Chargebacks: A Huge Price to Pay If you're not careful, customers can take advantage of you big-time.

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Q: Ijust started my online business, and I've been hearing a lotabout chargebacks. How do these happen exactly, and what can I doto prevent them?

A: Achargeback occurs when a credit card processor charges the merchant(you) for the cost of returned items or incorrect orders that thecustomer claims were made to his or her credit card. Chargebackscan also be initiated by banks, often without consulting theircustomers. These chargebacks are usually for processing orauthorization-related issues. As you might imagine, chargebacks arequite costly for merchants.

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

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

Create a database to identify high-risk transactions and blockspecific credit card numbers within your system.
Use the Address Verification Service (AVS) to verify thecardholder's address at the time of the sale, and compare theaddress against the information in the card-issuer'sdatabase.
Submit your customer service telephone number to your credit cardprocessor so it can be included with your merchant name oncustomers' billing statements.
Know your customers-obtain their telephone numbers during atransaction, and call to verify the order and the number given toyou.
If they're available, utilize CVC2 (MasterCard) and CVV2(Visa). These two numbers are the three unique digits on the backof a MasterCard or Visa credit card. These are used in situationswhere the card is not present.

2. The customer claims not to havereceived the requested goods or services, or claims that you'vecharged them improperly for goods or services they haven'treceived yet.

Obtain your cardholder's signed proof of delivery for everycredit card transaction in which the merchandise or service is notdelivered 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 theshipment date of goods.
Use the appropriate wording on the transaction receipt, such as"delayed delivery," "deposit" or"balance." Note: You can process delayed-deliverytransactions before delivery of the goods, but you can not processa deposit or balance transaction before delivery.
You can process a prepayment transaction if you advise yourcustomer that he or she will be billed immediately; you can processa full prepayment for custom-order merchandise (goods manufacturedto the customer's specifications).

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

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

4. The customer claims the credit for arefund was not processed.

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

5. You get tangled in a dispute overduplicate transaction processing.

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

6. Authorization isdeclined.

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

7. A cardholder disputes the quality ofthe merchandise or service or indicates it wasdefective.

Ensure that your customers are aware of your return policy bydisplaying it prominently on receipts. If you want your returnpolicy to be limited, say so.
Be sure your merchandise suits the needs of the customer, andensure the goods are packed properly for shipping.

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

Tim Miller is COO of Cardservice International and hasmore than 15 years of experience in the credit card processingindustry.

The opinions expressed in this column are thoseof the author, not of All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.

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