The Chargeback Challenge
By John CondeJanuary 14th 2005
Nobody goes into business to lose money. You work hard for every
penny, and every penny counts. To have that taken away from you months after a
sale was completed is not only bad for business but extremely frustrating. Too
many chargebacks usually spells doom for an online merchant.
The best tools for avoiding a chargeback are not available for online
merchants. Retail-style businesses can perform certain actions that render them
virtually bulletproof to chargebacks (they're still vulnerable, so don't be too
envious just yet). They can either swipe the customer's credit card through a
processing terminal or get a manual imprint of the card. Plus they can get a
signature on that receipt at the time of sale. All of these methods verify that
the customer, merchant, merchandise, and credit card were present and
satisfactory at the time of sale. It's pretty hard to dispute that.
So what is an online merchant to do? Since giving up is not an option,
education and prevention are an online merchant's best weapons. Having some
basic policies and procedures in place can significantly reduce the number of
chargebacks your business will receive. In this article, we will discuss the
realities of chargebacks and identify some strategies that will lower your
potential for needing to deal with them.
What exactly is a Chargeback?
A chargeback occurs when a customer contacts a credit card-issuing bank to
initiate a refund for a purchase they made on their credit card. The reasons
why chargebacks arise can vary greatly but generally, they are the result of a
customer being dissatisfied with their purchase.
The customer may or may not have contacted the merchant about remedying this
situation ahead of time. They may even be completely wrong. However,
responsibility falls to the seller to ensure that the transaction goes smoothly
and the customer is satisfied. A failure somewhere within the fulfillment
process, including at the customer service level, can lead to a chargeback.
The Chargeback Process
The chargeback process is a largely unknown to merchants and can often be a
cause of frustration. To assist merchants in understanding the chargeback
process, let's take a look at the chargeback process used by Visa and
MasterCard. American Express and Discover Card use a similar process. However,
because they do not issue their credit cards through member banks, there are
fewer steps involved and the process is usually faster. The process is as
follows:
- The customer disputes a transaction
by contacting their card-issuing bank
- The card-issuing bank
researches to determine whether the reasoning for the chargeback is valid.
If not, the chargeback is declined and the customer is held responsible
for the charge.
- A provisional credit is provided
to the customer. The card-issuing bank initiates a chargeback process and
obtains credit from the merchant's processing bank.
- The merchant's processing
bank researches the validity of that chargeback. If they determine the
chargeback is invalid they will decline the chargeback and return it to
the card-issuing bank.
- The chargeback amount is
removed from the merchant's account and the merchant's processing bank
provides written notification to the merchant.
- Did a processing error occur?
If so, the sale is re-presented to the card-issuing bank for corrections.
- The merchant provides
documentation to remedy the chargeback. If the provided documentation is
found to be satisfactory, the chargeback is declined and the customer is
once again charged for the sale. If the documentation is found to be
unsatisfactory, the chargeback is successful and the process ends.
As you can see, there are multiple steps involving multiple parties, and
each step requires the responsible party to dedicate a certain amount of time
to its management. The resolution of a typical chargeback can take anywhere
from six weeks to six months. If each party takes the maximum amount of time to
complete a responsibility, it's not hard to see how a chargeback can seem to
drag on forever.
Reasons for Chargebacks and Their Remedies
Chargebacks can fall into any of five different reason categories:
- Point-of-Sale Processing
Errors
- Customer Dispute
- Post-Transaction
- Potential Fraud
- Authorization-Related
Here,
we're going to cover the three reason categories that most commonly apply to
online merchants: Point-of-Sale Errors, Customer Dispute, and Potential Fraud.
Within each category, we'll discuss one or more common reasons for chargebacks.
I'll provide the chargeback code assigned by Visa and MasterCard to each
different reason in parentheses. These codes are commonly used it notify a
merchant of a chargeback, and have been included for your reference.
Point-of-sale Processing Errors
Incorrect Account Number (36)
The card-issuing bank identified the account number on the original
transaction receipt as being different from the account number in the record
deposited for payment (e.g. the merchant made a data entry error (keyed in the
wrong account number for that particular transaction)).
Remedy: Issue a credit back to the customer's credit card.
Re-ring the original sale with the correct credit card number if possible.
Further contact with the customer may be necessary to attain corrected credit
card information.
Duplicate Processing (82)
The card-issuing bank received the same transaction more than once for
posting to the customer's account. (e.g. The customer was 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)
The card-issuing bank received a written complaint from a customer stating
that a promised service was billed but never performed.
Remedy: If the service was performed, send a copy of an
invoice or contract signed by the customer and other evidence that the service
was performed to the processing bank. If the service hasn't been performed
because it was set to happen a specified date which has not passed, send a copy
of the contract specifying that information to the processing bank.
Canceled Recurring Transaction (41)
The card-issuing bank received a claim by a customer that the merchant had
been notified to cancel the recurring transaction and has since billed the
customer, or the transaction amount exceeded the pre-authorized dollar amount
range, or the merchant was to notify the customer prior to processing each
recurring transaction and had not done so.
Remedy: Issue a credit back to the customer's credit card.
Merchandise/Service Not as Described (53)
The card-issuing bank received a written claim that the goods or services
were not the same as those shown and described on the documentation presented
to the customer at the time of the transaction (on the Website) and the
customer attempted to return the merchandise or to cancel the services. Or, if
services had already been rendered, customer attempted to resolve the dispute
with the merchant.
