Avoiding Merchant Account Chargebacks
Copyright ?? Scott Burke iMAX Business Solutions
A chargeback is a transaction that an Issuer returns to a merchant bank and most often, to the merchant – as a financial liability. In essence, it reverses a sales transaction, as follows:
- The card issuer subtracts the transaction dollar amount from the cardholder’s Visa account. The cardholder receives a credit and is no longer financially responsible for the dollar amount of the transaction.
- The card issuer debits the merchant bank for the dollar amount of the transaction.
- The merchant bank will, most often, deduct the transaction dollar amount from the merchant’s account.
- The merchant loses the dollar amount of the transaction. For merchants, chargebacks can be costly.
- You can lose both the dollar amount of the transaction being charged back and the related merchandise.
- You also incur your own internal costs for processing the chargeback.
Why Chargebacks Occur
The most common reasons for chargebacks include:
- Customer disputes
- Processing errors
- Authorization issues
- Nonfulfillment of copy requests (only if fraud or illegible)
Although you probably cannot avoid chargebacks completely, you can take steps to reduce or prevent them. Many chargebacks result from easily avoidable mistakes, so the more you know about proper transaction-processing procedures, the less likely you will be to inadvertently do, or fail to do, something the might result in a chargeback.
Of course, chargebacks are not always the result of something merchants did or did not do. Errors are also made by merchant banks, card issuers, and cardholders.
From the administrative point of view, the main interaction in a chargeback is between an Issuer and a merchant bank. The Issuer sends the chargeback to the merchant bank, which may or may not need to involve the merchant who submitted the original transaction. This processing cycle does not relieve merchants from direct responsibility for taking action to remedy and prevent chargebacks. In most cases, the full extent of your financial and administrative liability for chargebacks is spelled out in your merchant agreement.
Customer Dispute Chargebacks
Customer disputes are one of the most common reasons for chargebacks. A customer may dispute a transaction because:
Because these chargebacks may indicate customer dissatisfaction – and the potential for lost sales in the future – addressing their underlying causes should be an integral part of your customer service policies.
If a cardholder with a valid dispute contacts you directly, act promptly to resolve the situation. Issue a credit, as appropriate, and send a note or e-mail message to let the cardholder know he or she will be receiving a credit.
Even when you do receive a chargeback, you may be able to resolve it without losing the sale. Simply provide your merchant bank with additional information about the transaction or the actions you have taken related to it. For example, you might receive a chargeback because the cardholder is claiming that credit has not been given for returned merchandise. You may be able to resolve the issue by providing proof that you submitted the credit on a specific date. Send this information to your merchant bank in a timely manner.
The key in this and similar situations is always to send your merchant bank as much information as possible to help it remedy the chargeback. With appropriate information, your merchant bank may be able to resubmit, or "represent", the item to the Issuer for payment.
Timeliness is also essential when attempting to remedy a chargeback. Each step in the chargeback cycle has a defined time limit during which action can be taken. If you or your merchant bank does not respond during the time specified on the request – which may vary depending on your merchant bank – you will not be able to remedy the chargeback.
Although many chargebacks are resolved without the merchant losing the sale, some cannot be remedied. In such cases, accepting the chargeback may save you the time and expense of needlessly contesting it.
Representment Rights for Card-Not-Present Merchants
Card-not-present merchants should be familiar with the chargeback representment rights associated with the use of AVS, CVV2, and the option to provide compelling information. Specifically, your merchant bank can represent a charged-back transaction if:
If you believe you have AVS, CVV2, or compelling information representment rights on a charged – back transaction, work with your merchant bank to ensure that all supporting evidence for the representment is submitted.
Most chargebacks can be attributed to improper transaction- processing procedures and can be prevented with appropriate training and attention to detail. The following best practices will help you minimize chargebacks.
Point of Sale
Delayed Delivery. If the merchandise or service to be provided to the cardholder will be delayed, advise the cardholder in writing of the delay and the new expected delivery or service date.
Item Out of Stock. If the cardholder has ordered merchandise that is out of stock or no longer available, advise the cardholder in writing. If the merchandise is out of stock, let the cardholder know when it will be delivered. If the item is no longer available, offer the option of either purchasing a similar item or canceling the transaction. Do not substitute another item unless the customer agrees to accept it.
Disclosing Refund, Return, or Service Cancellation Policies. If your business has policies regarding merchandise returns, refunds, or service cancellation, these policies must be disclosed to the cardholder at the time of the transaction. Your policies should be pre-printed on your sales receipts; if not, write or stamp your refund or return policy information on the sales receipt near the customer signature line before the customer signs (be sure the information is clearly legible on all copies of the sales receipt). Failure to disclose your refund and return policies at the time of a transaction could result in a dispute should the customer return the merchandise.
Return, refund, and cancellation policy for Internet merchants. This policy must be clearly posted to inform cardholders of their rights and responsibilities (e.g., if the merchant has a limited or no refund policy, this must be clearly disclosed to cardholder on your Website before the purchase decision is made to prevent misunderstandings and disputes).
Scott Burke; President of iMAX Business Solutions in charge of sales, strategy, and execution and thus is responsible for managing all aspects of the company’s marketing, communications, new accounts, and support.
scott @ cmscreditcards.com