How to win a chargeback
December 1st 2012 -
If your business accepts credit cards as a form of payment then you’re probably familiar with the aggravation of the chargeback. In the process of a chargeback, the cardholder has contacted the card-issuing bank to dispute a charge. The bank through the acquiring network then opens an inquiry to determine if the reason given for the dispute is legitimate. Legitimate reasons can include:
- Unrecognized or unauthorized charges (including charges from a lost or compromised card)
- Incorrect date or amount of charges
- Duplicated charges
- Undelivered goods or services
- Goods or services received in unsatisfactory condition or not as advertised
- Unable to resolve dispute with merchant over dissatisfaction with goods or services
The one disadvantage that merchants have from the outset is that the issuing bank has a financially vested interest in the satisfaction of the cardholder and not the merchant; therefore, it is even more important that merchants take all the necessary steps to ensure that they can defend themselves when such a situation arises.
There is much more to this topic than I will be able to cover in this single article so I will limit the scope to physical storefront operations and leave most of the online merchant problems for a later time.
Friendly fraud and retaliatory chargebacks
Genuine fraud chargebacks may be unavoidable but there are two types of chargeback disputes which are more easily deterred or defended. The first is what is known as friendly fraud. Usually this arises from a simple misunderstanding on the part of the cardholder, such as the merchant name on their statement not matching the DBA of the business or a family member using the card but neglecting to inform the cardholder until after the statement has arrived. For online purchases or phone orders these are much more problematic but when a card was present at the time of purchase and an actual signature is obtained the resolution almost always favors the merchant.
Retaliatory chargebacks typically stem from customer dissatisfaction and unfortunately are a result of our litigation-happy society. Instead of pursuing the proper channels to get satisfaction from the merchant, the cardholder is more than willing to engage the bank to do the dirty work for them. In many cases this is also the method by which genuine credit card fraud is executed by the cardholder themselves – by disputing the charge but not taking reasonable steps for a non-dispute resolution, they think that they can avoid paying the bill while still keeping the goods or services they purchased! It is up to the merchant to determine how much time and expense to invest in combatting this type of fraud, both in terms of the loss of revenue and also the principles and reputation impact of prolonged dispute.
Responding to the dispute notice
Many merchants simply don’t think it is worth their time to respond to dispute notices but the impact goes beyond the loss of revenue and the chargeback fee. The additional underlying cost is that there is a scoring system by which acquiring networks measure the risks a given merchant poses and too many chargebacks can result in the suspension or cancellation of your merchant account. Secondary to this, there is an industry blacklist that prevents the merchant from applying to any other merchant processing solution for several years thereafter. For this reason alone it is far more important to respond to the inquiry simply to demonstrate due diligence to the process.
There is also a limited amount of time merchants have to respond to notifications of an investigation. The deadline will be clearly stated in the initial communication and failure to respond in that timeframe automatically awards the dispute to the cardholder.
Of course the goal shouldn’t be simply to deflect but to actually win the dispute and this is where preparation is vital. The most important aspect of any dispute is supporting documentation. With a point of sale purchase there is the credit card receipt with the cardholder’s signature. In the case of a recurring payment, a contract outlining the billing process with the cardholder’s signature needs to be available. In cases involving shipment of goods, invoices and tracking numbers are vital to demonstrate good faith in sending the order(s) and this may redirect the consumer to contact the carrier for lost carriage. In any case, having a reliable and referenced recordkeeping system is going to allow you to quickly locate and remit the required supporting documentation and put the issue to rest. It is best if the recordkeeping can be maintained electronically, allowing for instant search and retrieval in a few seconds.
The EFT caveat
There is an important factor to
consider which is especially common in this industry and that is when the cardholder and the consumer are not the same person. This is a common scenario in the case of recurring billing in which a parent may allow a spouse or minor to enroll using a card in the former’s name. It is vital therefore that the cardholder be present and sign for the authorization to debit the card and to not let the member sign by proxy. In a chargeback inquiry this is a major red flag to the acquiring network.
The ‘No Refunds’ defense is no defense
Even if it is clearly stated in your establishment or on the supporting documentation, a simple ‘no refunds’ policy is not in itself a valid defense thanks to the Fair Credit Billing Act. Consumers are assured certain rights under this law to dispute charges for a number of acceptable reasons. It is however still a good practice to have your business policies visible and/or available upon request, and if it is possible, to make the consumer acknowledge that they have received, read and understand the policies as part of the sales process. By demonstrating that the consumer was informed of the policies a merchant can greatly increase the chances of winning a dispute.
Along the same line, a clearly stated retention of the right by the merchant to refuse to do business is an important factor to protect against credit card fraud before it begins. This lends itself to a certain amount of ‘gut instinct’ but if there’s something unusual about a transaction or the circumstances surrounding a transaction your best bet may be to turn away the business. Non-standard card types, cards in a similar but not same name, and repeatedly declining cards are all red flags that should trigger caution before proceeding with the transaction. Also, if one of the first questions a potential consumer asks is the return policy, it is likely they are only looking for an opportunity to exploit that policy for their own gain. The right to refuse service provides the merchant the opportunity to deflect the fraud before it starts.
Other options to combat fraud
First, just like consumer credit protection, there are solutions out there for merchants to help them prevent chargebacks, defend against chargebacks and even provide insurance to compensate for the losses associated with chargebacks. Of course like any insurance or protection structure, it involves out-of-pocket expense against the potential for future expenses so unless you have a significant track record for chargebacks it may not be worth the expense.
Second, even if a merchant loses a chargeback dispute that is not to say that they have to accept the resolution as the end of the matter. The whole dispute process is handled ‘internally’, administered by the acquiring network (Visa, MasterCard, Discover, AmEx) as an alternative to litigation. Once the resolution is delivered, the funds are extracted from the merchant’s account and returned to the consumer’s account. If the merchant feels there is legitimate cause and evidence to make their case legally, they can take legal action to recollect the funds by way of a civil suit or debt collection agency. This can run counter to the merchant processing agreement but shouldn’t be discounted as an avenue of collection especially for a significant amount or if used infrequently and specifically against abusive and fraudulent chargebacks. Even if it is not a matter of collection, the reporting of a bad debt leaves a mark on the consumer’s credit report for seven years, making it more difficult for them to obtain credit in the future and thereby curbing the type of behavior which lead to the dispute in the first place!
A final word about online merchants
Online merchants are particularly vulnerable to chargebacks for several reasons. First, the credit card was not physically present which automatically results in a higher transaction interchange fee to process the transaction. Since there is no way to prove the card is in the purchaser’s possession, online merchants are the victim of choice for dishonest consumers as well as scammers using illicitly collected credit card numbers. When the cardholder disputes the charge, the online merchant is at a loss to defend against the claim because there is no card imprint or cardholder signature. The use of Card Verification Codes and Address Verification Services are helpful to combat this type of scam but still rely on a level of diligence on the part of the merchant as well as clearly established boundaries. If that means turning away transactions from questionable purchasers or requiring copies of the card and signed authorization forms, this is a small price to pay in contrast to the lost revenue and penalties frequent chargebacks can incur.Source: www.gohelios.com