Your risks:
Chargebacks & retrievals
Your risk
in accepting credit cards can be boiled down to one word - chargeback.
A chargeback is the reversal of a charge. It is a transaction
in which the merchant's account is debited and, most often, the
cardholders account is credited. Most chargebacks result from
disputes filed by cardholders for a variety of reasons. The most
common claims are that the cardholder either didn't engage in
the transaction (that is, with lost or stolen credit cards or
other forms of fraud), failed to receive the goods or services
ordered, or that the goods received were not as described by the
merchant. Chargebacks also commonly occur because merchants fail
to respond to retrieval requests, fail to issue promised credits
or double-charge their customers. While chargebacks are most common
among mail/phone/Internet merchants, they also occur among retail
merchants.
Chargebacks
are the bane of our industry. They're like bounced checks. We
do not like them, and you certainly will not either. PayNet will
do everything possible to help you avoid them. If they occur,
we'll do everything we can to help you get them reversed. But
don't be naive: Credit card fraud is rampant, and Mastercard and
Visa regulations favor cardholders in disputes with merchants.
More often than not, the ultimate outcome of a chargeback is based
more on regulations and procedures than on the facts of the case.
So it is essential to know the rules and employ several important
tools to successfully avoid chargebacks and get them reversed
if possible.
A few important
rules:
The contractual
basis of your liability
In
general, you are protected against the use of a lost, stolen or
counterfeit card, provided that a) proof of the card's presence, either a magnetic stripe reading or physical imprint, is obtained
at the time of the sale, and b) a signature is obtained that reasonably
matches the signature on the back of the card.
Absent
proof of the card's presence, you warrant that the person presenting
the card or card number is the authorized cardholder
In such a case, if the authorized cardholder claims that
he or she did not participate in the sale (that is, that the card
was lost, stolen or counterfeit, or that the card number was otherwise
fraudulently used) you will be liable for the chargeback that
results.
(Merchants who use electronic printers rather than manual imprinters
must be careful to imprint all sales in which the card is present
but the magnetic stripe cannot be read.) In addition, you must
make proper disclosure of applicable sales terms. You may
impose special terms on a bankcard sale, but in order to be enforceable,
the terms must be disclosed properly. Proper disclosure means
that the terms are printed in letters at least one-quarter-inch
in height and at close proximity to the space provided for a cardholder's
signature on all copies of the sales draft, invoice or other sales
document. The cardholder must sign. If proper disclosure is not
made, then the terms will not be enforceable, and you may be subject
to a chargeback if the cardholder disputes the charge. Terms posted
in retail stores, websites and in catalogs and advertisements
may deter cardholders from initiating chargebacks, but they won't
constitute proper disclosure in the event of a chargeback. Finally,
merchants must maintain hard-copy records of their transactions
(called sales drafts), and they must provide copies when requested
by their processing banks. (The request may come from any of the
other three parties to the transaction -- the cardholder, the
card-issuing bank or the merchant processing bank.) Failure to
respond to a retrieval request within 40 days of the request date
will result in an irreversible chargeback.
Chargeback
procedure
The original charge by a merchant to a cardholder's account
is called the First Presentment of a charge. If a chargeback occurs,
it is called the First Chargeback. If the chargeback is reversible,
then the merchant may file a rebuttal. If the rebuttal is valid
(filed within the time limits, and containing the information
or documentation necessary to remedy the chargeback), then the
processing bank will make a Second Presentment of the charge to
the card-issuing bank. This, in effect, reverses the chargeback.
A Second Chargeback by the issuing bank is possible if the bank
believes the information or documentation supplied by the merchant
was insufficient to remedy the First Chargeback. A Second Chargeback
is not reversible. After a Second Chargeback, a merchant has the
following options:
-
Mediation. For a fee, at the expense of the merchant, the processing
bank may present the case to a panel of mediators at the appropriate
card association.
