Protecting Your Business from Chargebacks

All businesses that accept payment cards are vulnerable to chargebacks, or a customer-initiated reversal of an electronic payment. Chargebacks can be a time consuming and expensive part of doing business, but there are ways to limit their impact.

A chargeback occurs when a cardholder disputes a transaction directly with the card issuer, bypassing the merchant. There are numerous reasons that can trigger a chargeback, such as a customer dispute, fraud, credit card processing error or an authorization issue.

A retailer’s first notification of a chargeback typically comes when the card issuer initiates a retrieval request against them to make good the loss on the disputed transaction. The issuer withdraws the disputed amount from the retailer’s merchant account until the matter is settled. The merchant has 10 days to dispute the chargeback with proof of purchase or delivery.

Your first line of defense as a merchant is to resolve all complaints promptly and directly with the customer so that the situation does not escalate to a chargeback. Try to settle the matter by issuing a refund or replacing the item in question. If the customer has already initiated a chargeback, this gesture may persuade them to withdraw their claim with the card issuer.

If the customer isn’t receptive, you must provide evidence to contest the chargeback claim. Typically this entails providing transaction or delivery documentation like signed receipts, a delivery or pickup notification, transaction-related communication between you and the customer, and the customer’s IP address and download time and date for digital services. Any evidence that you have that the customer lives or works at the delivery address or that they have previously used the same transaction information to process undisputed purchases is also helpful to your case.

Do not waste any time when responding to a chargeback notification. Pay attention to the deadline imposed by the processing network involved and move quickly to meet it. Develop a system for organizing transaction records so that you can assemble all the required evidence in a timely manner.

Be prepared to deal with chargeback reason codes, which correspond with a particular reason that a customer may request a chargeback. These include service not provided/merchandise not received, not as described/defective merchandise, authorization not obtained, duplicate processing and card present/card-not-present fraud. There is a broad range of allowable evidence that you can use to defend your business from a chargeback including emails or photographs proving a connection between the cardholder and the person who received the merchandise, the cardholder’s signature on a pick-up form or a copy of their identification presented at pickup.

For e-commerce transactions in which digital goods were downloaded from a website, allowable evidence includes time and date of the download, the cardholder’s email access and IP address, description of the product(s) downloaded and proof that the cardholder accessed your website for services after the transaction date. Clear, detailed and verifiable evidence can vastly improve your chances of successfully contesting a chargeback.

Once you have submitted your rebuttal to the chargeback, your payment processor’s acquiring bank reviews the information and forwards it to the customer’s card issuing bank, which makes the final decision and informs the cardholder.  If you are successful, the disputed funds are credited back to your merchant account; however, you will still be responsible for the chargeback fee imposed by your merchant account provider.

Not every chargeback can be resolved in the merchant’s favor, but many can be resolved without the loss of the sale — and that should be your goal. A chargeback can cost you not only the sale, but other fees and penalties as well.

Finally, if your chargeback rate becomes excessive (usually considered to be greater than 1 or 1.5 percent of your total transactions), your payment processor may cancel your merchant account and you may have difficulty opening a new one. Consider this to be one more incentive for dealing with chargebacks fully and in a timely fashion.

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