Merchant Chargebacks

Credit Card Chargebacks

The definition of a chargeback is when a cardholder disputes a charge posted to their credit card account. Chargebacks can occur for various reasons, such as when a purchase was not authorized by the cardholder (fraud), or when goods or services are not provided as expected.

Reason codes

With each chargeback the issuer selects and submits a numeric “reason code”. This feedback may help the merchant (and acquirer) diagnose errors and improve customer satisfaction. Reason codes vary by bank network, but fall in four general categories:

• Technical – Expired authorization, non-sufficient funds, or bank processing error.
• Clerical – Duplicate billing, incorrect amount billed, or refund never issued.
• Quality – Consumer claims to have never received the goods as promised at the time of purchase.
• Fraud – Consumer claims they did not authorize the purchase, or identity theft.

One of the most common reasons for a chargeback is known as a fraudulent transaction. A credit card is used without the consent or proper authorization of the card holder. In some cases, a merchant is responsible for charges fraudulently imposed on a customer. Mostly, fraudulent card transactions originate with criminals who gain access to secure payment card data and set up schemes to exploit those data.

Chargebacks can also result from a customer dispute over credit. This type of chargeback is usually described as credit not processed. A customer may have returned merchandise to a merchant in return for credit, but credit was never posted to the account. In this example, the merchant is responsible for issuing credit to its customer, and would be charged back.

Other types of chargebacks are related to technical problems between the merchant and the issuing bank, whereby a customer was charged twice for a single transaction (duplicate processing) or other various mistakes. Yet other chargebacks are related to the authorization process of a credit card transaction, for example, if a transaction is declined by its issuing bank and the account is still charged.

Another reason for chargebacks is when a customer does not receive the item they paid for. In this case, a chargeback is initiated and the payment to the merchant is reversed.

Merchant recourse

For transactions where the original invoice was signed by the consumer, the merchant may dispute a chargeback with the assistance of their acquiring bank. The acquirer and issuer mediate in the dispute process, following rules set forth by the corresponding bank network or card association. If the acquirer prevails in the dispute, the funds are returned to the acquirer, and then to the merchant.

Merchant penalties

The merchant’s acquiring bank accepts the risk that the merchant will remain solvent over time, and thus has an incentive to take a keen interest in the merchant’s products and business practices. Reducing consumer chargebacks is crucial to this endeavor. To encourage compliance acquirers may, at their discretion, charge merchants a penalty per chargeback received. Payment service providers, such as PayPal, have a similar policy.

In addition, Visa and MasterCard may levy severe fines against acquiring banks that retain merchants with high chargeback frequency. Acquirers typically pass such fines directly to the merchant. Merchants whose ratios stray too far out of compliance may trigger card association fines of $100 or more per chargeback.

You should be able to avoid the vast majority of chargebacks by providing good customer service and ensuring that your products and/or services are advertised, and delivered, as promised.

For those chargebacks related to fraud, there are simple steps every business can take to help avoid any problems. It is up to every merchant account holder to be diligent in accepting charges, and to educate their staff about the precautions to take.

Card Present Environment

In environments where the business is accepting and swiping cards at the time of the transaction, there are several simple steps which can be taken:

Always compare the signature on the receipt with the signature on the back of the card.

Always examine the card to ensure it is not altered or suspicious looking.

Request identification such as a license or some other picture ID.

Card Not Present Environment

In situations where the business is taking credit card without the customer present (over the phone or Internet, for example), the chance of fraud-based chargebacks is much greater. It is very important for these businesses to put systems in place to help determine legitimate charge activity.

• If appropriate, call customers to confirm their order if the billing and shipping or contact addresses do not match.
• Ask for the code number on the back of the card (or front with American Express®) to confirm that the card is in the customer’s possession.
• If you receive questionable orders, call to confirm the order with the cardholder.

If you have reason to believe that a card is fraudulent or otherwise questionable, always call the card issuing company for a voice authorization.

Download Merchant Guide to Fraud

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