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.
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 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:
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.
Chargebacks can fall into any of five different reason categories:
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.
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.
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.
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.