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Chargebacks: Yes, merchants have rights

Chargebacks. It's almost as though merchants are guilty until proven innocent. That's how one expert describes the reasoning behind strongly pro-consumer policies that protect credit card users against fraud. But merchants have rights, too, as well as a few ways to protect themselves from unsubstantiated chargebacks.

When a cardholder claims that a credit card transaction was unauthorized, the dispute is handled through a chargeback, in which the card issuer electronically refunds a charge to the card holder. The dollar amount of the original sale -- plus a fee ranging from $20 to $100 per transaction -- is deducted from the merchant's funds.

Chargebacks are designed to help consumers resolve fraudulent transactions if their efforts to resolve the issue with merchants are fruitless. But some card holders take advantage of the chargeback process. For example, they might make a legitimate transaction and receive a product but later claim they did not make the transaction or fabricate a problem with it and go directly to their card-issuing bank to get an automatic refund. This is known as "friendly fraud" and it puts the burden of proof on the merchant to show that a charge was authorized by the card holder. Chargebacks

"The bank is a shortcut, but chargebacks were invented as a last-resort solution rather than a first-resort solution," says Monica Eaton-Cardone, cofounder and chief operating officer of Chargebacks911, a company that helps merchants prevent and fight chargebacks and provides comprehensive risk service management.

Friendly fraud is a real and costly problem for merchants. In 2013, chargeback fraud was a $40 billion problem, according to a recent article Eaton-Cardone wrote for Transaction World Magazine. And Verifi cites a LexisNexis report estimating that merchants incur a $279 loss for every $100 in fraud losses because of the cost of distracting staff from their regular work, plus fees and even penalties if chargebacks become frequent. Only 14 percent of card holders who filed a chargeback dispute had contacted the merchant about resolving the issue first, according to a white paper by the global electronic payment and risk management solutions company Verifi. The company's study shows that 28 percent of those card holders contacted the merchant only after filing a dispute, and 58 percent did not contact the merchant at all.

"There are many reasons consumers engage in friendly fraud -- some use chargebacks as a form of shoplifting, others claim they never received goods or services because of buyer's remorse," the white paper says.

Eaton-Cardone said that many merchants do not realize they can fight chargebacks by submitting a case to a card issuer to win back the transaction value. It's also important to know that chargeback fees are not reimbursed, regardless of whether the chargeback stands or is successfully disputed. Essentially, a merchant pays for the time a credit card company spends investigating the chargeback.

According to Verifi, solid documentation about a transaction can strengthen a merchant's odds of winning a chargeback dispute. Merchants have the right to retain customer information for this purpose, and it's up to a merchant to fight back in order to protect its bottom line. So Verifi recommends merchants take measures to prevent chargebacks and aggressively work to recover these lost funds. Acceptable proof of a transaction includes:

  • Signed delivery receipts
  • Proof the customer provided the correct security code from the back of the credit card
  • Proof that billing and/or shipping address matches what was on file
  • Customer identity (email, address, physical address, name, date of birth, etc.)
  • Purchase history and usage information
  • Shipping details
  • Contact history

Once this information is submitted, each credit card company might have its own process, but Sanette Chao, director of corporate affairs for American Express, outlined that company's charge dispute process:

  • If a card member disputes a charge, American Express generally opens an investigation with the merchant.
  • During the investigation AmEx charges back the merchant, and removes the charge from the card member's bill.
  • Merchants may request a chargeback reversal if they provide the required information supporting the charge.
  • AmEx may reinvestigate an inquiry if a card member provides new information.

Resolving these disputes can take time, so the best approach is to try to avoid them altogether. Eaton-Cardone offers this advice to merchants who want to prevent chargebacks:

  • Clarify the statement. "Make sure what shows on the credit card statement actually shows the product," Eaton-Cardone says. "That's the merchant's job: Communicate to the customer what it was they purchased."
  • Keep in touch. "If you don't stay in communication with the customer, they may see that it's very difficult to get in touch with you," she says. Need a good example? Look to online merchants who send a confirmation email after receiving an order, as well as a receipt email and a follow-up email --all with links to customer service support.
  • Ask for customer feedback. This tip from Eaton-Cardone goes hand-in-hand with keeping in touch -- and it's a method for proving that a shipment was received. Send a post-delivery email with a question about satisfaction with the product and its delivery, perhaps with an offer such as, "Fill out this survey and get a $10 gift card." Delivery confirmation through the postal service is another option.
  • Be available. Don't give customers a reason to think twice about calling: Provide customer service support at all times. "Merchants need to make sure they understand they're competing with a customer's credit card-issuing bank," Eaton-Cardone said. "24/7 is required if you're going to impact a reduction in chargebacks."

Published: July 24,2022

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