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.

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.