Chargebacks Why They Happen, How to Prevent Them

The benefits of accepting credit cards are many. Among other things, accepting cards can help legitimize your business, boost sales and encourage impulse buying, as consumers find credit cards a convenient, advantageous way to pay for purchases. But from time to time, you may encounter a chargeback, which can be frustrating, especially if you don’t understand how the chargeback process works.

What is a chargeback?

A credit card transaction has posted to the cardholder’s account, and then the cardholder—or the card issuing bank—disputes the transaction. The merchant is notified about the disputed transaction and the disputed amount is withdrawn from the merchant’s account until the matter is settled.

Common reasons for a chargeback

The two most common reasons why a credit card holder will request a chargeback are:

  1. An issue with the product or service (the customer may claim she/he received defective merchandise, for example)
  2. Potential fraud (when the customer doesn’t recognize the transaction, for instance) Chargebacks can also occur in the wake of credit card processing errors (as when a transaction posts twice to the customer’s account), and in the wake of a declined authorization or the merchant’s failure to obtain an authorization.

How to prevent chargebacks

The good news is a merchant can be proactive about preventing chargebacks. If a customer has an issue with a product or service, the answer can be providing them with quality customer service. For instance, if a refund is required, letting a customer know how long the refund will take can be essential in order to avoid them needlessly request a chargeback.

Meanwhile, merchants need to take steps to protect themselves from credit card fraud. If payments are accepted at the point-of-sale (POS), a merchant should review the warning signs of card-present fraud and question any transaction that seems suspicious.

Warning signs of card-present fraud

In the A&B Payment Solutions white paper on Preventing Credit Card Fraud and Avoiding Chargebacks, it states “be wary of customers who purchase several of the same type of merchandise or very expensive merchandise [or] purchase a vast array of merchandise, seemingly without regard to size, color or price.” Also, merchants should be suspicious of customers who try to distract them or rush a transaction, or who make purchases at closing time.

Here are key tips for merchants to remember when processing face-to-face transactions. (See the above-referenced white paper for more.)

  1. Dip (or swipe) the card and make sure to obtain an authorization for the full amount of the sale.
  2. Never accept an expired card.
  3. Never accept a card that appears damaged, altered or excessively worn.
  4. Make sure the card is signed (and if not signed, request that the customer sign it in your presence, then match the signature against a picture ID).
  5. Verify that the card number and name printed on the sales receipt matches the card number and name on the card. If they don’t match, discontinue the sale.

Warning signs of card-not-present fraud

If payments are accepted online, by mail, or by telephone or fax, merchants need to be aware of the warning signs of card-not-present (CNP) fraud, which can be more difficult to detect, since neither the cardholder nor card are present at the time of payment.

Warning signs include: orders that are larger than normal, orders that include very expensive items, and international orders (where the shipping address cannot be verified by Address Verification Service).

It’s prudent to establish baseline requirements for each card-not-present transaction processed. Consider adhering to the following rules:

  1. Require the cardholder’s credit card number, the three- or four-digit card validation code (CVC) on the card, the expiration date and the name that appears on the card, as well as the cardholder’s billing address, phone number and email address.
  2. Use Address Verification Service (AVS) and don’t ship merchandise if the billing address doesn’t match the cardholder’s address on file with the issuing bank.
  3. Call or email the customer to confirm the order before shipping merchandise.
  4. Make sure you receive an authorization for the purchase. While an authorization doesn’t guarantee payment (it indicates the account is open and has available credit), it’s a good indicator.

What to do when receiving a chargeback

Cardholders have up to 120 days to initiate a dispute and if a merchant receives notification of a chargeback, they should respond ASAP. Provide a written response that includes clear, legible documentation that proves the cardholder received the goods or services. In a typical scenario, a merchant has 23-30 days to provide documentation. A complete chargeback cycle will take approximately 75 days.

Know too that there will likely be a chargeback fee charged by your merchant account provider, who mediates the dispute with the issuing bank and charges a fee to do so. Chargeback fees vary, but typically are $25 or less.

How can A&B help you with chargebacks?

To learn more about how to prevent and respond to chargebacks, view the recording of our Webcast on Disputes & Chargebacks. Or discover how TSYS can manage your chargeback and dispute processing with our Chargeback Processing Services.

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