A Merchants Guide to Reducing Fraud and Avoiding Chargebacks

What is a chargeback and why do I need to be concerned?

In order to begin the discussion on how to reduce fraud and chargebacks, it is important to understand exactly what a chargeback is. A number of years ago, the major card brands established a system to protect consumers from fraudulent charges, defective products, poor service, and clerical errors. The result was what is commonly referred to as a chargeback or consumer dispute. The purpose of the chargeback program was to keep businesses accountable for their product or service. Consumers were given an avenue by which to contact their issuing bank, voice their dissatisfaction and attempt to get the original transaction reversed back onto their credit or debit card.

In this day and age, with the expanding e-commerce marketplace and rising identity theft cases, chargebacks are becoming a much more common occurrence. All businesses should be taking the necessary steps to reduce the number of chargebacks they receive.

There are a number of reasons businesses who accept credit or debit cards should be concerned about chargebacks. First and foremost, when a chargeback occurs, the funds are debited from the merchant’s bank account so that the issuing bank can credit the customer who submitted the dispute. Even if the merchant responds to the chargeback and wins, they are still forced to pay a hefty chargeback fee. Depending on how far the dispute goes, various fees could cost upwards of $400. Furthermore, if the business’s fraud chargebacks creep to more than 1%, they could incur a $5,000 fine by the card brands for a chargeback monitoring program designed to detect businesses with excessive or unacceptable chargeback levels. These businesses also run the risk of being terminated by their merchant services provider which could lead to the business losing their ability to accept cards in the future.

What are the reasons a customer can initiate a chargeback?

When a customer initiates a chargeback, the issuing bank sends the merchant’s processor a notice with the specific reason code listed. This information is then sent to the merchant’s attention so that they can provide a response to the customer’s dispute. There are many reason codes for Visa, MasterCard, Discover and AMEX—you can find the complete list here. Some of the reasons are more difficult to contest than others, so prevention is key.

• Poor Quality / Customer Service: One of the main reasons customers initiate a chargeback is because they did not receive or were not satisfied with the product or service. Customers frequently try to contact the business to express their discontent and if the merchant is unresponsive the customers can initiate a dispute.
• Technical Errors: Technical chargebacks can occur when a merchant forces through a card without a valid authorization code or accidentally charges an expired card.
• Clerical Errors: Human error does account for a small percentage of chargebacks. These errors include double-billing a customer’s card, failing to refund a card, or charging an incorrect amount.
• Fraud: Unfortunately, with the rise of identity theft and major data breaches, it is becoming more common for a customer’s personal information and credit card data to be stolen. These fraud chargebacks happen when the customer views their statement and believes their card was charged without their permission. In these cases, the merchant pays the ultimate price as they are responsible for giving back the money. If they already provided the product or service it is highly unlikely they will be able to get any of it back.

Avoiding Card-Present Chargebacks

The best way for a merchant to avoid card-present chargebacks is to implement best practices for card acceptance and ensure their employees adhere to them.

• Merchants should swipe cards whenever possible and make sure their employees always check photo IDs if a card is not signed. It can be an easy thing to forget, but the merchant can prevent a large amount of card-present fraud by having their employees take the extra time to verify the cards.
• Merchants should make sure the authorization amount received is for the exact transaction amount. If the merchant can’t get a single authorization for the correct amount, they should decline the transaction and ask for another form of payment.
• Merchants should always obtain a signed sales draft/signature from the customer confirming exactly what product or service was provided and the date on which it was provided.
• If the merchant has to issue a refund to a customer who paid with a credit card, process the void on the same card they paid with. They should avoid giving customers cash back for the returned product/service.

Avoiding Card-Not-Present Chargebacks

According to Visa’s Card-Not-Present Guide to Greater Fraud Control there are a number of warning signs for merchants who accept card-not-present transactions. Any order fitting these or a combination of these patterns should be scrutinized by the business.

• First-time shopper: Criminals are always looking for new merchants to steal from.
• Larger-than-normal orders: Because stolen cards or account numbers have a limited life span, criminals need to maximize the size of their purchase.
• Orders that include several varieties of the same item: Having multiples of the same item increases criminal’s profits.
• Orders made up of “big-ticket” items: These items have maximum profit potential.
• “Rush” or “overnight” shipping: Criminals want their fraudulently obtained items as soon as possible for the quickest possible resale, and aren’t concerned about the extra delivery charges.
• Shipping to an international address: A significant number of fraudulent transactions are shipped to fraudulent cardholders outside of Canada/U.S.
• Transactions made with similar account numbers: May indicate the account numbers used have been generated using software available on the internet.
• Shipping to a single address, but transactions placed on multiple cards: Could involve account number generated using special software, or even a batch of stolen cards.
• Multiple transactions on one card over a very short period of time: Could be an attempt to “run a card” until the account is closed.
• Multiple transactions on one card or a similar card with a single billing address, but multiple shipping addresses: Could represent organized activity, rather than one individual at work.
• In online transactions, multiple cards used from a single IP address: More than one or two cards could indicate a fraud scheme.
• Orders from internet addresses that make use of free email services: These email services involve no billing relationships, and often neither an audit trail nor verification that a legitimate cardholder has opened the account.

Other Steps a Merchant Can Take to Prevent Chargebacks

• Be recognizable on credit card statements

If the doing-business-as name appears differently than the descriptor on a customer’s credit card statement, the customer may not recognize the charge and contact their issuer. A merchant should always ensure their descriptor matches the business name they solicit customers under.

• Don’t skimp on customer service

With open communication, the merchant will be able to limit the amount of chargebacks caused by simple human error. Generally, customers will first attempt to contact the business when they feel like something has gone awry, and they’ll appreciate eagerness to remedy problems when they arise.

• Be transparent

Merchants should establish a clear return policy and make it easily accessible to the customer. A refund policy should include contact information and a statement urging customers to contact the business if they have any concerns about their product or service. For card-present transactions, the company’s return policy should be included on the credit card receipt.

• Avoid friendly fraud…

Friendly fraud occurs when a customer knowingly indicates a transaction is fraudulent and initiates a chargeback with their issuer despite having made the transaction themselves. No business likes to think that their customers would intentionally file a fraudulent chargeback, but it can happen. When it does, the credit card issuer almost always takes their customer’s side.

• Keep good records. Without a record of transactions, chargebacks will always go through, no questions asked. If the merchant keeps scrupulous documentation they will be able to prove when transactions were processed properly and have friendly fraud chargebacks reversed in their favor.
• Require signature upon delivery. Merchants should not allow goods shipped to be left without a signature. This way, the merchant will have verification that the order was received.
• Track IP addresses. If the merchant keeps a record of IP addresses from online orders, they will be able to tell where the order originated from. This can also help weed out potentially fraudulent transactions.

• …And prevent actual fraud

There are a number of steps/add-on products available for businesses to help combat potentially fraudulent orders. Requiring CVV and CVV2 codes is a common step many businesses take, but that may not always be enough. AVS is a product which verifies credit card billing information to the information housed by the issuer of that card. Merchants should always keep an eye out for suspicious orders and make this part of their day-to-day operations.

When in doubt, check it out…

If the merchant discovers something suspicious, they should verify the order. A simple phone call to the issuer can help them verify the transaction is legitimate and can be the difference between a mountain of chargeback fees and a potential unhappy customer. And if the merchant verifies fraud, they should act fast. The merchant should contact the cardholder’s bank and let them know what happened so they can issue a courtesy call to the cardholder. If the transaction was already processed, the merchant should immediately refund the card in order to avoid chargeback fees and potential adverse action on their processing account.