Table of contents
Overview
A chargeback occurs when a customer (the buyer) requests that a charge on their credit card be reversed and funds returned to their bank account, line of credit, or credit card. A chargeback is initiated when the customer contacts the issuing bank to request a reversal, at which time the issuing bank will ask the customer to provide an explanation and documentation about why they are requesting the chargeback. If the reason provided by the customer is valid, the card issuing bank will return the funds to the customer and notify the merchant (the seller) of the chargeback. The merchant is given the opportunity to dispute the chargeback and recover the funds if the dispute is won.
The most common reason for chargebacks include:
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Quality - Customer claims to have never received the goods as promised at the time of purchase; customer was shipped an item that was very different from the seller's description; or the item was damaged when the buyer received it.
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Fraud - Customer claims they did not authorize the purchase, they did not make the purchase, or they were a victim of identity or credit card theft
Chargebacks are designed to protect customers, however, some customers will abuse the chargeback system by habitually requesting chargebacks. Chargebacks can have negative impacts on both the customer and the merchant. A customer requesting too many chargebacks may be blacklisted by merchants, and merchants with a high chargeback status will incur chargeback transaction fees from their merchant account provider. The period of time for which the customer can request a chargeback varies by the card issuing banks or networks; some will allow chargebacks for up to a few weeks to months after a purchase was made.
Solution
The best way to deal with any chargeback is to prevent it from happening in the first place. The following suggestions are very generic and can be used by most businesses to decrease their chargeback potential:
- Verify CVC and CVV Verification Numbers
- This approach not only significantly reduces chargebacks, but also reduces transaction processing fees. All major credit cards have a 3-digit or 4-digit security code that is separate from the credit card number. This code is not captured in a carbon-copy of credit cards, and therefore provides additional assurance that the customer has the card in possession. Most online payment processors support providing these additional security codes when processing credit card orders. Check with your specific payment gateway to see if they support it, and use it if they do.
- Use Address Verification System (AVS)
- AVS matches the billing address entered by the buyer/customer on the order to the cardholder's billing address on record with card issuer. It is supported by Visa and Mastercard in the US, Canada and the UK, and by American Express in the US.
- Use a clear DBA (Doing Business As) name that customers will recognize
- An unrecognized DBA name on billing statements is one of the most common causes of chargebacks. A vague corporate name that does not mirror the name the customer is familiar with, or does not describe your company's products or services will confuse customers when they review their billing statements. Make sure the customer knows what name will appear on their credit card statement at the end of the month. This will help to reduce any confusion that might would otherwise occur. Alternately, you can put your phone number on your customers' statements, and if they do not recognize your DBA, they can call you to find out who you are and why you charged them.
- Always respond to a chargeback as quickly as possible
- A limited amount of time (10 business days) is available to resolve a chargeback. If you miss the window of opportunity to respond, you forfeit your ability to fight the chargeback.
- Posting a warning message
- Taking the time to post a warning message on your order page to those who may attempt to make a fraudulent order will greatly deter the number of instances of fraud. Be sure to mention that IP (Internet Protocol) addresses are being logged. IP addresses can come in handy when locating people about fraudulent orders.
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