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Chargebacks (AKA Claw-Backs)


Chargebacks are often seen as another business expense. However they don't need to be...

The facts:- In the United Kingdom the right of a consumer to chargeback is limited to: goods costing less than £100 (over £100 then section 75 of the Consumer Credit Act applies). American Express, MasterCard and Visa cards; only if goods paid for arrive damaged, or not as described or if the seller has stopped trading. In other cases such as for goods costing more than £100 where a claim can be made for misrepresentation by the seller or breach of contract.

The Truth:- Unfortunately certain online industries are more prone to Chargebacks than others and more often than not should never have happened *. Typically travel, subscriptions, dietary, adult, music and film downloads, gaming, file sharing and other intangible goods (to name a few) are most at risk and is one reason they are classed as high risk. However NOBODY, regardless of what you may think, is Chargeback immune.

Please use the links below to learn more about Chargeback mitigation...

 

What are chargebacks and why they occur?


A chargeback is when a credit card user (your customer) successfully disputes a transaction. Disputes typically arise from the customers dissatisfaction with merchandise or services and represent one of the biggest risks faced by merchants accepting online payments. Not only are they costly, they can also get your merchant account closed as both Visa and MasterCard allow only 1% of the total number of your monthly transactions to be a Chargeback.

Visa reported 70% of all chargebacks are actually fraudulent.

First of all Chargebacks can happen regardless of what you are selling or how you run your business and are pretty much inevitable. Nobody has a 100% safe business when it comes to Chargebacks and it's the legal right of every credit card holder to do one within 6 months of making a transaction (so make sure you keep all transaction details for at least 12 months).

Chargebacks are often necessary because a customer has indeed received poor customer service or had their card used without their authorisatiuon. However that doesn't always mean that by doing one they are being fair. People will sometimes deliberately Chargeback because as they are simply wanting said product or service for free, cannot remember what they purchased or cannot be bothered to ask for a refund. This is also known as friendly fraud.

As previously stated it is not possible for you to avoid Chargebacks completely, however, the information in this section could help you reduce the number of Chargebacks you may receive.


What is a Chargeback?

If a merchant cannot fulfil its obligations to its customers i.e delivery, replacement or refund, or alternatively a card has been used fraudulently, the genuine cardholder is likely to return to their card issuer to begin a Chargeback of any amounts paid or to dispute unrecognised transactions that have appeared on their statement.

In the normal course of business, Chargebacks are passed from the issuer (credit card company) to the acquirer (who is debited by the issuer), who in turn would return to the merchant to either gather sufficient information to defend the Chargeback claim, or to recover monies paid in Chargebacks.

 

Unfortunately, if in the meantime the merchant has gone out of business the Chargebacks are unlikely to be defendable and the Acquiring bank will stand the loss. This is why we implement rolling reserves and deferred settlements, to mitigate this exposure.

Transaction authorisation does not prevent Chargebacks

Authorisation of a transaction does not guarantee payment; it will only check the availability of funds at the time of the transaction and that the card has not been reported lost or stolen at the time of authorisation.


Why a Chargeback may occur

  • Processing errors

  • Duplicate processing

  • Incorrect account numbers

  • Claims of service not being up to scratch

  • Claims of merchandise not arriving

  • Merchandise or service not as described

  • Defective merchandise

  • Friendly fraud

 

Customer Service

One way to reduce the number of Chargebacks is to provide good customer service and have a high quality of goods/services offered, as this will reduce the number of cardholders raising disputed transactions with their card issuer.

For further information about providing high standards of customer service within your online store refer to:

 



Chargebacks with a Virtual Terminal account

Criminals like to place orders over the phone using stolen cards because they know that it’s sometimes harder for you to detect fraud - depending on your virtual terminal and merchant account facility. For example our VT uses the same anti-fraud measurers, however the PayPal account (and many others) do not. Also extra security measures such as 3D Secure can not be used in conjunction with a Virtual Terminal. Something else criminals know all to well.



