Are You Ready for the Chargeback Challenge?

Chargebacks are a part of doing business, but if you're prepared, you can minimize the negative impact they have on your profits.
Chargebacks — the reversal or credit of a charge back to a customer's credit card account — unfortunately, are a part of doing business, whether online or offline. But e-tailers are at a natural disadvantage compared to bricks-and-mortar stores because there's no face-to-face signature witness or card imprint taken.

And, while it's relatively easy for a customer to get a charge reversed, proving a sale was legitimate can be time-consuming and costly for online merchants. To add to the dilemma, in fraudulent cases, e-tailers bear the liability in most cases, not the card issuers, as is the case in traditional commerce.

Still, knowing the reasons why chargebacks occur, how to spot suspicious ones versus valid ones, and how to handle both types, helps minimize the negative impact they can have on your bottom line, namely hefty fees and a lost sale.

Typically, chargebacks are initiated by unsatisfied customers, or worse, fraudsters who claim they never received the product. Sometimes the customer wants to return a product after the "return deadline" and wants his or her money back or lent their card to a friend who made unauthorized purchases. In the case of fraud, the trade publication Nilson Report estimates the rate of credit card fraud to be 18 cents to 24 cents per $100 of online sales, which is three to four times higher than the overall rate of fraud.

Chargeback Fees
Once a chargeback is made, the merchant faces what usually amounts to a hefty fee of $30 or more. In the case of a dispute, an appeal process does exist to aid merchants in their fight against incorrect or fraudulent claims. Once a chargeback claim is processed, all parties are informed and given the opportunity to appeal the decision. A claim case will then be undertaken and if the chargeback is eventually accepted the merchant is usually levied a chargeback fee.

Even if the chargeback is reversed, and you receive that money back, you won't receive a refund of the chargeback fee. This is because merchant accounts claim this charge is a fee, not a penalty, so you are still liable for the fee. Also, be aware that a consumer can still go on to reinitiate the chargeback for a second time, costing you the same amount again.

Chargeback Case Outcome
Unfortunately, it is alarmingly unusual for a chargeback claim to be found in favor of the merchant. Credit card issuers are attempting to persuade consumers to use online shopping more and more, and as such, some guarantee the reversal of these funds regardless of the information provided by the merchant. However, it is possible to win a chargeback reversal in some cases. One resource you can use is companies such as Receivable Management Services that specialize in fighting online chargebacks for Web shop owners.

Keeping Track of All Important Information
You should always be aware that chargebacks can happen with any transaction. Tracking orders and requesting signatures upon delivery of an item is essential. It is also imperative that you keep any and all details regarding a transaction. If a customer contacts you by e-mail or by other written correspondence, keep a copy. Make notes on incoming phone calls, too, especially if it seems like the customer might not be sure about their purchase.

You should always track an order from the processing of the order itself to the delivery of the item. Shopping cart or e-commerce software will do a lot of this legwork for you. Also, check the details of your merchant account because they often automatically store a lot of your sales data.

We can't emphasize enough how important it is to obtain signatures from your customers upon delivery. If you appeal against a chargeback, you will be asked to provide this as part of your appeal case. If you don't have one, then it is virtually impossible to argue that your customer received the item; no matter how certain you are.

Policy Transparency and Clarity
Sales policies, terms and conditions are an essential part of an e-commerce store. You should provide as much information as possible regarding shipping, billing, returns and refunds. In some cases, it can be almost impossible to plan for failed deliveries, so include some kind of action plan customers can take in these cases.

One important note: don't over-promise when it comes to sales and shipping policies. A three-day delivery guarantee may look fantastic and encourage some consumers to buy from your e-store, but unless you are confident you can meet that guarantee, don't offer it.

Returns - The Good, The Bad and the Profitable
Returns policies are also a vital facet of your online efforts. While returns may not appear to be a good thing, offering a refund without having to involve the credit card company and your merchant account can save you the $30 (or more) fee. Be reasonable and offer a decent amount of time to accept a return. If you only give 24 hours for a return, then an unhappy consumer is more likely to contact their credit card company and request a chargeback. The credit card company will also be more likely to simply agree to the chargeback.

Returns aren't necessarily a bad thing. If you deal with unsatisfied consumers in a positive manner, for instance, offer them a discount on their next purchase, then you can turn an unhappy customer into a very happy customer. These shoppers will actually become more likely to purchase from you again in the future, because they know that if they have any problems they can contact you and be treated fairly.

Crediting Your Customers
If you do need to credit your customer's account, then do so quickly and within an agreed time period. When a customer asks for a credit, contact him or her immediately. Tell the customer that you would be happy to provide a credit but ask if there is anything you can do to remedy the situation first, without being pushy.

Card and Cardholder Verification
Card verification processes exist, and they exist for a reason. The address verification service provided by the bank ensures that the billing address and delivery address match. Most card fraudsters will use different addresses for delivery compared to the billing address. Never accept credit cards that are expired and use CVV2 verification whenever possible. The CVV2 number is the final group of digits on the signature strip of a credit card. The card must be present for your customer to be able to provide this number because it is not present on any statements, invoices or other paperwork.

Manual Verification
Manual verification of information can save you a lot of trouble in the long run, even if it does add a minute or so to every transaction. Check names, addresses, e-mail addresses and other information provided for anything that looks suspicious. If in doubt, attempt to get e-mail or telephone confirmation of the order and keep a record of it.

Essentially, the more time you spend manually looking at each transaction the less risk you run of facing a chargeback against your account. Manual verification by phone or e-mail may not be conceivable for every order, so it may be a good idea to concentrate on the larger orders.

Bottom Line
Over time, and with experience, you will learn to recognize the transactions that are more likely to result in a chargeback. While this may be a costly learning curve initially, taking the steps above will help to reduce the chances and costs of chargebacks.

Matt Jackson is a regular contributor to and offers Web site content services through

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