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Credit Card Chargebacks - A Merchants Nightmare

Joe Q. Merchant, a successful e-commerce business owner, opens a letter from the Chargeback Department of his credit card processing company. Whats this? he wonders, intuitively knowing that this cant be good news. His suspicions are proven correct when he reads this retrieval request form where he must provide information about a particular transaction. While no specific reason is offered as to why this request has been initiated, Joe knows that he must comply to avoid a chargeback where funds can be taken out of a merchants account due to a variety of reasons and placed back into a given customers account.

Joe ponders what went wrong with this particular transaction. Is it possible that a member of his staff accepted an invalid credit card (e.g., expired date)? Has there been a processing error (e.g., an input error has been committed where the wrong account has been charged)? These scenarios are very unlikely, Joe decides. In all probability, a customer has either disputed a) the validity of the transaction (i.e., whether the customer has authorized the transaction) or b) the quality of the service and/or product (i.e., the customer has voiced dissatisfaction and wants a refund).

According to guidelines set by Visa, Mastercard, American Express and Discover, Joe Q. Merchant must reply with written correspondence, providing all the requested information in an expedient fashion in an attempt to rebut any possible chargeback. (A review committee will eventually render a decision as to the legitimacy of a chargeback.) But the retrieval request has indicated the date that this information must be received. If the merchant offers evidence of a transaction after this date, a chargeback will ensue and the merchant will automatically lose those hard-earned dollars that he/she may have already spent.

Online merchants, such as Joe, have more difficult obstacles to overcome than retail merchants in the resolution of chargebacks. After all, those who generally swipe credit cards have a transaction slip or receipt. If a card does not swipe through a credit card terminal, retail merchants must run the card through a manual imprinter to prove that the transaction was authorized. In contrast, those who run businesses online will not have such a physical receipt proving that the customer authorized the sale. This is why online transactions are categorized as card not present or customer not present.

Every year, a myriad of chargebacks result when customers claim that they never received the merchandise. In such instances, it is imperative that the merchant has a proof of delivery notice, indicating the date with the customers signature. If the signature on this notice belongs to another individual (e.g, neighbor) or even if the customer claims that he/she never signed for the item (signature is not clear), the merchant can lose the chargeback. It is always best that an online merchant use the Address Verification system (AVS) to ensure that the address listed on the customers credit card matches the billing address. Moreover, it is advisable to check for Visas CVV2 code or Mastercards CVC2 code the three digits printed on credit cards near the signature panel in the back of the card to help determine the validity of a sale. This aides the merchant in helping to identify a cardholder in a non-face-to-face transaction.

Of course, the merchant may then insist that the billing address and ship to address be the same to reduce the possibility of a chargeback. (As an added measure of protection as a proactive maneuver a merchant may fax a customer an order or invoice form and ask that the form be faxed back so that the customers signature may be on file. In another scenario, if the customer has initiated a chargeback for non-delivery of goods, before 30 days has elapsed from the time that the transaction occurred, the merchant can respond that ample time for shipment was not provided especially if he/she can submit the terms of agreement, indicating the delivery date. If the merchant knows that delivery will be delayed, it is imperative to contact the customer should the customer derive the conclusion that the shipment was never made. Moreover, at least with phone orders, the merchant may even decide to postpone charging the card until the delivery is near completion or completed.

The retrieval request/chargeback battle becomes even more complex if the customer claims that the product or service does not live up to the customers expectations. If this has occurred, Joe Q. Merchant needs to submit his refund policy and proof that the customer was made aware of such a policy.

If a product was purchased, the customer must return it before a chargeback can be initiated at least if the customer used a Visa or Mastercard. It is then up to the merchant how to proceed (i.e., to either grant or deny a refund). Disputes regarding a service fall in a very gray area. While it is mandatory that the customer attempt to work out an agreement with the merchant before attempting to charge back payment, such a conference may result in a stalemate. The almighty refund policy may help the merchant but if there are loopholes, the customer may very well be deemed victorious. And it should be clear that any tie goes to the customer; if the merchant cannot provide conclusive evidence that services rendered were thorough and appropriate or if there exists reasonable doubt, Joe Q. Merchant will not only have lost time with the customer but his money. And if the customer asserts that services were not rendered at all, Joe needs to show evidence of his work to the processing bank or a contract that spells out that he intended to provide service on a future specified date. Again, any inconclusivity that Joe fulfilled his obligation or planned to will result in a thinner wallet for Joe.

Although Joe Q. Merchant was quick to dismiss the notion that a point-of-sale processing error transpired, he needs to realize that there exists the possibility for human error on any given transaction. What happens, for example, if a customer has inadvertently been billed twice for a product or service? What happens if a customer cancelled a recurring billing charge but was still assessed a charge? In business, attention to detail is a must. But if Joe or a member of his staff erred, a credit to the customer must be issued posthaste.

Of course, the best way to prevent chargebacks starts with Joes actions and not necessarily the customers actions. Are safeguards in place to prevent processing errors? For instance, on phone orders, do the merchants representatives ensure that every given digit, including the expiration date, is absolutely correct? Are orders confirmed by fax?; Are phone numbers checked with directory enquiries?; Are customers contacted back by phone to confirm the telephone number?

Internet orders need to be evaluated, too. Are fraud-preventative devices, such as the AVS and CVV2/CVC2 code employed? Was the customers address verified by calling the card issuing banks Voice Authorization Center? (Alternatively, the merchant can automatically decline any transaction where there is an AVS mismatch.) Is the refund policy easily accessible and observable on the website? Does a recognizable Doing Business As (DBA) name with a concomitant phone number appear on the customers statements? Are signed delivery receipts obtained?

Logic and intuition are powerful tools in preventing chargebacks, too. If Joe Q. Merchant has an uneasy feeling about a transaction (e.g., the customer is willing to pay additional fees for faster delivery for a high-ticket item, the customer has a domestic billing address but a foreign shipping address, etc), he needs to proceed with caution. High-ticket items are profitable but risky and Joe Q. Merchant must especially perform his due diligence with such transactions.

A yellow light should also appear for any foreign order, particularly those that originate from certain problem countries like Singapore or Indonesia. Indeed, Joe needs to weigh the benefits vs. the potential cost of doing business outside the States.

Although chargebacks can raise their ugly head for any merchant, Joe Q. Merchant realizes that by taking a thorough, hands-on and cautious approach, he can substantially reduce or eliminate their occurrence. As an added measure of protection, Joe will conduct business ethically and responsibly and reach out towards his customers to ensure their satisfaction. He will, for example, describe products and/or services with accurate descriptions, provide a clear and fair return policy and establish dialogue, whenever possible, with the customer either before, during or after a given transaction.

Advancing technology, to better identify customers (e.g., Verified by Visa or SecureCode provided by Mastercard), will serve to reduce fraud and/or limit chargebacks. But until technology catches up with the oft-unpredictable world of e-commerce chargebacks, Joe Q. Merchant can look towards one reliable stop-gap measure: himself.