For merchants in every line of business, chargebacks are an annoying inconvenience and part of the responsibilities of accepting electronic payments. But, if you understand the types of chargebacks, how to dispute them appropriately, and how to avoid them to begin with, you can lower your risk for chargebacks and the burden of the associated fees they incur.
Chargebacks occur any time a customer disputes a charge with their issuing credit card provider or their bank in cases of debit cards. This usually results in the funds immediately being returned to the customer because the process weighs heavily on the side of the card holder instead of the merchant. In fact, about 70 to 80 percent of chargebacks are resolved as merchant liability. That’s why merchants need to have their chargeback/return fee policy well published and clear and why you need to be able to dispute what you consider unfair chargebacks for goods/services quickly and effectively with the card issuers.
According to The Federal Reserve Bank of Kansas City Research Working Papers, “For Visa and MasterCard transactions, chargebacks merchants receive are, on average, 1.6 basis points (bps) of sales number and 6.5 bps of sales value. The most common chargeback reason is fraud, which accounts for about 50 percent of the total chargebacks. The merchant fraud loss rate is 0.7 bps in number and 2.6 bps in value. For American Express and Discover transactions, the total and fraud chargeback rates are somewhat lower.”
There are over 150 chargeback reason codes out there so you’d first need to find out from your merchant services provider what the chargeback code is for this case before you can determine how to move forward to dispute it if you believe that is necessary. Also, keep in mind that different banks/card issuers have different procedures for handling chargebacks and they typically take two to three months to fully complete, especially in cases of suspected fraud.
Typically, the chargeback steps go like this:
- Customer complains about a transaction to their bank/card issuer which triggers the issuing bank to being the chargeback procedure.
- Merchant (store/retailer) is contacted and the merchant must prove that the sale was legitimate.
- The bank will ask for details regarding the purchase. During this process merchants shouldn’t attempt to directly refund the customer because the bank will have already issued a refund credit on your behalf so you’d end up refunding the merchant twice for the same charge. Note: Chargebacks always have fees that the merchant must pay whether the merchant wins the dispute or not. This is one of the costs of doing business and accepting electronic payments.
- The bank/issuer will review both sides and issue a final resolution decision – typically within 90-days.
To dispute a chargeback, you’ll need to gather and provide the following details to the bank:
How you, the merchant, respond to chargebacks hinges on the nature of your business and the circumstances of the transaction in question. If you obtained authorization from the cardholder (swiped a card in person and have a receipt on file) or took a card not present payment online but did used AVS and CVV, then you should supply at least the following in your response:
- Copy of the transaction invoice, receipt, or signed order form
- Proof of delivery (when applicable)
- If the cardholder collected merchandise from your physical storefront/location, include:
- Cardholder signature on the pick-up form
- Copy of identification presented by the cardholder
- Details of identification presented by the cardholder
- A connection/relationship between the order recipient and the cardholder; i.e. a member of the cardholder’s family authorized the transaction
- The cardholder disputing the transaction is in possession or using the merchandise- for example if you’re selling an online service and the user has been logging in to use it that will help dispute resolution.
- The IP address, email address, physical address, and/or telephone number was used in a prior transaction that was not disputed
Merchants selling digital goods/services have a bit more compelling evidence to collect to respond to a chargeback categorized as fraudulent. The chargeback response needs to include a description of the merchandise downloaded, the date and time of download, and at least two of the following:
- IP address of purchaser at date and time of transaction
- Device geographical location at date and time of transaction
- Device ID number and device name
- Name and email address linked to the customer profile on-record
- Evidence that the customer profile was activated and verified by the cardholder before the date and time of transaction
- Evidence that the cardholder accessed/used the downloaded digital goods on or after the date and time of transaction
- Evidence that the same device and card were used in previous, undisputed transactions.
Learn more about what to provide to dispute customer chargebacks on the Shopify blog.
Here are some simple ways merchants can try to avoid chargebacks to begin with:
- Make sure you have an EMV chip-enabled terminal to avoid the fraud risk of exposing your customers’ credit card data. *Reminder, if you’re using a terminal that is not EMV chip-enabled you can switch free to our CardPointe terminal and secure yourself from the chargeback liability.
- Always follow proper protocol and stay current with your PCI DSS security certificate. This is done by completing an annual SAQ (Self-Assessment Questionnaire) and by paying the $99 annual PCI compliance fee.
- Use a processor with sufficient security and payment descriptors to accurately label your transactions – this always reduces the risk of fraudulent purchases that lead to chargebacks.
- Service oriented businesses should always publish and get their chargeback/electronic payments policies signed by customers. This way customers cannot argue they didn’t receive the service they paid for and the cancellation/refund policy is clear in writing.
- Provide good customer support and try to resolve customer complaints before they file a chargeback whenever possible. If you can deal with a customer issue out of the line of site of the bank it’ll save you on the chargeback resolution fees.
- Train your employees to look for signs of fraud, check ID when they accept credit cards for in person payments, and to follow good security protocols when inputting card not present payments through an online terminal, such as never writing down credit card information.
Now that your chargeback savvy merchant, test your credit knowledge with our Business Credit Quiz.