 

The Chargeback Process

Please find below information on the basic Chargeback process:

  1. One of your customers has a problem with a transaction on your website.
  2. The customer informs their card issuer of the problem, and asks for their money back
  3. The card issuer does some research to see if the shopper's demand is reasonable
  4. If the customer seems to have a case, the card issuer makes a provisional payment to the shopper
  5. The card issuer starts the chargeback process, and obtains funds from the acquiring bank
  6. The acquiring bank sends a 'Notification of Chargeback' and a 'Request for Information' to you
  7. You receive an e-mail that is the Request for Information (RFI).
  8. If you ignore the RFI the chargeback automatically proceeds unchallenged and the money is gone
  9. If you reply to the RFI we forward any information you can give about the transaction to the card issuer
  10. The card issuer looks at the information you have given and follows the rules associated with the card
  11. The card issuer decides if the information you provide satisfies their criteria *


* If the information you supply does satisfy the criteria. You are paid for the transaction after a certain period of time. If you fail to satisfy the criteria, or arrives too late, the chargeback is automatically valid and the bank pays the card issuer from your account. We then charge you an admin fee for processing the chargeback.



 

Ways to minimize chargebacks


Good customer service
The easier it is for customers to contact you and speak to a real human being, the less likely they are to resort to chargebacks.

Confirm what they have purchased and where it will be delivered
Always provide a order confirmation page showing the details of the purchase. This should include your company name, what they purchased, their billing and delivery address and how to contact you. It is also a good idea to provide the descriptor that will appear on their card or bank statement - this is especially so for aggregated payment services where by you share a descriptor.

Constantly communicate
Email them when you have received an order and shipped it out. Contact them back straight away if they contact you. Email is the best way to communicate as it provides proof.

Have a good refund policy
A good refund policy is essential. It spells out exactly how a customer can be refunded and how they need to go about it. Make it up front and easy to find

Provide terms and conditions and make them easily accessible
All terms and conditions need to be clearly stated on all pages of the website. You should include your cancellation and return policy. Making the customer to “Check the Box” as part of the agreement is also recommended.

Save as much information as possible
Collect and store as much information on the customer as well as the order as you can. This will allow you to show that they did indeed buy from you knowingly.

Use 3D secure and other authentication tools
This forces the consumer to take extra steps to validate their identity at the time of the sale which can defer them from committing “friendly fraud” later on.

Get a signature whenever possible
Proof of signature is ideal as it stops a customer from using the excuse that they did not get the item.

Use your own data against them

Using your own data to prevent chargebacks is a very effective way to stop a thief from coming back and striking again. Unfortunately, merchants often don’t Blacklist the users that did a chargeback allowing new transactions to go through. Many gateways and processors offer this service for free to their merchants. They take the data from all of the merchants on their systems and use it to create a master blacklist. So even if the merchant did a chargeback with a different merchant you may be protected.





Remedying Chargeback Issues

With all of our accounts when a Chargeback is issued you will receive an RFI - Request For Information.

Even when you do receive a chargeback, you may be able to resolve it without losing the sale. Simply provide your acquirer with additional information about the transaction or the actions you have taken related to it.

For example, you might receive a chargeback because the cardholder is claiming that credit has not been given for returned merchandise. You may be able to resolve the issue by providing proof that you submitted the credit on a specific date. In this example and similar situations, always send your acquirer as much information as possible to help it remedy the chargeback. With appropriate information, your acquirer may be able to resubmit, or “re-present,” the item to the card issuer for payment. Timeliness is also essential when attempting to remedy a chargeback.

Each step in the chargeback cycle has a defined time limit during which action can be taken. If you or your acquirer do not respond during the time specified on the request—which may vary depending on your acquirer—you will not be able to remedy the chargeback.

Although many chargebacks are resolved without the merchant losing the sale, some cannot be remedied. In such cases, accepting the chargeback may save you the time and expense of needlessly contesting it.



 

Fraud Prevention and Chargebacks

Fraud Prevention plays an important role in the reduction of the number of Chargebacks you receive. Here is a number of fraud prevention facilities and procedures listed below:



 

Friendly Fraud - what is it and how to stop it?

