Protect Your Business From Chargebacks

Chargebacks are customer-filed disputes on credit card transactions. There are many reasons why customers file chargebacks, but it is commonly done in the event that the transaction is fraudulent or unauthorized, or when there is an issue regarding the product or service (e.g. damaged or not received). When a chargeback is filed, the cardholder’s bank (issuing bank) reverses the transaction and returns the funds to the customer’s account.

Chargebacks can be very costly for merchants as they often are associated with fees. And, if a merchant gets too many chargebacks, it can even put their processing account at risk. Unfortunately, once an account is labeled as high-risk, it’s not quite as easy for the merchant to obtain a future processing account—or one that has decent rates.

Although chargebacks cannot be entirely prevented so long as your business accepts credit cards, there are things that merchants can do to mitigate the negative consequences. Once a chargeback is filed, the merchant has a limited time to dispute the chargeback in accordance with card issuer regulations. This means that it’s essential for businesses to be familiar with different types of chargebacks, as well as the best practices to respond properly should a chargeback occur.

Card-Present vs. Card-Not-Present

Credit card transactions can take place either in-person, with the cardholder and their card on-site (‘card-present’), or they can be processed by the merchant remotely—for example, online, via a mobile device, or by keying in card information into a virtual terminal (‘card-not-present’). Merchants should be careful to exercise good risk control when processing card-not-present transactions, as verifying the customer’s identity can be more challenging.

Types of Chargebacks

There are several different types of chargebacks, and the card brands have assigned reason codes to the different types. The following is an overview of the main chargeback types:

1. Fraudulent Transactions
This category covers transactions processed either in-person or online that were not placed by the cardholder and were in fact fraudulent.

  • EMV Liability Shift Counterfeit Fraud
  • EMV Liability Shift Non-Counterfeit Fraud
  • Other Fraud – Card Present Environment
  • Other Fraud – Card Absent Environment

2. Authorization Issues
Whenever a payment is processed, the merchant’s bank (acquiring bank) communicates with the cardholder’s bank, or issuing bank, to ensure that the account is in good standing. If the transaction is approved, then an authorization code is passed back to the merchant who is then able to complete the sale. There are several authorization-related reason codes, such as:

  • Declined Authorization
  • No Authorization
  • Card Recovery Bulletin

3. Processing Errors

  • Late Presentment
  • Incorrect Transaction Code
  • Incorrect Currency
  • Incorrect Account Number
  • Incorrect Amount
  • Duplicate Processing
  • Paid by Other Means
  • Invalid Data
  • Transaction is not recognized
  • Transaction is a duplicate

4. Consumer Dispute
Consumer disputes are filed on transactions in which the customer is dissatisfied with the product or service, or when the charge should have been cancelled/voided by the merchant (for example, a subscription service payment that’s processed once the subscription was cancelled by the customer).

  • Merchandise/Services Not Received
  • Cancelled Recurring
  • Not as Described or Defective Merchandise/Services
  • Counterfeit Merchandise
  • Misrepresentation
  • Credit Not Processed
  • Cancelled Merchandise/Services
  • Original Credit Transaction Not Accepted
  • Non-Receipt of Cash or Load Transaction Value

Best Practices for Mitigating
Damage From Chargebacks

Chargebacks happen for a variety of reasons and can cost merchants a lot of time and money, and even jeopardize their merchant account. Here are a few simple tips to help you reduce damage from chargebacks you receive.

  • Be clear about the terms and conditions of the sale, as well as the refund and return policies. For card-present transactions, it’s best to have the customer sign off that they’re aware of all policies. The reason for this is if a customer is not aware of the policy in advance, they may file a chargeback.
  • Respond to inquiry letters as soon as possible. If you wish to dispute a customer’s claim, all materials needed to resolve the issue should be sent no later than the date displayed on the inquiry letter. Even if the customer is wrong, if the merchant doesn’t reply to a dispute on time, they are usually liable for the funds.
  • Let customers know what name will appear on statements if it’s going to be something different than what they’d expect.
  • Maintain organized transaction and shipping records. For example, credit card transaction dates, transaction amounts, authorization/invoice information, and tracking information/proof of delivery can all be helpful if you need to respond to a chargeback.
  • Collect signatures upon delivery. You can use carriers that require signatures for delivery and allow you to also have a copy. Always retain these in your records.
  • For card-not-present transactions, you can confirm with the issuing bank that the cardholder’s information is correct before you process the transaction.
  • Request a copy of identification and credit card. Always see identification for face to face transactions, but you can also request to have a copy of an I.D. and credit card faxed to you. This works best when it is a business to business transaction.
  • If you deliver products, do not charge the customer’s card until the item(s) are shipped. Additionally, be sure to make note of the expected delivery times in your terms and conditions. For card-not-present transactions, enable address verification (AVS) and ask for the customer’s card verification value (CVV). The more information you have, the better protected you are.
  • Be familiar with the warning signs of fraud. For example, an incorrect CVV number or cardholder name, or mismatched billing and shipping addresses, can be signs of fraud.
  • If the transaction is in-person, you can make a code 10 verification request before completing the sale if you are suspicious of fraud. A code 10 verification request is made by contacting your acquiring bank’s authorization center, and stating that you would like to make a code 10. You will then be transferred to the card’s issuing bank, who will investigate the situation, contact the cardholder, and let you know if the transaction is fraudulent or not. Please note that some processors charge a minimal fee for code 10 verification requests.
  • Ensure open communication with your customers. Provide the customer with contact information at checkout, and respond to customer complaints as soon as possible. If you receive a chargeback notification, try reaching out to the customer directly to attempt to solve the problem (keeping in mind that this must be done within the timeframe set by the card brand).
  • Use a fraud screening tool and upgrade to EMV if you haven’t already. These technologies will curtail fraudulent transactions from going through.
  • For card-present transactions, make sure that EMV cards are always dipped or tapped. Keyed-in transactions are very often indicative of fraud.

Fidelity’s Chargeback Alerts Program is here to help merchants respond to chargebacks fast. To learn more about our Chargebacks Alerts Program, or for further guidance on how your business can manage chargebacks effectively, reach out to Fidelity today.