Effectively Managing Merchant Chargebacks

Feb 8, 2019 | Merchant Cash Advance

In business, getting paid for your work should be the final step in the sales process, right?

The customer gets their product or service and you get the payment.

This may not be the end of the transaction if your customer issues a chargeback.

There are many types of chargebacks, and the process can often be frustrating, costly and timely.

This document will help you better understand what a chargeback is, the time frames in which a chargeback can occur, and how to effectively prevent these from impacting your business.

What Is a Chargeback?

Put simply, a chargeback is the demand or request for a refund from a payment made using a credit or debit card for a fraudulent or disputed transaction.

In most cases, the cardholder initiates the request with their banking institution which files a request for refund with the processor of the transaction.

The money is then taken directly back from the retailer or merchant that made the sale, and remitted back to the cardholder or their bank until the merchant can prove that the transaction was valid.

The Most Common Reasons For a Chargeback

Chargebacks can arise from a number of situations including:

Outright Fraud

A purchase is made using a stolen card or stolen card data input onto a counterfeit card from an individual or business that did not authorize the transaction

To prevent this issue, always make sure that the processing equipment is up to date and able to process EMV chip cards, and that all chip cards are read in the chip reader.

If an EMV enabled chip card does not read properly in the chip reader, be wary of swiping the magnetic stripe on the back of the card. In theory, an EMV chip card cannot be counterfeited, however the magnetic stripe on the card uses the same technology as cassette tapes and can be rewritten with fraudulent cardholder data.

If you do swipe the card in this scenario always make sure to confirm the cardholder name matches their ID and that any proof of purchase or invoice is kept to prove that the individual making the purchase is the actual cardholder and that they are authorizing the transaction. Ensure that the cardholder signs the receipt and that the receipt is retained for 13 months from the purchase date.

If you have an e-commerce business it may be useful to have software in place to help screen and prevent fraudulent transactions before they happen.

Duplicate Transactions

If a same dollar amount transaction happens multiple times at the same business on the same business date the cardholder may contact their financial institution stating that the additional charges were made in error.

In some cases, these errors occur due to connection or equipment issues, but often times the same item may be purchased by the same cardholder on multiple transactions (think of a bar that closes out the transaction on each purchase).

Most terminals and software will notify the merchant that a duplicate transaction using the same card and same transaction size is being sent for authorization. Always ensure that the cardholder signs every receipt regardless of whether they signed a previous receipt.

Receipts mark not only the date but also the time of the transaction so multiple receipts and multiple signatures will help verify that the transactions were authorized.

General Misunderstanding or Error

The name of the business and their address showing on the transaction or receipt is not a good identifier or does not correctly match the name and address of the business where the goods or services were purchased.

When the cardholder reviews their statement they don’t realize they may have authorized the transaction because of the mismatch.

The “Doing Business As” name provided to your merchant processor is what will show on receipts and also on the cardholder’s online banking transactions list and card statement.
The name provided should match the signage and the DBA name of your business, and should not be the Legal Filing name of your business unless it is the same as the DBA name.

Customer Service Issues

The cardholder may have received the product or service and was not satisfied with the item.

They may attempt to reach the customer service department for a resolution but if this fails they may contact their financial institution to dispute the transaction.

Have an effective method of handling customer service issues, complaints and requests.

Log call information or record incoming customer service calls so that you have proof that you are working with the cardholder to handle their issue.

Never received an item purchased online

A cardholder may issue a chargeback for a refund if they purchase an item online and they don’t receive the product within a reasonable time frame.

Typically the cardholder reaches out to the retailer to request a refund or shipping information, but they may make a request directly with their financial institution for a refund.

Only ship items using reputable shipping companies such as UPS, USPS and FedEx and get tracking information that can be provided to the purchaser.

If an item is backordered or not immediately available, make sure that that purchaser understands the time frame in which the item will be back in stock and then shipped.

Recurring Transactions/ Memberships

The cardholder may have signed a membership agreement and contract for a specific product or service and then changed their mind.

The cardholder may contact the merchant to request to cancel, and if they are not satisfied with the resolution they may contact their financial institution.

The Card Networks (Visa, MasterCard, Discover, AmEx) typically frown upon any membership contract that extends beyond 12 months and therefore the underwriting for these types of accounts is inherently more difficult.

If you employ a recurring transaction contract make sure to detail everything in writing and have the cardholder sign and agree to the terms. Include the contract length, the number of payments and the size of the transaction and if the cardholder is able to cancel the agreement.

Fake Fraud or Friendly Fraud

A cardholder may knowingly provide their card and cardholder information to another individual and authorize them to use the card, but then state that they did not know the individual or authorize making the purchase.
In other cases a cardholder may make an online purchase, receive the product, and then issue a chargeback.
This should be treated as theft and dealt with accordingly. Follow your merchant services processors Chargeback resolution process and consider filing criminal charges against the individual.

What Next?

Effectively managing merchant chargeback is just a part of successfully dealing with your credit card processing needs.
Read about 7 most common things that business owners don’t know about processing cards to find out how to eliminate monthly fees and keep the profits in your pocket.

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(800) 597-0713

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