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Chargebacks: A Huge Price to Pay

If you're not careful, customers can take advantage of you big-time.
June 25, 2001
URL: http://www.entrepreneur.com/article/41670

Q: I just started my online business, and I've been hearing a lot about chargebacks. How do these happen exactly, and what can I do to prevent them?

A: A chargeback occurs when a credit card processor charges the merchant (you) for the cost of returned items or incorrect orders that the customer claims were made to his or her credit card. Chargebacks can also be initiated by banks, often without consulting their customers. These chargebacks are usually for processing or authorization-related issues. As you might imagine, chargebacks are quite costly for merchants.

Resource Guide
Get more tips on effectively running your e-business:
How to Dotcom by Robert McGarvey
Managing Your e-Commerce Business, 2nd Ed. by Brenda Kienan

Here are some common causes of chargebacks, all of which you need to be concerned about as an e-commerce merchant, along with possible preventive measures:

1. You are the victim of fraudulent mail-order/telephone order or Internet transactions.

Solutions:
Create a database to identify high-risk transactions and block specific credit card numbers within your system.
Use the Address Verification Service (AVS) to verify the cardholder's address at the time of the sale, and compare the address against the information in the card-issuer's database.
Submit your customer service telephone number to your credit card processor so it can be included with your merchant name on customers' billing statements.
Know your customers-obtain their telephone numbers during a transaction, and call to verify the order and the number given to you.
If they're available, utilize CVC2 (MasterCard) and CVV2 (Visa). These two numbers are the three unique digits on the back of a MasterCard or Visa credit card. These are used in situations where the card is not present.

2. The customer claims not to have received the requested goods or services, or claims that you've charged them improperly for goods or services they haven't received yet.

Solutions:
Obtain your cardholder's signed proof of delivery for every credit card transaction in which the merchandise or service is not delivered immediately at the point of sale.
Disclose to your customer in writing the terms of a transaction, including shipping and handling charges and any applicable taxes. The first payment installment must not be processed until the shipment date of goods.
Use the appropriate wording on the transaction receipt, such as "delayed delivery," "deposit" or "balance." Note: You can process delayed-delivery transactions before delivery of the goods, but you can not process a deposit or balance transaction before delivery.
You can process a prepayment transaction if you advise your customer that he or she will be billed immediately; you can process a full prepayment for custom-order merchandise (goods manufactured to the customer's specifications).

3. A customer requests a copy of a transaction through his or her credit card company, and you are asked for copies of all your documentation, called a "retrieval request."

Solution:
It's critical that you file all customer information in a manner so you can quickly retrieve it and prove the customer made a purchase from your site. To reduce confusion that could result in a dispute, have a copy of each transaction to support it.

4. The customer claims the credit for a refund was not processed.

Solution:
Process refunds to your customers' accounts quickly, always using the same card number from the original sale. Never give a customer a refund by cash or check. Be sure your return or refund policy is clearly stated on all receipts to avoid any disputes.

5. You get tangled in a dispute over duplicate transaction processing.

Solution:
Make sure you process only one transaction at a time. If your customer makes more than one purchase-or makes two purchases for the same dollar amount within the same day-make sure you create a separate invoice for each transaction.

6. Authorization is declined.

Solution:
Do not continue to seek authorization on a declined transaction; do not reduce the amount requested, and do not repeat the request. Simply do not process the sale.

7. A cardholder disputes the quality of the merchandise or service or indicates it was defective.

Solution:
Ensure that your customers are aware of your return policy by displaying it prominently on receipts. If you want your return policy to be limited, say so.
Be sure your merchandise suits the needs of the customer, and ensure the goods are packed properly for shipping.

For more information on chargebacks, visit Cardservice International's Web site.


Tim Miller is COO of Cardservice International and has more than 15 years of experience in the credit card processing industry.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.