-
Good Faith Collection. The processing bank, on behalf of the
merchant, may seek collection from the card-issuing bank. This
option may be available in certain other circumstances in which
other efforts are impossible.
-
Collection
efforts outside the bankcard system, such as letters, lawsuits,
etc.
Use the
following tools to help avoid chargebacks: Good customer service
Treat your customers as you would expect to be treated. Keep an
open mind to complaints.
Common
sense
If an unusually large order comes in to your mail-order operation
at the last minute one day, and the customer wants it rushed out,
perhaps to an address that's different from the billing address
on the card, perhaps even to a foreign country like Romania, use
your head. It's probably a fraudulent charge.
If a couple of customers walk into your store late one afternoon
shortly before closing, and they quickly fan out to separate sections
of your store and select merchandise with little regard to size,
style or color, and then decline such services as free alterations,
shipping or gift wrapping, and then remove a credit card from
a pocket, rather than a wallet, and then explain that the wallet
is in the car, and they don't have any ID, use your head. The
card is probably stolen or counterfeit.You know your business.
You know what's typical, and what is out of the ordinary. Don't
be blinded by the desire to make a sale. Stop, and consider if
the circumstances are unusual enough to ignite suspicion. If so,
pick up the phone and call the authorization center and request
a "Code 10" authorization. This will inform the operator that
the cardholder is present and that you are suspicious without
alerting the cardholder.
Address
Verification
Available to all PayNet merchants free of charge, the Address
Verification Service (AVS) verifies billing addresses on credit
cards. You input the numerals in the street address and the zip
code, and the AVS response tells you if they match, don't match
or only partially match. An exact match tells you only that the
person who gave you the card number knows the billing address
on the card. It is not foolproof! You use the information
in determining whether or not to proceed with the sale. You may
proceed with a sale even if the AVS response is negative. If you
ship to the billing address and obtain a signature upon delivery,
then you will receive greater protection against claims that the
cardholder did not receive the goods.
Smoke and
mirrors
We hinted above at a couple of methods of deterring cardholders
from initiating chargebacks. An authorization form obtained by
mail, fax or the Internet may be a useful deterrent, and if signed
may be used to successfully fight a chargeback involving disclosure
of sales terms. But without an imprint or magnetic stripe reading
it would be of little use in fighting a claim that the cardholder
simply didn't participate in the sale.
Retrievals
and Chargebacks
If you get a retrieval request or a chargeback, the best way to
stack the deck in your favor is to respond fully, legibly,
and on time. Retrievals may or may not precede chargebacks,
and may or may not signal impending chargebacks. If you fail to
respond to a retrieval request, an irreversible chargeback will
result. If you respond, but the copy you provide is illegible,
a mediation ruling (and fee) may be necessary from the appropriate
card association, and a chargeback will result. Such a chargeback
may be reversible if you can provide a legible copy in time. But
if you can't provide a legible copy, the chargeback will stand.
All merchants should be sure that their imprinters and electronic
imprinters produce legible copies. If you receive a chargeback,
read it carefully. If it can be reversed, it will outline the
steps you must take to reverse it. Provide all documentation available
on the sale, including invoices, sales agreements, etc. A letter
explaining any relevant circumstances may be appropriate.
The potential
for customer fraud
Merchants are liable for unauthorized use of cards. The Address
Verification Service (AVS) and Internet fraud screening programs
(such as those offered by CyberSource and ClearCommerce) can help
deter fraud, but are not foolproof. The processing system must
be configured to consider AVS and fraud screening responses. In
addition, merchants should consider shipping only to credit card
billing addresses and requiring signatures upon delivery. Merchants
prone to high rates of fraud should consider other fraud screening
programs such as those offered by Verisign, CyberSource, Cybercash
and other vendors. These systems consider numerous characteristics
of an order (not just the credit card information) to assign a
risk score to a transaction. They are highly customizable, and
check against negative databases containing billions of other
transactions.
