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What are chargebacks and how to prevent them

A chargeback is a reversal of funds transferred. Chargebacks occur when a customer disputes a charge on their payment card. Depending on the card type, chargebacks can result in substantial fines, excessive rates, and a freeze or termination of your merchant account – not to mention damage to your reputation. Even a small number of chargebacks demonstrates that you have some unhappy customers. In the first of this two-part series, we’ll examine what happens during a chargeback and look at some of the most common scenarios that lead to a chargeback.

What happens during a chargeback

When a customer suspects an incorrect charge on their credit card statement, they may contact their issuing bank to reverse the charge. The process is then initiated through your payment processor.  Your processor will charge you a fee for each chargeback you receive (fees typically range from $5 to $25 per chargeback(1).You have the right to fight the dispute in a process called representment, where you must substantiate the charge by providing verification of the sale. If you cannot substantiate the sale, you will have to reimburse the customer.

Common scenarios

Any business that accepts credit cards faces the threat of chargebacks.  Following are some of the most prevalent situations that lead to chargebacks.

  1. Unauthorized Use. This type of chargeback occurs when consumers claim their cards were used without their knowledge or permission. In some cases, this will reflect actual fraud and may require the issuing bank to close the account. Asking the consumer for additional card information (e.g. CVV2 and CVC2) at the time of purchase can greatly reduce this form of chargeback.
  2. Authorization Not Obtained. This occurs when the card issuer believes that a valid authorization was not obtained for a deposit. The merchant may have attempted a forced deposit, used an invalid authorization, or obtained a voice authorization. This type of chargeback often occurs when multiple partial deposits are made against single authorizations. A combination of sound procedures and proper exception handling by your processor can eliminate these chargebacks.
  3. Recurring Transactions. When a consumer believes they have been billed after cancelling a subscription, membership, or multi-payment billing series (e.g. continuity program or installment payments), it’s called a recurring transaction chargeback. Using clear and explicit billing descriptors will help you avoid these types of chargebacks. Be certain to quickly acknowledge and record any correspondences with customers regarding changes or cancellations. This should include keeping records of all phone calls.

If you have questions about chargebacks, contact us. And be sure to check back for part two of this series, where we’ll offer tips to avoid chargebacks in your business.

1. Internet Retailer®,  https://www.internetretailer.com/2014/03/03/not-so-friendly-fraud, 3/3/2014.

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