Defeating Chargebacks

By Susan Petracco

If you've ever shuffled through a stack of mail to come across a thick envelope labeled "Chargeback Notice," you have probably felt the same queasiness that almost every retailer has encountered at some point. The reality is, by accepting credit cards you will probably face a chargeback now and then. But a proper understanding of chargebacks, their causes and what to do about them will help lower your costs and exposure.

In simple terms, a chargeback is when the money paid to you by a credit card customer is taken away and given back to the customer. When this happens, you lose both the shipped merchandise and the revenue from the order. In addition, you could be charged a fee, experience higher rates on future orders, lose your ability to process credit cards or even lose your merchant account.

Chargebacks are initiated by two groups of people: dissatisfied customers and those attempting to commit fraud. Dealing with an existing chargeback and preventing future ones is a bit different for each of these groups.

DISSATISFIED CUSTOMERS
Let's look at this from the customers' perspective. If you pay for an item with cash or a check, and later discover your merchandise to be defective or disappointing, the only recourse is an attempt to resolve the dispute with the merchant. If the merchant is difficult or unethical, you might lose your money. Credit cards offer more than just convenience for customers; they offer protection in the form of a chargeback. A customer may request a chargeback if they were double-charged for a single order, if the bank made an error, or if an order was returned but a refund was never processed.

Chargeback prevention and customer service go hand-in-hand. So, your first step is to make it easier for customers to contact you. Call your merchant account provider and ask them to place your toll-free phone number on customers' credit card statements. Display your phone number and e-mail address in easy-to-find locations on your website and on the packing slip included with the shipment.

Additionally, stay in contact with your customer throughout the sales cycle. Send a follow-up e-mail immediately after an order is placed, so the customer can review their address and purchase. Then send another e-mail when you ship the order. If an order must be cancelled or delayed, contact the customer with a polite explanation and an offer to substitute products, keep the items backordered, or cancel the sale.

Following best practices when charging your customers' cards will also help reduce your chargeback frequency. When the order is placed, authorize the customer's card for the exact amount of the order. Do not capture the sale, however, until the order is shipped. On the other hand, don't wait too long to capture the order. Late captures create customer confusion, and they can also raise your discount rate on the transaction or reduce your ability to collect funds. When you process a refund, promptly issue the money back to the customer using the same credit card that was used to make the sale.

Finally, be clear about your products and services, as well as your store policies. Don't mislead potential customers in your marketing campaigns. Make sure your product descriptions and images are clear and accurate. Publish your return policy on your website and link to it from every page. Additionally, if you do not allow returns or have a limited policy, make this clear to customers during checkout and require that they check a box to indicate their agreement with your policy.

CHARGEBACKS AS FRAUD
While chargebacks are often used for valid reasons, they are also employed as a method of fraud. The most obvious scenario is when someone makes a purchase with a stolen card. Fortunately, your credit card gateway offers a number of tools to help identify fraud. The Address Verification System (AVS) is a system that validates the billing address associated with the credit card. Because people using stolen cards often don't know the billing address, an AVS mismatch is one potential indication of fraud. At a minimum, the customer should provide a billing address that matches the address for their credit card.

Merchants should also use the Card Security Code . This is the three- or four-digit number printed on a credit card that is not raised or embossed, so it does not appear on a card imprint slip. Additionally, card issuers require that merchants do not store these numbers. The idea is that a person should only have access to the card security code by looking at the actual card.

The AVS and CSC codes are useful for most transactions within the United States. However, many international banks do not support these features. For international orders, you may wish to use other measures, such as reviewing the IP address of the computer used to place the order, or verifying that the card-issuing bank is located in the same country as the shipping address.

A less common form of fraud occurs when a customer orders an item, falsely claims it was never delivered, and then requests a chargeback. When contesting this chargeback, you might be required to present proof of delivery or a signature of the person who received the item. To combat this issue, always ship orders in a manner that requires a signature for delivery.

Finally, create an internal negative database that lists names of problem customers, their IP addresses, and the card numbers used. Compare suspicious future orders against your negative database when deciding whether to ship or cancel a potentially fraudulent order.

THE CHARGEBACK RESPONSE
Although an ounce of prevention is worth a pound of cure, most of us still have to deal with the occasional chargeback. First try to resolve the issue directly with the customer. It's quite possible that the chargeback is due to a misunderstanding or it's simply an error. For example, if a customer's card was stolen and used, they may report all the transactions from a given date range as fraudulent, without looking at the transactions closely. In this case, the customer might withdraw the chargeback request. If this happens, ask for a signed letter from the customer stating they accept the transaction as valid, and provide this to your bank.

Make sure to respond to all requests from your bank quickly. In your response, include all other useful documentation, including an electronic signature, proof of delivery, communication between you and your customer, a copy of your return policy, and anything else that might apply. If you can prove your charge is valid, your bank can re-present the transaction and you could walk away with your money and no fees or other negative results.

For most online retailers, a few simple steps will help reduce the frequency of chargebacks. By training yourself and your employees to provide great customer service and to handle credit card transactions with care, you can escape the chargeback nightmare.

About the Author: Susan Petracco is an ecommerce consultant and founder of NetBlazon, a Web services firm. With more than 11 years of experience, she has worked with companies such as Talbots and Serta on a variety of retail initiatives. She can also be found blogging about ecommerce and small business topics at DoublePlus.com.

MERCHANTS FIGHT BACK
BadCustomer.com offers a new and interesting way for merchants to control chargebacks. Through the BadCustomer API, merchants upload information they have gathered about certain consumers and their propensity to engage in chargebacks. The collective data is then pooled at BadCustomer. Merchants can then implement BadCustomer and their collective information about chargeback-prone consumers to block a transaction on their own website when one of those customers attempts to make a purchase. Information specific to that customer is checked against BadCustomer's database before the transaction is completed.

And here's where it gets interesting — the system is free for merchants. However, should a consumer find themselves on the BadCustomer list, they charge $100 to be removed. BadCustomer.com is relatively new in the space, so consumers engaging in chargebacks are not likely to feel the sting of being denied a purchase — yet.

It remains to be seen if this type of "blacklisting" of consumers will be tolerated by the public and consumer advocacy organizations.

— WM Staff