Understanding Credit/Debit Card Chargebacks
You will find chargebacks on your merchant processing statement when a customer asks their financial institution to refund their money for a purchase or if your customer’s bank sees a problem with a transaction. If you have refused to refund your customer’s money directly, the customer has the right to go to their card provider and take their money back.
Another way of looking at it is that it’s a forcible refund even when the customer has nothing to return to you but you are required to return their money.
As a merchant, you want to avoid chargebacks at all costs (pun not intended) because of associated fees between $20 and $100 per chargeback. If your business incurs a large number of chargebacks, compared to your total monthly credit card transaction amount, your processor can elect to close your account or assess larger per-transaction costs to counteract the chargebacks.
Customer Chargebacks Process
Customers typically file a chargeback (or dispute a charge) with their financial institution between 60 and 120 days from the purchase date. Once the chargeback is filed, the affected merchant has 45 days to reply if they disagree with the charge. After the merchant responds to the chargeback, the merchant bank investigates the claim and determines the outcome. If necessary, arbitration may be called in to mediate the dispute, lengthening the chargeback resolution process.
Each credit card provider has specific rules and timeframes for disputes. If you incur a chargeback claim against your business, become familiar with the company’s – American Express, Mastercard, Visa or Discover – requirements.
If the chargeback is determined to be valid by the bank, you (merchant) are asked to provide proof of the claim so the bank can refute the chargeback on your behalf. If your proof is substantive, the chargeback is removed from your account and the customer charge stands.
If the bank decides the customer’s chargeback claim is accurate, and your documentation doesn’t substantiate your argument, you as the merchant must refund the customer’s money along with a chargeback fee assessed by the bank.
You can avoid credit card chargebacks by strictly observing the guidelines and policies of the principal payment processing systems. Handy links to the chargeback guidebooks for Mastercard, Discover, Visa and American Express are at the bottom of this article.
Summarizing guideline best practices:
- Check the expiration date of the credit card proffered and decline it if beyond the expiry date
- Ask for proof of a customer’s identity for in-person transactions. In non-COVID times, ensure the customer signs the receipts and your business name is printed on their receipt
- Verify the signature on the credit card used for a purchase
- If activated, capture the customer’s signature electronically, then compare to the signature on the back of the card
- Never accept unsigned credit cards for payment
- Stay up to date with all current credit card security standards such as enabled chipped card readers
- Ensure that employees who accept payments follow these best practices
However, the reality is your business accepts credit card payments, it is almost unavoidable that you will also have occasional chargebacks. When you are notified of a chargeback, diligently research and provide the requested paperwork within the specified timeframe. Also work inside your business to understand why that chargeback occurred in the first place and create a policy or rule to prevent a similar situation in the future.
The most common chargeback reasons, according to Visa, are:
- The merchant did not process a credit in the timely manner the customer expected
- Ordered products were not received
- A paid-for service was not accomplished at all or to the customer’s satisfaction
- The charged customer did not make the specific purchase; it is a fraudulent charge
- There were authorization issues in processing the transaction
- An error in processor occurred
Merchant Protections and Rights with Chargebacks
In this day and age, merchants have few protections available to fight chargebacks. Even a No Refund policy isn’t sufficient to protect your business from chargebacks; the Fair Credit Billing Act says customers can still file chargeback claims.
Clearly display your policies in your storefront or online and ensure that your customers are familiar with your transaction requirements. This is a key protection if a chargeback goes through arbitration and helps your business refute a chargeback.
In general, banks tend to side with the customer rather than the merchant in chargeback disputes. This makes it imperative for you as a merchant to make sure your transactions and sales are thoroughly documented and validated, conforming to the guidelines and rules published by the major institutions.
Links to chargeback guidelines:
For more information about how to avoid chargebacks and effective Point of Sale systems for your business, contact SalesSensePayments.com, Mike Krause, 585-704-6453.
To your health,
Sales Sense Payments
Please visit SalesSensePayments.com for more information.