will help you to verify a customer’s identity at the time the transaction takes place. In addition to taking advantage of current technology, customer service is the tried-and-true way of keeping customer complaints under control. When you have a good relationship with your customers, and they don’t just feel like a number, they’re more likely to call you than rush into initiating a chargeback. Enforce a customer-centric client satisfaction policy, and do whatever you can to provide your customers with a positive shopping experience. Most importantly, always remember to perform your due diligence.

Contact TM&S for more information about chargeback prevention services and tools.

The most common categories for chargebacks include point-of-sale errors, customer disputes, and fraud – and within these categories are a multitude of possible reasons. Understanding the reasons provides insight into how you can keep chargebacks in the “soft” phase from becoming full-blown chargebacks.

Let’s take a look at the possible remedies for common chargeback claims, along with the reason codes assigned by Visa and MasterCard.

Point-of-Sale Errors

Duplicate processing (82): This happens when the customer is charged twice for the same transaction.

Remedy: Issue a credit back to the customer’s credit card.

Customer Disputes

Customer claims services not performed (30): If you offer services and a customer claims that services were never performed, he or she will file a complaint with the issuing bank.

Remedy: If you did perform the service, send to the bank a copy of the invoice or contract signed by the customer and any other evidence that shows the service was performed.

If the service wasn’t performed because it was scheduled for a date that is still in the future, provide a copy of the contract specifying that information. If the service wasn’t performed, issue a credit back to the customer’s credit card.

Canceled recurring transaction (41): This happens when a customer claims that he or she notified the merchant to cancel recurring transactions but the merchant continued to bill the customer. Chargebacks can also result when a transaction amount exceeds a pre-authorized dollar amount.

Remedy: Issue a credit back to the customer’s credit card.

Merchandise/service not as described (53): If a customer claims that the merchandise or services received were not the same as described on your website at the time of the transaction, the bank will issue a chargeback.

Remedy: In these situations, it’s important to find out if the customer returned the merchandise or in the case of services, attempted to resolve the matter directly with you. Customers can’t file a chargeback unless they’ve attempted to return the merchandise to you.

If the customer has already returned the merchandise, or for services rendered, issue a credit back to the customer’s credit card.

Defective merchandise (56): In these cases, the customer claims that merchandise was defective, damaged or not suitable for the purposes sold and the customer attempted to return the merchandise.

Remedy: If the customer did not return the merchandise notify your issuing bank. The customer must attempt to return the merchandise (and prove it). If the merchandise was returned, but is not defective, let your processing bank know. If the customer returned the merchandise and it is defective, issue a refund.

Customer claims merchandise not received (90): If a customer doesn’t receive the merchandise, he or she should try to work it out directly with you but it doesn’t always happen that way. Customers can file a claim with the bank disputing that the merchandise was ever delivered.

Remedy: If you did deliver the merchandise, send all evidence of delivery, including signatures, to your processing bank. If the chargeback is attempted less then 30 days from the date of sale, send a copy of the transaction to the processing bank showing that 30 days has not yet passed since the sale took place.

If you haven’t shipped the order but have notified the customer of the expected ship date, send all communications to your bank. You are entitled to a fair amount of time to deliver your product.

Potential Fraud

Fraudulent card-not-present transactions (61): Your bank will notify you if a customer claims that he or she did not authorize or participate in a transaction appearing on his or her billing statement.

Remedy: Provide all documentation from the sale including authorization approval, confirmation of exact match to the AVS request (i.e., the customer’s street address and zip code), and proof of delivery to the AVS address. If you don’t have the above confirmations, you will probably end up with the chargeback.

With the right amount of due diligence and transaction monitoring, you can prevent chargebacks in the first place or remedy them before they become full-blown chargebacks. For tips on avoiding fraudulent charges, see our previous post on staying off the MATCH list.

Chargeback ratios are calculated by dividing your monthly sales by the number of chargebacks or the total dollar amount of the total chargebacks registered in any given month – or both. You can take proactive steps towards facilitating approval of your merchant account and receiving a fair chargeback ratio – which in general is 1%.

Make sure that you provide your bank with as much detailed and specific information as possible, including:

• How long your company has been in business and what you sell
• If you have processed credit cards in the past
• The dollar amount you expect to process per month

If you sell “high risk” products or services like online gambling or adult content, don’t hide it. The bank will find out and could shut down your account if you were dishonest during the application process.

And here’s something else to consider – in some cases, returns are weighted into standard chargeback ratios. Visa and MasterCard have two separate scores for determining your risk potential. One score is based on chargebacks and the other is based on returns. However, many processors combine these two scores for risk assessment.

