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Costados KnowledgeBase: Chargeback Prevention

Push Back on Chargebacks
By: Peg Monahan, Content Manager
March 27, 2001

If you are a small business owner who accepts credit card payments for merchandise, chargebacks - reversals against sales credited to your merchant account - can be very costly. You lose the revenue from the transaction, and often the merchandise itself. In addition, you're forced to pay a chargeback fee to the bank that issued the credit card used in the transaction.

The following tips will save you money by reducing unnecessary chargebacks:

  • Learn the ropes. Knowing the rules is essential to a successful chargeback prevention campaign. Make sure you and any employees involved in credit card processing are familiar with the rules and regulations of your processor. Visa, MasterCard, American Express, and Discover supply detailed information on both minimizing the chance of chargebacks and managing the process when they do occur.
  • Post your return/exchange policy. Customers having ready access to a clear return/exchange policy are less liable to challenge it, according to Carter Cullen, president of YourRights, a small business advocacy service located in Matamoras, PA. Prominently display your return policy - either in your store or on your Web site if you sell merchandise over the Internet - and make sure it is easy to understand. In addition, print the policy on your sales drafts and billing statements. These actions will discourage customers from contesting your policy later on.

Finesse the transaction process: In-store sales.

  • Create proof that the credit card was present during the transaction (swipe the card or imprint it on the transaction receipt).
  • Obtain a signature from the cardholder and compare it to the one on the back of the card.
  • Request additional identification if the card is unsigned. Ask to see a photo ID that includes a signature, and require the cardholder to sign the card in your presence.
  • Check the expiration date on the card.

Finesse the transaction process: Phone sales.

  • Indicate that the transaction was a phone sale on the billing statement - this will serve as proof of the customer's call.

Finesse the transaction process: Internet-based sales.

  • Provide your merchant bank with an 800 number to include on credit card statements sent to customers, and make certain that the name of your Web site, rather than the name of your company, appears on the statements. This helps customers easily identify charges and keeps them from reporting an unfamiliar vendor as fraudulent. It also increases the chances that dissatisfied customers will contact you before they attempt a chargeback.
  • Confirm large transactions by sending customers a fax-back or mail-back form requiring name, address, credit card number, expiration date, and signature.
  • Maintain complete and legible records. As the merchant, you are responsible for presenting a copy of the original sales draft or billing statement should a customer dispute a transaction listed on his or her credit card statement. In most cases, the customer will remember the transaction after seeing the sales draft or billing statement, immediately resolving the chargeback issue. If your original copy cannot be read, however, the transaction could be returned to you as a chargeback because the copy was illegible.
  • Actively seek retrieval requests. A customer who suspects an error or fraud requests the credit card company to nullify the charge. Tarek Kirschem, CEO and president of MerchantOnline, a turnkey e-commerce solution for small merchants, recommends asking your credit card service to send you each "retrieval request" as it comes in, so you can verify it with the customer if possible - before any money is returned to the customer and before you are assessed a chargeback fee.

Ten Point Guide to Prevent Chargebacks

1. Mail Order, Telephone Order, and Internet Transactions:

Due to their inherent risks, it is important for merchants to implement safety precautions when accepting mail order, telephone order, or Internet transactions. The following are mail, telephone, or Internet-related chargebacks:

  • Fraudulent mail/telephone order transaction.
  • Fraudulent transaction: no cardholder authorization.

These chargebacks can be avoided through the following risk-control measures:

  • Build a high-risk customer database: By developing this database, you can identify high-risk transactions and block specific credit card numbers, disallowing future purchases. You can control multiple orders and/or use of your service that could later result in a dispute. There are other risk-control tools that may suit your business, including limiting the number of transactions per hour, day, or week.
  • Use the Address Verification Service: The Address Verification Service helps you make a more informed decision about accepting these types of transactions by verifying the address the cardholder gave you at the time of sale. After comparing the address against the information in the card issuer database, the authorization system sends back a code telling you if there was a full, partial, or no match on the address. This allows you to make a better decision about whether to continue the transaction.
  • Include your Customer Service Number: Include your customer service telephone number along with your business name on the customer's billing statement. This enables customers to contact you directly before calling the card issuer to initiate a dispute.
  • Know who your customers are: Another risk control measure is to obtain the customer's telephone number during a transaction. Later, you can call to verify the order and the phone number given to you. You can avoid many chargebacks simply by getting to know your customers.

2. Did You Get an Imprint?

If you are unable to swipe a credit card through your point-of-sale terminal, it is imperative that you obtain a manual imprint of the card. Make sure the sales slip is completed and contains the customer's signature, and make note of the authorization code and purchase amount on the slip. Failure to follow these instructions can result in the following chargebacks:

  • Fraudulent transaction - no cardholder authorization.
  • Fraudulent transaction - no imprint obtained.
  • Fraudulent transaction - signature not obtained.

3. Respond Promptly to Requests for Transaction Copies:

Many times a customer will request a copy of a transaction through his or her credit card company. Such requests are forwarded to your Merchant Services Provider by MasterCard or Visa. It is important that copies of these transactions are received as quickly as possible. When these transaction requests are not fulfilled, or are done too slowly, they will almost always result in one of the following chargebacks, for which you have no response:

  • Non receipt of requested item.
  • Requested copy illegible.

