Credit Card Processing Chargebacks - The Best Offense is a Good Defense

A chargeback occurs when a cardholder disputes a merchant's charge against their account. Although they're relatively uncommon, chargebacks are an inevitable and potentially expensive part of credit card processing. Taking precautions to prevent chargebacks is instrumental in winning a dispute when one of your customers issues a chargeback.

Chargebacks are costly because of the fees charged by the processor when one is issued and also because of the time and energy that a merchant must invest in an attempt to win the dispute. A thorough chargeback prevention plan will limit the number of chargebacks that your business receives and it will minimize the time and effort required to win disputes.

Knowing the why customers issue chargebacks is the best place to start when creating a prevention plan. Cardholders can cite various specific reasons for issuing a chargeback but each reason will fall into one of the following general categories:

• Customer related - (dissatisfaction, confusion, failure to recognize charge, etc.)
• Processing errors - (authorization problems, duplicate charges, bad swipe, incomplete transaction record or documentation, etc.)
• Potential Fraud - (unauthorized purchases)

Using these three categories as a guide, the rest of this article will address specific ways to prevent chargebacks.

Best practices to prevent customer related chargeback issues

Use a recognizable DBA name - The doing business as (DBA) name of a business is what processors print on cardholder statements. If the DBA is not easily recognizable to cardholder may not recognize the charge and they issue a chargeback.

Include a phone number on cardholder statements - Making sure that your business phone number is printed on cardholder statements allows cardholders to easily contact you with any questions regarding the charge.

Clearly post policies - Make sure that store policies such as return and damaged merchandise policies are clearly visible and easy to understand.

Work with customer to resolve issues - If you don't communicate and work with customers to resolve issues, you're forcing them to resort to a chargeback to solve their problem.

Proactively communicate with customers and keep them informed - Be proactive in contacting customer to keep them updated about the status of their order. Many customers won't bother to contact you if an order doesn't arrive on time. Instead, they may issue a chargeback.

Best practices to prevent chargebacks resulting from processing errors

Use address verification service (AVS) for not-present transactions - Never process a card-not-present transaction without an AVS match.

Swipe all card-present transactions or get a full imprint - Ideally, you want to authorize all card-present transactions by swiping the card. If the card won't swipe, get a fully legible manual imprint of the card to prove that it was present.

Don't re-run a decline transaction - If a credit card is declined, don't run it again. Instead, ask the customer for another card or form of payment.

Never split transactions - Always authorize a credit card once for the total amount of the transaction. Never split a transaction into smaller amounts. If you accidentally undercharge a customer's card, cancel the transaction and run another transaction for the entire amount.

Clear credit card batches daily - Clearing your credit card batches daily will post your transactions to your customers' accounts quickly while the purchase is still fresh in the memory. This lowers the chance that they'll fail to recognize the charge and issue a chargeback.

Best practices for preventing fraudulent chargebacks

It's important to note that this article focuses on preventing chargebacks in a card-present processing environment. It's considerable tougher to prevent fraud and chargebacks in a card-not-present processing environment and those tactics are beyond the scope of this article.

Obtain and compare signatures - Credit cards that aren't signed aren't valid. If a customer's signature on the receipt is significantly different than the one on the back of the card, the transaction may be fraudulent.

Examine the card - Credit cards are like currency in that they have security features that you can use to recognize a valid card.

Verify the number on the credit card machine matches the card - After obtaining an authorization, make sure that they number that is displayed on the credit card machine matches the number on the credit card.

This article talks about a few of the major ways that you can prevent chargebacks. Check with your processor, at VISA and MasterCard's websites or at CardFellow.com for more great information on preventing chargebacks. Any time invested in researching the important topic of preventing chargebacks is time well spent.

Questions & Comments

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On May 21, 2009 Duane said:

How can we successfully defend against a chargeback for a card present use at a convenience store at the Fuel Pump where no ID is required and no signature is required?

Respectfully,
Duane

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On June 2, 2009 Ben said:

Hi Duane,

Transactions involving automated fuel dispensers have special regulations and the chargeback amount that a merchant is liable for is limited. The limitation can differ depending on the type of card used in the transaction and the reason code for the chargeback, but this is all outlined in VISA's Operating Regulations.

As it sounds like you're already aware, chargebacks involving automated fuel dispensers have steadily increased as the cost of fuel rises. As far as combating chargebacks at the point of sale, there's not too much that can be done. Short of hiring an attendant to imprint customer credit cards and obtain a signature, the burden of proof is left with the electronic data obtained when a customer swipes their card.

In this situation you're tools are limited when it comes to preventing a chargeback, but being proactive when you do receive a chargeback will still help decisions to go your way. It's also important to note that increased chargebacks involving automated fuel dispensers is a problem that Visa and MasterCard are aware of and work to combat.