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 Technology News | January 2005 
The Chargeback Challenge
 John Conde - SitePoint.com
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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