Unfortunately, combining these two scores could get your merchant account shut down, hit with fines, or you could end up on the MATCH File. Why am I telling you this?

Many merchants consider returns as a customer service issue – it is par for the course. You want your customers to be happy, so if they’re dissatisfied with a purchase, it makes sense to offer a fair return policy. The alternative sets you up for potential chargebacks (e.g., if you don’t approve the return, customers will dispute the charge with their bank anyway).

From the bank’s point of view, you – the merchant – dropped the ball somewhere. Banks are aware that oftentimes customers simply change their mind and don’t view returns as seriously as chargebacks. But you still need to keep a close eye on your returns.

If the number of returns is alarming, processors will notice. With every return there’s a chance that you don’t have enough money available in your account. This scares processors. When they approve your merchant account, processors become financially liable for every penny they approve. If they processed $20,000 and it charges back, the processor gets the bill if you can’t pay. Processors work with hundreds, if not thousands, of companies, meaning they process millions of dollars worth of transactions – that’s a lot of money to cover if their merchants can’t come up with the money.

So guess what this means? Since returns are often weighed into the standard chargeback ratio, they can cause your business to reach the 1% mark. If you’re a small business, 1% doesn’t leave you with much wiggle room. Fortunately returns are usually weighted so that several returns equal one chargeback – but returns tend to be more common than chargebacks.

I’m not telling you this to alarm you. If you monitor your returns and amend your return policy if necessary, you can head off trouble before it hurts your bottom line. Read my posts on the chargeback process, how chargebacks work, and how to prevent chargebacks.

A “chargeback” is more than a buzzword. A chargeback happens when a customer disputes a charge you’ve made on his or her credit or debit card. The chargeback usually happens after customers get their billing statement in the mail. And many times they’re quick on the draw – meaning they don’t call the merchant to try to figure out the problem before calling their bank.

There’s also the problem of “friendly fraud”, where customers dispute a legitimate charge. Friendly fraud is particularly pervasive in online gambling and adult entertainment industries.

So what happens when a chargeback is initiated? A chargeback usually happens within 120 days of the transaction date (most banks have a time limit on initiating chargebacks). The cardholder or bank claim that the merchant – that’s you – made a mistake at the time of the transaction.

Typical chargeback reasons:

• Disputes over merchandise quality
• Refund credit not received
• Proper authorization not obtained at the time of the transaction
• Merchandise not received
• Duplicate charges
• Fraud

Then your account is debited and you must provide proof that the transaction is valid and complies with Visa/MasterCard rules and regulations.

How the Chargeback Cycle Works:

There are five formal steps in the chargeback process:

1. Presentment: Original Sale
2. First Chargeback: A customer disputes a charge to his or her credit card company or bank and the bank responds with a retrieval request to dispute the transaction.
3. Second Presentation or Re-presentment: This is when the merchant has an opportunity to respond to the first chargeback.
4. Second Chargeback: If the second presentment is rejected by the cardholder, the issuing bank files a second chargeback.
5. Arbitration: This is when Visa/MasterCard staff reviews the situation. The losing party could pay up to $500 in fees. If it means keeping your chargeback ratio in check, you may find it worth the gamble.

First Chargeback

Once your bank receives electronic notice of a chargeback from a cardholder’s issuing bank, you will get a notice advising you of the chargeback. You will have about 7 days to offer your rebuttal. Unfortunately, until the matter is resolved, your account will be debited for the disputed amount.

Second Presentment

Once your bank receives your supporting documents, they will review them to determine if the substantiation you provided meets the Visa/MasterCard requirements necessary to remedy the chargeback.

If it doesn’t, expect to get a letter notifying you of the decision, along with the reason the documents didn’t meet Visa/MasterCard requirements. In some cases you may be asked to provide additional documentation to clear the chargeback.

If your documentation does meet the requirements, you’ll get your money credited back and a letter stating that the chargeback was remedied. The process up to this point can take up to 45 days.

Second Chargeback and Arbitration

When the situation escalates into a Second Chargeback or Pre-Arbitration, you have to make a decision about your next course of action. If you continue to disagree with the cardholder and issuing bank, you must file for MasterCard arbitration.

For Visa transactions, the transaction amount is left in the merchant’s bank account while the merchant decides whether to accept the issuing bank’s request and return the transaction amount to the cardholder. If the merchant rejects the request, the issuing bank has the right to file for Visa arbitration.

What is Arbitration?

Arbitration is a process reserved for cases when the cardholder/issuing bank and the merchant cannot resolve a disputed transaction through the chargeback process. You would only move on to arbitration after the Second Presentment stage. All involved parties have an opportunity to present their case to a Visa/MasterCard analyst.

