by Dan Kane, Project Analyst
Consumer and business credit cards are one of the most regulated financial products that exist today. With a laundry list of restrictions and processes in place designed to protect the consumer, oftentimes businesses large and small find themselves having the burden of proof thrust upon them to justify transactions taken days, weeks, even months earlier. If these requests are not adequately responded to, organizations face the reversal of legitimate sales transactions as well as potential fines and fees. So how do businesses protect themselves from the ramifications of these chargebacks? Before adequate measures can be taken to reduce or eliminate these situations, one has to understand the nature of Chargebacks, and how and why they occur.
Originally designed to protect cardholders from fraud as part of the Truth in Lending Act (TILA) of 1968 (credit cards) and Electronic Funds Transfer Act of 1978 (debit cards), chargebacks used to be a relatively simple process. A customer would dispute a charge that they did not recognize, and the issuing bank of that card would contact the merchant who ran the sale to gather information about the transaction. This information could include a signed receipt or work order, a letter of authorization, contract, or any variation of these that demonstrated that the cardholder was aware of the transaction and authorized the use of their credit card to meet the balance for services rendered. This mechanism was designed to protect against fraud, as well as providing merchants with an incentive to provide quality products, helpful customer service, and timely refunds as appropriate. As the concept has evolved, chargebacks may now be initiated by the issuing banks themselves for a wide variety of reasons. Understanding these reasons, documented by the aptly named “Reason Codes” identified in a chargeback notification, can help merchants not only identify potential problems with their current card acceptance process, but also determine how
best to document, respond to, and ultimately win chargebacks that will inevitably occur.
Bank Initiated: Issuing banks are authorized to reverse cardholder transactions based on a variety of factors spanning from suspicious transactions, to processing errors performed at the point of sale. The best defense against these kinds of chargebacks is to take all necessary steps when accepting cards as payment.
- Settle all transactions within 24 hours: Transactions that remain unsettled, or in a pending status, for a long period of time are more likely to be flagged by banks as suspicious, and potentially be charged back. This will also ensure that the transaction does not downgrade to a less desirable rate.
- Keep all relevant sales documents: Hardcopy or electronic records of transactions should be maintained for two years, as cardholders and banks have the ability to chargeback a transaction for up to 20 months.
- Obtain a card use authorization letter for all recurring transactions: it is not uncommon for customers to forget that they have set up a payment plan, or other form of recurring payments with a merchant, and subsequently initiate a chargeback. Having a formal, signed letter that outlines the terms of a recurring payment can help to diffuse such a claim.
Card Present Transactions: Chargebacks are less likely to occur on a transaction where the card is physically presented, however these kinds of chargebacks still occur, and can be especially difficult to fight without some basic information.
- Confirm the signature matches the name: This may seem simple, but it is not always done by employees at the point of sale. A signed receipt matching the signature on the card goes a long way in proving that a transaction was authorized.
- Tag sales with an invoice number: All point of sale equipment has the ability to tag sales receipts with any information that links the card transaction to other relevant sales information. Oftentimes a signed work order is not enough to combat a chargeback without a specific reference to the card being used for the sale.
- Tag refund transactions with the original transaction being returned: Demonstrating that a credit was issued does nothing if there is no evidence that the refund is for the disputed charge. Tagging the transaction with the original invoice
number can help to further identify that a problem was resolved.
Card Not Present: Fraud and chargebacks are more prevalent in situations where the card being used is not physically present. Whenever possible, it is best to swipe a transaction. In the event a transaction has to be taken when the card is not present, always be sure to enter the following:
- Define sale as Card Not Present: This option is available on all Point of sale equipment and will initiate a series of prompts for relevant information otherwise contained on the magnetic strip of the card:
- Billing Address: Numeric portion is sufficient
- Billing Zip Code
- CVV2 Code: Located on the back of the card
In the event your business incurs a chargeback from a customer, the most simple and easy way to resolve the issue is directly with the customer. The card associations can be difficult to deal with at best, and so the best resolution is to have the customer retract the chargeback, and resolve their issue directly with them. It is also important to note that no matter how much information a merchant keeps, if a transaction is truly fraudulent, a chargeback cannot be undone. The primary purpose of a chargeback is to protect the consumer, and so the responsibility is on the merchant to mitigate fraud as much as possible. We will go into greater detail next month on how to best identify potential credit card fraud, and mitigate your business’ exposure to it!