Remedy: If the customer has not returned the merchandise,
notify your processing bank. The customer must attempt to return the merchandise
before attempting a chargeback. If they have already returned the merchandise,
or this is a service, issue a credit back to the customer's credit card.
Defective Merchandise (56)
The card-issuing bank received a written claim from a customer that merchandise
received was damaged, defective, or unsuitable for the purpose sold, and the
customer attempted to return the defective merchandise.
Remedy: If the customer has not returned the merchandise,
notify your processing bank. The customer must attempt to return the
merchandise before attempting a chargeback. If the merchandise was returned,
but is not defective, notify your processing bank. If they have already
returned the merchandise, and it is defective, issue a credit back to the
customer's credit card.
Customer Claims Merchandise Not Received (90)
The card-issuing bank received a written claim from a customer that merchandise
ordered was not received or that the customer canceled the order as the result
of not receiving the merchandise by the expected delivery date.
Remedy: If the merchandise was delivered, send all evidence
of the delivery 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 the 30 days has not yet passed since the sale was
performed. Also be sure to state the expected delivery date. You are allowed a
fair amount of time to deliver your product.
Potential Fraud
Fraudulent Card-Not-Present Transactions (61)
The card-issuing bank received a written complaint from a customer that
stated that he/she neither authorized nor participated in a transaction
appearing on his/her billing statement.
Remedy: If you obtained authorization approval, received an
exact match to the AVS request (e.g. a match on the customer's street number
and ZIP code), the merchandise was delivered to the AVS address, and you have
proof of delivery, provide this information to your processing bank.
The Additional Burdens of Chargebacks
Besides losing the money earned from a sale, online businesses incur
additional costs -- some monetary, some not -- that additionally hurt their
business. One cost rarely recovered is the cost of shipping merchandise in a
disputed sale. If you shipped that package via overnight service to the
customer, chances are that you lost an additional $35-$100 on top of your lost
sales revenue.
Even worse, if a merchant gets too many chargebacks -- usually more than one
or two percent of total sales -- their merchant account will be terminated by
their processor and the merchant will be added to the Terminated Merchant File
(also called The Match File). This file is a blacklist that effectively
prevents the merchant from ever accepting credit cards again. Needless to say,
it's important to keep chargebacks to an absolute minimum as online merchants
have few options for accepting payment and none are as powerful as owning a
true merchant account.
Even if your online business manages to keep its chargebacks below the 1-2%
threshold, any chargeback you receive will require that you spend time
researching the sale and gathering the necessary documentation requested by
your processing bank. Every online business would rather spend that time
promoting their business instead of defending its already completed sales.
Chargeback Prevention
The best way to deal with any chargeback is to prevent it happening in the
first place. The following suggestions are very generic and can be used by most
businesses to decrease their chargeback potential.
- Use a clear DBA (Doing
Business As) name that customers will recognize. Vague corporate names
that do not accurately describe what your company might do or sell will
only confuse customers when they review their billing statements. An
unrecognized DBA name on billing statements is one of the most common
causes of chargebacks.
- Put your phone number on your
customers' statements. If they do not recognize your DBA, they can call
you to find out who you are and why you charged them.
- Always respond to a
chargeback 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 ability to fight the chargeback. If your processing bank
has any more questions or requests, your quick response will ensure that
they have enough time to get the relevant information from you.
- Never accept an expired
credit card.
- Obtain authorization for the
full amount of the sale. Declined transactions should not be accepted or
split into smaller amounts.
- Some disputes are not the
result of unauthorized credit card use. Rather, they start because the
customer disputes the quality of the goods or services purchased. The best
way to avoid this type of chargeback is to work closely with the customer
to establish a mutually satisfactory solution.
- Balance each batch to the
host or to your tickets; this will help prevent duplicate charges.
- Call or fax any large or
suspicious orders to ensure the order is legit. If you are unable to reach
the customer, you might have intentionally been given incorrect contact
information.
- Verify the customer's
address. It is possible to 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.
- Always get signed proof of
delivery. Be able to provide a shipping tracer log that shows that the
customer received the shipped goods.
- Charge the customer's account
at the time the goods are shipped. If you know there will be a delay in
delivery, wait to process your customer's credit card.
- 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.
- Have your return/refund
policy clearly stated on your Website. Make it a requirement that
customers read the policy before their order can be processed.
- Provide accurate descriptions
and images of your products on your Website.
- Be very cautious of any
foreign orders. Generally, orders from Asia, the Middle
East, and most parts of Africa are
considered high-risk.
- Be wary of orders with
domestic billing addresses and foreign shipping addresses. They are
usually fraudulent.
- Be wary of orders for which
the customer is willing to pay more for faster delivery.
Summary
It's no secret that online merchants are at a disadvantage when it comes to
chargebacks. With no credit card to swipe or receipt to sign, verification of a
sale is voodoo at best.
There are new tools available, and more on the way, that aim to reduce
online fraud and therefore reduce opportunities for chargebacks. Two similar
technologies, Verified by Visa and SecureCode, provided by Visa and MasterCard
respectively, will help to verify a customer's identity at the time of
purchase. Unfortunately, at the time of writing, these technologies were not
fully supported and have a limited impact on fraud.
In the meantime, what should you do? Exactly what you've always done: make
your customers happy by offering them a great product or service, having a
customer-centric client satisfaction policy, and providing customers with a
positive experience. Just be sure to approach each sale with due diligence and
you'll be keeping your hard-earned money, not giving it back.
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