Arbitration cases must be filed with Visa/MasterCard no later than 45 days after the Second Chargeback is issued.

Filing Procedures, Fees and Penalties for Chargeback Arbitration

You must complete a Visa/MasterCard Arbitration form along with a narrative description of the problem and legible copies of all documentation submitted during the chargeback process.

There is a filing fee of $150.00 and a review fee of $250.00 paid by the losing party (these fees are subject to change and verification). One important thing to note is that either party can be assessed a $100 fine for each technical violation against a party. A party could win a case but still be assessed a technical fine.

Who Wins?

If you end up in arbitration, there are several criteria the arbitrator will consider. Merchants usually get an unfavorable ruling if they:

• Fail to address the issued raised by the cardholder.
• Fail to prove that the dispute was unreasonable.
• Present insufficient documentation to support either argument.

Split decisions sometimes happen when one party offers a reasonable compromise solution to the dispute.

Compliance Issues

There are instances when you are not protected by the chargeback process. This happens when a cardholder or issuing bank alleges that you violated specific Visa/MasterCard Operating Rule(s) that is not covered by a chargeback right.

The issuing bank must certify that a financial loss did or will occur as a result of the rule violation. Each side has an opportunity to present to a Visa/MasterCard analyst assigned to the case.

Examples of compliance violations include:

• Failing to properly disclose limited refund or return policies to the cardholder at the time of the transaction;
• Preparing two or more transaction receipts to avoid authorization for a single transaction;
• Quality of service received from a travel and entertainment merchant.

Compliance cases are filed within 90 days (Visa) and 180 days (MasterCard) from the transaction date, the date of a Retrieval Request or the date of violation; or 90 days for Visa and 45 days for MasterCard from the date the issuing bank receives notice from its cardholder of a violation (Date of Discovery).

Filing Procedures, Fees and Penalties for Compliance Issues

If you face a compliance violation claim, you will have to complete a Visa/MasterCard compliance form and provide a narrative description of the problem and legible copies of all documentation supporting your case. The issuing bank must provide you with a pre-compliance letter at least 30 days prior to filing in an attempt to settle the matter.

As in regular arbitration, there is a filing fee of $150.00 and a review fee of $250.00 paid by the losing party. Further, a $100.00 fine may be assessed for each technical violation found against a party. A party could win a case but still be assessed a technical fine.

Decision Criteria for Compliance Violations

The arbitrator will consider the following factors when determining final financial liability:

• Whether or not there was a rule violation and a resulting financial loss.
• Whether or not the cardholder’s complaint was reasonable.
• Whether or not the disputed amount should be allocated between the requesting and opposing parties.

If you’re facing a chargeback claim, arbitration or a compliance violation charge, the most important thing to remember is to respond quickly and accurately with sufficient supporting documentation. Failure to respond by the stated deadlines is an automatic forfeiture of the transaction – meaning you will lose the full transaction amount.

Stay tuned for more on calculating chargeback ratios and preventing chargebacks. In the meantime, download the Visa Merchant Card Acceptance Guide. Learn more about the chargeback process and what triggers a chargeback on Visa’s website.

How? For starters, rethink whom you do business with. Signing up with the wrong processor greatly increases your chance of landing on the MATCH file, especially for incidental reasons like fee discrepancies.

Sign up with reputable processors and have a thorough understanding of the provisions in the merchant account application, particularly the contract period and any associated termination fees. Also, it’s a good idea to understand the rules of Visa and MasterCard. Knowing about the MATCH file and the general regulations of Visa and MasterCard can help when trying to get off of it – or stay off.

Preventative measures can help you to stay off the TMF – measures such as fraud detection and an effective transaction management system that prevents mistakes like authorizing transactions multiple times, charging cancelled cards and other oversights.

Tips for staying off the TMF list:

• Don’t go over your officially authorized maximum sales without permission from your merchant processor.
• Provide your customers with up-to-date information about how and when you will debit funds from their accounts. Give them easy access to contact methods for them to reach you with any of their questions, concerns or complaints. Respond to all inquires in a timely fashion.
• List your customer support phone number on your customers’ monthly statements. If they don’t recognize your debit they should call you first before hastily-and mistakenly-disputing the charge.
• Provide excellent customer service and stay in touch with your customers. Send emails, call them to confirm higher-than-normal charges or to solicit customer feedback, and send newsletters. The more they know you the better the more they will feel comfortable with and trust you.
• Monitor transactions closely with a transaction management system, so that you can protect your business from an expensive interruption of service.