Preventing Chargebacks

There’s an increasing problem eating away at merchant profits today. It’s called chargebacks. And retail businesses across the board are starting to feel the pinch.

What are chargebacks? A chargeback is a credit card transaction that a card issuer returns to a merchant bank as a financial liability. In turn, the merchant bank may return the financial responsibility back to the merchant. More simply put, a chargeback reverses a sales transaction.

The problem. Chargebacks can cost your business not only the dollar amount of the transaction but also the related merchandise as well. To add to insult, you can also incur other costs for processing the chargeback as well as the time invested handling the matter. And, if chargebacks represent more than 1% of credit card sales volume, you could get fined by the credit companies. Worse yet, it could result in the loss of your small business merchant account and the ability to take credit cards.

Common causes for chargebacks. According to VISA^®, the most common reasons for chargebacks are:

• Customer disputes – Caused by a customer’s failure to recognize a charge, dissatisfaction or confusion
• Fraud – Caused by unauthorized purchases and criminal activity
• Processing errors – Caused by duplicate charges, bad swipe, bank errors, etc.
• Authorization issues – Caused by problems authorizing transactions
• Inaccurate transaction information – Caused by incomplete transaction records or documentation

Chargeback remedies. Just because you’ve received notice of a chargeback doesn’t mean the sale is automatically lost. Depending on the agreement, there’s still a chance to resolve it if you can provide the merchant bank with additional information about the transaction or all business actions taken regarding the sale. For example, a cardholder requests a chargeback because they never received the item ordered, but you have a signed postal confirmation saying they did. You must provide this evidence to the merchant bank in a timely manner in order to defend the claim. However, merchant agreements can vary for chargebacks, so be sure to read it closely to know all merchant rights as well as administrative and financial liability.

Reducing chargebacks. Most businesses understand that chargebacks are a cost of doing business and cannot be completely eliminated. Many chargebacks are actually easily avoidable. Here is a list of best practices for reducing chargebacks.

Tips for preventing customer-related chargebacks.

• Use a recognizable “Doing Business As” (DBA) name – If your DBA appears different than what shows up on a cardholder’s statement, they may not recognize the charge and initiate a chargeback.
• Include your phone number on cardholder statements – This allows cardholders to easily contact you with any questions they may have regarding a transaction.
• Noticeably post store policies – Make certain that all store policies regarding damaged merchandise, warranties, exchanges and returns are easy to understand and clearly visible. Consider printing these policies on all of your receipts.
• Communicate with customers to resolve issues – Work with your customers to resolve any problems that may come up. If you’re difficult or stonewall them, customers have no choice but to request a chargeback.
• Be proactive with customer communications – Keep customers informed on the status of their orders. If there will be a delay or an item is temporarily out of stock, tell them. Customers that know when their merchandise will be arriving usually won’t initiate a chargeback. Customers that are kept in the dark will just assume the order isn’t coming and may not even bother to contact you before initiating a chargeback.
• Run a separate charge for damage to rental equipment – Do not attempt to cover damage to rental equipment without running a separate transaction and have the customer sign a separate sales draft and invoice for the claim.
• Use a shipper that tracks delivery – Many shipping companies provide tracking information and signature confirmation. This information can be invaluable in proving whether a customer received their shipment.
• Analyze sales records – If you have certain customers who request chargebacks on a regular basis, stop doing business with them.
• Ship merchandise before depositing a transaction – If a customer sees a transaction on their monthly statement before they receive their merchandise, they may initiate a chargeback. Wait until you have shipped the merchandise before depositing transactions with the merchant bank.

Tips for preventing chargebacks from processing errors.

• Use an address verification service (AVS) – Make sure you use an AVS for all transactions where the credit card is not present, and never process a transaction without an AVS match.
• Swipe all card-present transactions – To reduce human error, always swipe a card or at least get a fully legible manual imprint to prove the card was present for the transaction.
• Make an imprint if you need to hand-enter a card number – Should you need to enter a card number by hand, take a legible imprint of the card with the card number, cardholder name and expiration date.
• Make only one imprint of a card for each transaction – Making more than one imprint can create duplicate receipts and increase the chances of a chargeback. If you need to redo an erroneous sales receipt, write “VOID” on the incorrect receipt, inform the customer, and tear up the invalid one.
• Never re-run a declined transaction – If a credit card is declined, ask your customer for another card or form of payment. Don’t complete the transaction anyway or try running the same card through again after receiving a decline.
• Don’t accept expired cards – Never accept a card after its “Good Thru” or “Valid Thru” date.
• Don’t split transactions – Never split a transaction into smaller amounts. Authorize a credit card only once for the entire amount of the transaction. Should you inadvertently undercharge a customer’s card, cancel the first transaction and run a new one for the total corrected amount.
• Reauthorize transactions over seven days old – You must reauthorize transactions that are more than seven days old even if they were previously approved. If only part of an order can be shipped, the authorization should be reversed and the new amount posted.
• Use only one entry for each transaction – Ensure that transactions are entered into point-of-sale terminals only once and deposited only once.
• Whenever possible, deposit credit and sales receipts daily – Post and clear transactions to your customers’ accounts quickly while the purchase is still top of mind. Preferably within one to five days. This will lower the chance they won’t remember or recognize a charge and result in a chargeback. However, if the transaction involves shipping, wait until you have delivered the merchandise. (See “Ship merchandise before depositing a transaction” above.)

Tips for preventing chargebacks from fraudulent transactions.

• Obtain and compare the cardholder’s signature – A customer’s signature should reasonably match the one on the back of their card. If it does not, the transaction may be fraudulent. Cards with no signature are not valid.
• Make sure the credit card is from the legitimate cardholder – Consider checking another form of ID like a driver’s license and never accept credit card numbers from a customer’s memory.
• Look for security features – Examine the card and check for the built-in security features that identify valid cards.
  Protect your merchant ID and terminal ID – Don’t share this information with anyone so transactions can’t be submitted without your permission.
• Make sure the number on your machine matches the card – After getting an authorization, verify that the number displayed on the processing machine matches the number on the credit card.
• Require a Card Verification Value 2 Code (CVV2) – Whenever possible, ask for the 3- or 4-digit code on the back of most cards. (On the front for American Express.) If it does not match, do not complete the transaction.
• Avoid shipping to high-risk addresses – Try to steer clear of shipping to P.O. boxes, prisons, hospitals, motels and areas of the country known for risk.
• Avoid shipping to anonymous e-mail accounts – Do not conduct business with e-mails using unknown ISPs (Internet Service Providers). Stick with the larger and more well-known ISP addresses.
• Use extra caution on high-dollar and non-U.S. transactions – Many non-U.S. transactions can’t be screened by AVS, and first-time, high-dollar transactions should be given extra scrutiny.

For more information on preventing chargebacks, check with your processor, visit the VISA and MasterCard websites, or contact your local Better Business Bureau.

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