Friendly fraud (we personally hate this industry term as there is nothing 'friendly' about it) happens when a customer makes a credit card payment with their own card and then issues a chargeback through through the card provider after receiving the goods or services with the aim for getting them for free (in other words, theft!) or because they fear that their bank statement may be read by someone else and they get into trouble (as is often the case in the adult industry).

"Friendly" fraud differs from online fraud committed by criminals using stolen credit cards. The challenge with friendly fraud is that there is no way to verify the authenticity of the actual transaction, which is in fact legitimate. We find that this happens more with higher risk merchants and also adult ones.

Please click here to learn much more about friendly fraud



 

Visa and MasterCard reason codes

Visa Codes:

30: Services Not Provided or Merchandise Not Received
41: Cancelled Recurring Transaction
53: Not as Described or Defective Merchandise
57: Fraudulent Multiple Transactions
60: Illegible Fulfillment
62: Counterfeit Transaction
71: Declined Authorization
72: No Authorization
73: Expired Card
74: Late Presentment

 

75: Transaction Not Recognized
76: Incorrect Currency or Transaction Processing Violation
77: Non-Matching Account Number
80: Incorrect Transaction Amount or Account Number
81: Fraud—Card-Present Environment
82: Duplicate Processing
83: Fraud—Card-Absent Environment
85: Credit Not Processed
86: Paid by Other Means
96: Transaction Exceeds Limited Amount

MasterCard Codes:

4802: Requested/Required Information Illegible or Missing
4807: Warning Bulletin File
4808: Requested/Required Authorization Not Obtained
4812: Account Number Not On File
4831: Transaction Amount Differs
4834: Duplicate Processing
4837: No Cardholder Authorization
4840: Fraudulent Processing of Transactions
4841: Cancelled Recurring Transaction
4842: Late Presentment
4846: Correct Transaction Currency Code Not Provided
4847: Requested/Required Authorization Not Obtained

 

4849: Questionable Merchant Activity
4850: Installment Billing Dispute
4853: Dispute — Defective Merchandise/Not as Described
4854: Dispute — Not Elsewhere Classified (U.S. region only)
4855: Goods or services not provided
4857: Card-Activated Telephone Transaction (fraud only)
4859: Change to Addendum, No-show, or ATM Dispute
4860: Credit Not Processed
4862: Counterfeit Transaction Magnetic Stripe POS Fraud
4863: Cardholder Does Not Recognize—Potential Fraud
4870: Chip Liability Shift
4871: Chip/PIN Liability Shift

 



 

Software and website's to help prevent Chargebacks

There are many different website's and bits of software available to help you counteract Chargebacks. Below are just some of the ones we found doing a simple Google search.

Please note that we do not endorse any of these and encourage you to do your own checks before signing up with any of them.

Chargebacks911™ offers a comprehensive, two-part chargeback management solution: preventing and fighting chargebacks. At each stage of this two-fold approach, our chargeback experts use innovative strategies to minimize risk, optimize profitability, and ensure long-term growth.

Zumigo.com works with telcos around the world, leveraging their mobile network data to match whether the name and phone number being given on the online checkout page matches the mobile device that is near the PC or laptop.

Ravelin.com examines all your user data, spotting fraudsters while you still have time to block them. Which means fewer chargebacks, better margins and uninterrupted sales growth



 

Our own Smart Dispute System (standard account solution only)

As part of our direct merchant account solutions we provide an automated “Smart Dispute” system that fully automates the chargeback dispute process, making sure deadlines are met and no chargeback goes unresolved. Chargebacks are electronically routed to our proprietary Smart Dispute system, where they are analyzed and disputed based on your behalf. Our chargeback management team is also on hand to assist you in implementing best practices for avoiding chargebacks.

  • Automatically retrieves and disputes chargebacks on behalf of the merchant

  • Monitors chargeback thresholds to ensure merchants remain within acceptable limits

  • Prevents chargebacks from occurring by stopping fraudulent transactions from being processed

  • Assists merchants in disputing invalid chargebacks and recovering funds

 

 


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