When accepting payments, whether in person, over the phone or over the internet, you as the merchant can always be held liable for a chargeback. It is important to understand the chargeback process and your responsibility as a merchant.
So what is a chargeback, anyway? A chargeback is a transaction that has been disputed by either the card holder or the issuing bank. Funds from a chargeback are immediately withdrawn from your account to cover the cost of the transaction from the customer and will also charge a fee.
Why am I responsible for a chargeback? As a merchant, it is your responsibility to take precaution to prevent unauthorized purchases and handle issues directly with your customers. If a customer feels that they should not be responsible for the purchase, they have the right to dispute the charge. Unfortunately this is the cost of accepting credit card payments.
What reasons can a customer file a chargeback for?
1. Fraudulent Transactions – The customer claims their credit card was used without their consent or authorization.
2. Credit Not Processed – The customer claims they returned the merchandise but did not receive a credit. If you did issue a credit, make sure to provide this information to the card issuer.
3. Customer claims the service did not occur – If you did provide the service, send a copy of an invoice or contract signed by the customer and any other evidence you have that proves you did provide the service.
4. Merchandise/service not as described – the customer claims the goods or services were not the same as shown or described on your site or during the sales process. If the customer has returned the product or merchandise make sure to notify the card issuer. If the dispute is over a service, try to reconcile the issue directly with the customer and consider issuing a credit to the customer.
5. Defective merchandise – the customer claims the merchandise received was damaged or defective. The best option is to reconcile with the customer directly. The customer must make an attempt to return the merchandise and if they have not, make sure to notify the card issuer when disputing the chargeback.
6. Merchandise not received – the customer claims the merchandise did not arrive, or they cancelled the order because the merchandise did not arrive by the expected delivery date. If you delivered the merchandise, send all evidence of the deliver to the card issuer.
How long can a customer take to file a chargeback? Most banks do not allow chargebacks to be disputed after 6 months of the final sale, however some chargebacks can be filed up to 1 year after the purchase was made.
What is the chargeback process?
1. The cardholder disputes the transaction with their card issuer.
2. The issuing bank checks whether the dispute is valid. If the bank finds the request invalid, the dispute is simply declined.
3. If the issuing bank sees a justification by the cardholder, a provisional credit is provided immediately. The card issuer will initiate the chargeback process and obtain a credit from your acquirer
4. Your acquirer will research whether the chargeback is valid or not and send you a notification that there is a pending chargeback request.
5. If they find the chargeback to be invalid, they may decline the chargeback to the card issuing bank. In most cases, they will request information from you about the transaction.
6. You now have a specified number of days to defend the chargeback. This includes providing the needed documentation and proof to defend your case against the reason (proof of delivery, signature, any contract or correspondence with the customer, etc.)
7. If your acquirer finds the information you provided to be satisfactory, they will deny the claim to the card issuer/customer and the customer will be charged again for the sale. If the documents seem to be unsatisfactory, the chargeback amount will be provided to the customer and you will be responsible for the charge.
How can I prevent a chargeback?
1. Work with your customers! The best way to avoid a chargeback is to work directly with your customer to resolve any issues or complaints they have had with their purchase. If you do have policies regarding returns make sure you have evidence that those policies were provided to the customer at the time of purchase.
2. Check AVS and CVN. If you are taking “card not present” transactions, ensure you have an AVS and CVN match on all transactions. AVS (Address verification service) checks the first digits of the billing address and the billing postal code to the address the customer has on file with the bank. If you accept a transaction where the AVS is not a match, you will not win the chargeback dispute.
3. Ship only to the billing address. If the transaction is “card not present” ensure the shipping address is the same as the billing (and the AVS also matches). If you ship to an address other than the billing address, it is unlikely you will win a chargeback dispute. It is common for merchants to ship to different addresses other than the billing, however there is risk associated with it. If you plan to ship to alternate addresses, try to do your due diligence and ensure the cardholder lives at the address or is a valid place of business.
4. Proof of Delivery/Purchase. Make sure to keep records showing proof of delivery (or a sale made in person). This will be required if you try to defend against a chargeback. If it is not feasible to provide proof of delivery with signature on every shipment, make sure to do it with purchases above a specific dollar amount.
5. Be suspicious. Fraudsters come in all different shapes and sizes, and can be difficult to identify. f something seems fishy, consider whether you want to accept the credit card payment, especially if it is card not present.
How likely am I to win a chargeback?
1. If you have all the documentation provided above (AVS match, billing = shipping, proof of delivery) you still may not win the chargeback. Unfortunately the chargeback process does not run in the merchant’s favor. However the more evidence you can provide the better.
2. If you do not have the information like AVS match, it is unlikely you will win the chargeback.
3. This is the risk associated with accepting payment.
If I have a lot of chargebacks, will that be a problem? Yes! Besides the loss of the transaction, you will also incur fees associated with the chargeback. Additionally, if your chargeback to sales ratio exceeds 1% you can incur additional fines your acquirer and/or card association.