It is in your best interest to respond quickly to such requests. The following suggestions will be helpful:

  • Keep a record of your Sales Drafts: Always remember to file all of your sales drafts by date and credit card number. Retrieval requests do not include the cardholder's name; thus, filing sales drafts by name makes it difficult to retrieve a transaction.
  • Be sure Sales Drafts are legible: Ensure that the information on a sales draft is complete, accurate, and legible before completing the transaction. An illegible draft, or a draft which produces an illegible copy, may be returned because it cannot be properly processed. Always check the ink cartridge or ribbon on your printer.
  • Will your customer remember the Transaction? It is important that your customers are able to recognize transactions made at your business. If cardholders do not recognize a transaction on their billing statements, they can complain to their card issuer, who will then question or dispute the purchase. This is how a retrieval request gets started, and having a copy to back up each transaction can help customers identify their purchases. If a transaction is not face-to-face, it is a good idea to send a confirmation directly to the cardholder's address to later help them identify the transaction when it appears on a billing statement. Include the business name that will appear on the cardholder's statement. This will help reduce or eliminate costly retrieval requests and/or chargebacks.

4. Credits/Refunds:

Refunds and credits can generate "credit not processed" chargebacks. You can prevent such chargebacks by quickly processing refunds to your customers' accounts. If you do not accept merchandise returns or give refunds, or if your return/refund policy is limited (e.g. in-store credit only), this information should be preprinted or handwritten on each sales draft near the signature line. This must be done prior to the customer signing the receipt, and the information must show clearly on all copies of the sales draft. If the customer did not receive your refund policy prior to the transaction, you could be at a disadvantage if he or she later decides to return/credit the purchase. MasterCard/Visa policy dictates that you always process a credit card refund using the same number from the original sale, and that you never give the customer a refund by cash or check.

5. Duplicate Transactions:

Duplicate transactions can cause "duplicate processing" chargebacks. Make sure you process only one transaction at a time through your point-of-sale terminal, and always balance your deposits at the end of the day. If your customer makes more than one purchase, or makes two purchases for the same dollar amount within the same day, make sure you create one invoice per transaction to describe each purchase.

6. Recurring Transactions:

To avoid "cancelled recurring transaction" chargebacks, take immediate action to stop recurring transactions that a cardholder has asked to be cancelled. By doing so, you can potentially reduce the number of repetitive chargebacks by the same customer.

7. Merchandise or Service Not Received by Cardholder:

When a cardholder does not receive their purchased merchandise or services, a "non-receipt of merchandise" chargeback may occur. Sales transactions must not be processed prior to delivery of the purchased product or services. You must obtain the cardholder's signed proof of delivery for every credit card transaction in which the merchandise or service is not delivered immediately at the point of sale. Such proof of delivery may be your only defense if a chargeback occurs. Here are some helpful hints:

  • Paid-in-Installment Transactions: Disclose to the customer in writing the terms of the transaction, including shipping and handling charges and any applicable tax. Inform your customer that each installment may vary due to fluctuations in the current conversion rate. MasterCard/Visa regulations prohibit merchants from including finance charges in the installments.
  • Interval for Installment Transaction Receipts: The first installment must not be processed until the shipping date of the goods. Use the 30-calendar-day rule or process installments on the monthly anniversary of the shipping date (must be the same day each month).
  • Delayed Delivery: Use wording on the transaction receipt, such as "delayed delivery," "deposit," or "balance." You may process delayed delivery transactions before the delivery of the goods or service, but you may not process a deposit or balance transaction receipt before delivery of the goods or service.
  • Pre-payment Transactions: You may process a pre-payment transaction if you advise your customers that they will be billed immediately. You may process a full pre-payment for custom-order merchandise (manufactured to the customer's specifications).

8. Declined Authorization Means Declined:

To avoid "declined authorization" chargebacks, do not continue to obtain authorization on a declined transaction by reducing the amount requested or by repeating the request.

9. Cardholder disputes the quality of Merchandise/Service:

Some of the most difficult chargebacks to dispute are those in which the customer challenges the quality of your merchandise or service. Such disputes can result in the following chargebacks:

  • Merchandise/service not as described.
  • Cardholder dispute - not elsewhere classified.
  • Defective merchandise.

To avoid such chargebacks, you must ensure that your customers are aware of your return policy at the time of purchase. Display the policy at the point of sale, and print it on your sales slips directly above the cardholder signature in accordance with MasterCard/Visa regulations. Always follow your return policy.

If a customer disputes a transaction, he or she must attempt to resolve the dispute with you. Take this opportunity to rectify the problem. Always keep accurate records of each transaction; you may have to provide documentation should the customer continue to dispute the transaction.

It helps to ensure proper packaging of shipped goods and to see to it that the goods are suitable for the purpose for which they were sold. Also make sure your customer has a clear understanding of how to return the goods. The primary goal is the customer's satisfaction.

10. Account Numbers Do Not Match:

If, after swiping a card, the number displayed does not match the number embossed on the face of the card, ask the customer for a different form of payment. Always print the account number on all telephone and mail orders, and double-check by asking the customer to read back the card number. Accepting non-matching transactions will leave you vulnerable to the following chargebacks:

  • Account number not on file.
  • Non-matching account number.