What is a chargeback?

The credit card system protects issuing banks from unscrupulous merchants. When you submit a deposit, you are promising the issuing bank that you have delivered the goods and services promised to the cardholder. If you don't, the issuing bank has the right to charge back the transaction.

CONSUMERS

Cardholders are protected from merchants who fail to keep their promises. They're not liable for payment if a merchant fails to deliver as expected.

Trust holds the credit card world together. The issuing bank doesn't ask a cardholder if he is satisfied before the merchant gets his money. They TRUST that the cardholder will be satisfied. When the merchant sell by credit card, he must deliver on those cardholder's "expectations" or risk of losing his payment through a process called "credit card chargeback".

"What expectations?" Think about it. Either by policy or by practice, implicitly or explicitly, the merchant tells the customer that he may expect a certain level of quality and satisfaction. By accepting a credit card for payment, he is promising the issuing bank that he will"make good" on those expectations. If not, your customer has legal recourse to get his money back via a dispute process.

Chargebacks: Customers Wanting Their Money Back

Almost everyone has an idea how a credit card sale works. But even some experienced merchants don't know the other side of the system: Chargebacks. Understanding chargebacks can save a lot of money and aggravation, not to mention help salvage customer relationships.

If a cardholder believes a charge isn't legitimate, or his/her expectations aren't met by the goods or services provided, his initial recourse could be to ask the seller for a refund. But he also has another more troublesome, option: Disputing the charge and asking for a chargebacks credit to his card.Credit processing service providers have their hands tied when this happens...they are legally obligated to follow the procedures set forth by the card associations.

Here's how chargebacks work: Regardless of merit, the issuing bank...the bank that provided the customer with his credit card, NOT the merchant account service provider,,, is obligated to investigate the card holder complaint, which among many other things may encompass:

• The customer claims the merchant failed to deliver the goods or services promised
• The customer claims he/she never ordered the goods that showed up on their credit card bill
• The customer received the goods and services, but they didn't meet expectations, so they want a refund

In these circumstances, the issuing bank initiates a Retrieval Request and/or a Chargeback to resolve the matter.

Some common causes of chargebacks many of which could and should be easily avoided with a little knowledge, good faith, and common sense:

• The selling company name appears one way on advertising or receipt, but a different way on the customer credit card statement. In other words, the customer doesn't connect the sale with the seller because he doesn't recognize the seller. In some cases, this problem results from two businesses attempting to process transactions through one shared merchant account. This is dangerous, contrary to bancard regularion, and very illegal in many states (it's known as 'factoring'). Don't do it! Each individual business entity, even if with common ownership, requires it's own individual merchant account
• The customer is charged before the goods have been shipped. He rightfully feels he shouldn't have to pay for something he doesn't have yet, so he disputes the change when the bill comes. To avoid this, credit cards should be billed only after goods or services have been delivered, never before

• The Merchant failed to properly disclose any special terms or conditions attached to the sale, in compliance with strict bankcard association regulations. Examples: All sales final, returns within 10 days, and so on. This procedure should have been provided to the merchant during initial processing system installation and training
• The card used to make the purchase was stolen, unauthorized, or otherwise invalid, the sales clerk was negligent in accepting the card for payment
• Dozens of other possible reasons too numerous to ention

Step One in Credit Card Disputes: Retrieval Requests

Traditionally, the dispute process begins with a Retrieval Request that asks for documentation.

1. The issuing bank sends a Retrieval Request (often called simply "retrieval") to the processor. Sometimes, they start with a chargeback and skip the retrieval request altogether. Yes, under certain circumstances they CAN do this!

2. The processor sends the retrieval to the Merchant, ideally within the permitted chargeback period although there are many exceptions to this rule. The retrieval demands that the merchant furnish proof that the disputed goods or services have in fact been delivered to the cardholder, and states a deadline for production of this proof.

3. When the Merchant provide proof that the goods or services were in fact delivered to the cardholder, the processor forwards it to the issuing bank who in turn informs the cardholder. The proof usually is a document (delivery receipt, credit card receipt swiped or manually imprinted, and signed by the authorized cardholder or similar . TIP: Reply PROMPTLY to these requests within the timeframe stated.. Late responses almost always result in chargebacks going against the merchant.

4. At this point, the complaint is usually (but not always) considered resolved and dropped.

Chargebacks: When the Merchant Can't Prove the Customer Wrong

If the Merchant fails to produce documents for the retrieval, or if copies of requested documents are not delivered to the processor in time, the cardholder is deemed to be right. In this case several things happen, all bad for the merchant:

1. The customer card issuing bank submits a chargeback to the merchant processor through the Visa/MasterCard network.

2. Visa/MasterCard debits the original transaction amount from the Merchant bank account. (Or, it is deducted from a recent deposit transactions).

3. The sponsoring bank records the chargeback on the account record of the business.

Besides the obvious financial loss to Merchant, chargebacks are also bad in a far more serious way. Here's why:

Everyone in the business world knows that eventually a few transactions will result in chargebacks. They're a cost of doing business. But, if the Merchant causes too many chargebacks, the credit card system will start to doubt him and his standing as a credit card merchant. When chargebacks become too prevalent, the processing account may be terminated by the sponsoring bank and placed on the "MATCH FILE" (see Glossary). The merchant may then find it impossible to find another merchant account for accepting credit card payments. In other words, no more credit card acceptance, and the merchant is essentially out of business.

Chargebacks and Timing

In most (but not all) cases, chargebacks must be initiated within 90-120 days of the original transaction. However if a merchant is alleged to have violated Visa or MasterCard rules, or fraud is suspected, a "compliance" case can be disputed at a much later date.

How to Avoid Chargebacks

Preventing credit card losses is not only good for the Merchant, but it is also his contractual responsibility. Here are some general guidelines on how to prevent fraud and avoid chargeback losses:

• Make sure that the credit card is from the legitimate cardholder… not just someone who knows the card number, or has stolen or 'borrowed' the actual card
• Verify signatures (for face-to-face transactions) on the card and on the receipt signed by the customer
• Take special care with non-magnetic transactions such as telephone orders, mail orders or Internet orders. Be aware that you have ZERO chargeback protection in these scenarios... these types of sales are accepted entirely at merchant risk.
• If applicable, always use the Address Verification System and verify the Security Codes (also known as "Validation Codes") on the card
• Obtain a signed receipt from the cardholder and, if applicable, a signed proof of delivery from the shipper for delivered goods
• Protect your merchant ID and terminal ID so no one submits transactions without your permission

More Tips to Avoid Chargebacks

• Make sure shoppers are aware of warranty and return policies. Make sure YOU consistently live up to it. When consumers can resolve problems directly with you, you avoid the hassles of dealing with chargebacks
• If you have a "no refund policy," the customer must acknowledge this with a signature. The words "No Refunds" must be printed at least ¼" high and be within ¼" from the signature space. Signs on walls, sales invoices, verbal warnings do NOT suffice or protect the Merchant from chargeback liability
• NEVER submit a deposit transaction until the goods or services are delivered or rendered
• In the case of rented equipment or sporting goods, do not attempt to cover damage to products by charging the customer's credit card without doing the following: You must run a separate transaction for the damage after swiping the card again and having the customer sign a separate sales draft and invoice for the damage claim. Never attempt to charge for damage or loss using only the credit card draft obtained when performing your rental transaction
• Make sure you have a manual flatbed imprinter and official vouchers on hand, and use them to manually imprint every credit card transaction in which the card, for whatever reason, will not successful swipe thorugh the electronic card reader of the POS equipment