Editor’s Note: A version of this post was published in March 2012, it has been updated and revised for accurateness and completeness.
The chargeback (also sometimes referred to as “friendly fraud”): A forcible reversal of funds typically due to a credit card holder’s dispute of the transaction.
Originally established in 1968 as a credit card holder’s protection against clerical error, the chargeback has become a major tool in the fight against identity theft, especially for online credit card processing and ACH transactions.
However, for a business owner credit card processing chargebacks can be a huge headache. Consumer protection needs to be a priority but the downside to chargebacks is that they are often caused by miscommunication or even consumer fraud. At worst, chargebacks can affect a business’ ability to maintain a merchant account and accept future credit card or ACH payments. Merchant account providers can also impose steep fines if a business has high chargeback rates or put they might put funds on a hold.
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So, how can you help protect your business and maintain a good standing with your merchant account provider?
First, familiarize yourself with the four basic chargeback types:
- Technical: Expired authorization, non-sufficient funds or bank processing error
- Clerical: Duplicate billing, incorrect amount billed or refund never issued
- Quality: Consumer claims to have never received the goods as promised at the time of purchase
- Fraud: Consumer claims they did not authorize the purchase or claims identity theft1
For some types, such as expired authorizations or incorrect billing, if you follow proper online credit card processing regulations and best practices (your merchant account provider can supply these) you’ll be able to thwart many would-be disputes. However, fraud disputes can be more complicated since they are the result of fraudulent consumer purchases (as opposed to a business charging without authorization). Global Risk Technologies (GRT) found that about 86% of chargebacks are fraudulent and that many consumer file complaints directly with the card-issuing bank instead of contacting the merchant/business owner.11
Here are 5 ways to verify lawful transactions and avoid credit card processing disputes:
- Closely examine orders from foreign countries that do not ordinarily purchase from you. A large number of fraudulent Internet purchases originate in Russia, Indonesia, and from Eastern developing countries.
- Require a CVC or CVV2 code on your payment form (or check to see if your merchant account processor offers it). This helps to ensure that the customer has the credit card in hand while making the online payment
- If the business name that will show up on your customer’s statement is different than the one they’re familiar with (example: if you’re part of another legal entity), be sure to explain this beforehand and on their receipt.
- Go with your gut: If it seems suspicious, call or email the customer to confirm the order.
- Post a warning message on your order page to people who may attempt to make a fraudulent order.
With diligence, chargebacks can certainly be reduced, saving your business time, money and its reputation. Managing chargebacks is an important piece of the the cash flow puzzle for many businesses.