By Susan Petracco
If you’ve ever shuffled through a stack of mail to come across a thick
envelope labeled “Chargeback Notice,” you have probably felt the same
queasiness that almost every retailer has encountered at some point. The
reality is, by accepting credit cards you will probably face a chargeback
now and then. But a proper understanding of chargebacks, their causes
and what to do about them will help lower your costs and exposure.
In simple terms, a chargeback is when the money paid to you by
a credit card customer is taken away and given back to the customer.
When this happens, you lose both the shipped merchandise
and the revenue from the order. In addition, you could be
charged a fee, experience higher rates on future orders, lose your
ability to process credit cards or even lose your merchant account.
Chargebacks are initiated by two groups of people: dissatisfied
customers and those attempting to commit fraud. Dealing
with an existing chargeback and preventing future ones is a bit
different for each of these groups.
Let’s look at this from the customers’ perspective. If you pay for an
item with cash or a check, and later discover your merchandise to
be defective or disappointing, the only recourse is an attempt to
resolve the dispute with the merchant. If the merchant is difficult
or unethical, you might lose your money. Credit cards offer more
than just convenience for customers; they offer protection in the
form of a chargeback. A customer may request a chargeback if they
were double-charged for a single order, if the bank made an error,
or if an order was returned but a refund was never processed.
Chargeback prevention and customer service go hand-in-hand.
So, your first step is to make it easier for customers to
contact you. Call your merchant account provider and ask
them to place your toll-free phone number on customers’ credit
card statements. Display your
phone number and e-mail
address in easy-to-find locations
on your website and on
the packing slip included with
Additionally, stay in contact
with your customer throughout the sales cycle. Send a follow-up
e-mail immediately after an order is placed, so the customer can
review their address and purchase. Then send another e-mail
when you ship the order. If an order must be cancelled or
delayed, contact the customer with a polite explanation and an
offer to substitute products, keep the items backordered, or cancel
Following best practices when charging your customers’
cards will also help reduce your chargeback frequency. When the
order is placed, authorize the customer’s card for the exact
amount of the order. Do not capture the sale, however, until the
order is shipped. On the other hand, don’t wait too long to capture
the order. Late captures create customer confusion, and they
can also raise your discount rate on the transaction or reduce
your ability to collect funds. When you process a refund,
promptly issue the money back to the customer using the same
credit card that was used to make the sale.
Finally, be clear about your products and services, as well as
your store policies. Don’t mislead potential customers in your
marketing campaigns. Make sure your product descriptions and
images are clear and accurate. Publish your return policy on
your website and link to it from every page. Additionally, if you
do not allow returns or have a limited policy, make this clear to
customers during checkout and require that they check a box to
indicate their agreement with your policy.
CHARGEBACKS AS FRAUD
While chargebacks are often used for valid reasons, they are also
employed as a method of fraud. The most obvious scenario is
when someone makes a purchase with a stolen card. Fortunately,
your credit card gateway offers a number of tools to help identify
fraud. The Address Verification System (AVS) is a system that
validates the billing address associated with the credit card.
Because people using stolen cards often don’t know the billing
address, an AVS mismatch is one potential indication of fraud. At
a minimum, the customer should provide a billing address that
matches the address for their credit card.
Merchants should also use the Card Security Code . This is the
three- or four-digit number printed on a credit card that is not
raised or embossed, so it does not appear on a card imprint slip.
Additionally, card issuers require that merchants do not store these
numbers. The idea is that a person should only have access to the
card security code by looking at the actual card.
The AVS and CSC codes are useful for most transactions within
the United States. However, many international banks do not
support these features. For international orders, you may wish to
use other measures, such as reviewing the IP address of the computer
used to place the order, or verifying that the card-issuing
bank is located in the same country as the shipping address.
A less common form of fraud occurs when a customer orders
an item, falsely claims it was never delivered, and then requests
a chargeback. When contesting this chargeback, you might be
required to present proof of delivery or a signature of the person
who received the item. To combat this issue, always ship orders
in a manner that requires a signature for delivery.
Finally, create an internal negative database that lists names
of problem customers, their IP addresses, and the card numbers
used. Compare suspicious future orders against your negative
database when deciding whether to ship or cancel a potentially
THE CHARGEBACK RESPONSE
Although an ounce of prevention is worth a pound of cure, most
of us still have to deal with the occasional chargeback. First try to
resolve the issue directly with the customer. It’s quite possible that
the chargeback is due to a misunderstanding or it’s simply an
error. For example, if a customer’s card was stolen and used, they
may report all the transactions from a given date range as fraudulent,
without looking at the transactions closely. In this case, the
customer might withdraw the chargeback request. If this happens,
ask for a signed letter from the customer stating they accept
the transaction as valid, and provide this to your bank.
Make sure to respond to all requests from your bank quickly.
In your response, include all other useful documentation,
including an electronic signature, proof of delivery, communication
between you and your customer, a copy of your return
policy, and anything else that might apply. If you can prove your
charge is valid, your bank can re-present the transaction and
you could walk away with your money and no fees or other
For most online retailers, a few simple steps will help
reduce the frequency of chargebacks. By training yourself and
your employees to provide great customer service and to handle
credit card transactions with care, you can escape the
About the Author:
Susan Petracco is an e-commerce consultant and founder of
NetBlazon, a Web services firm. With more than 11 years of experience,
she has worked with companies such as Talbots and Serta on
a variety of retail initiatives. She can also be found blogging about
e-commerce and small business topics at DoublePlus.com.
MERCHANTS FIGHT BACK
BadCustomer.com offers a new and interesting
way for merchants to control chargebacks.
Through the BadCustomer API, merchants
upload information they have gathered about
certain consumers and their propensity to
engage in chargebacks. The collective data is
then pooled at BadCustomer. Merchants can
then implement BadCustomer and their collective
information about chargeback-prone consumers
to block a transaction on their own website
when one of those customers attempts to
make a purchase. Information specific to that
customer is checked against BadCustomer’s
database before the transaction is completed.
And here’s where it gets interesting — the
system is free for merchants. However, should a
consumer find themselves on the BadCustomer
list, they charge $100 to be removed.
BadCustomer.com is relatively new in the space,
so consumers engaging in chargebacks are not
likely to feel the sting of being denied a purchase
It remains to be seen if this type of “blacklisting”
of consumers will be tolerated by the public
and consumer advocacy organizations.
— WM Staff