Steering Clear of Chargebacks

Most CurdBee users are freelancers and small businesses, small enough that chargebacks can really hurt them. We talked to our payment processing partners e-onlinedata to gain insights on how an online merchant could avoid these frustrating situations. Answering our questions was Kris Lavallee, their Marketing Director.

What is a chargeback?

As a general rule, cardholders have the right to dispute any transaction processed on a Visa/MasterCard. These disputes are called chargebacks and are governed by a series of rules set forth by these brands. In the chargeback process, the burden of proof lies with the merchant. A merchant is given the opportunity to provide supporting documentation to prove the legitimacy of the transaction in question. If successful, the transaction is credited back to the merchant’s account. If unsuccessful or does not respond in a timely fashion, the merchant is financially responsible for returning funds to the consumer who filed the dispute.

How do chargebacks adversely affect a small business merchant? For example, there is a fee associated with a chargeback from the merchant account provider – are there other disadvantages too?

Chargebacks are red flags for small business merchants. When customers file chargebacks, it means they are unhappy with the product or service they received or there are fraudulent transactions associated with the account. Merchant providers generally charge $25 per chargeback. If multiple chargebacks are being filed against a merchant, a merchant processor has the right to suspend a merchant’s ability to process future payments until further investigation. If a merchant receives a high chargeback ratio based on sales volume, the merchant can lose the ability to process and even be placed on the Visa and MasterCard’s Terminated Merchant File, which prevents any further processing.

How can online merchants benchmark themselves against the average rate of chargebacks in their business or industry? Are there any authorities or useful websites where these stats can be found?

Merchants should keep chargebacks below 1%. More information can be found here [PDF].

What advice do you have for small business merchants who want to resolve chargeback disputes? Is there a recommended approach or a step-by-step process to follow?

A chargeback letter gives the merchant 8–10 days to respond. If a response is not received within that timeframe, there is no second warning. At times, the response request comes in at a later date. That’s why it is IMPORTANT that the merchant always checks the “Respond by” date on top of the communication letter to insure that the response is sent on time. A case number is assigned to each disputed item.

The merchant must attach the correct case number to each page of the rebuttal paperwork.

Cardholders may dispute a charge for various reasons (i.e., “Non-Authorization,” “Merchandise not received”, etc.) and often attach a letter of explanation to the output package. The merchant’s rebuttal must address each one of the customer’s complaints.

A rebuttal letter containing the merchant’s point of view should always accompany the paperwork. As a default, we send the letters to the business address indicated by the merchant. Once the rebuttal paperwork is received by the chargeback department, the case is reviewed and, if applicable, it is reversed back to the Issuer. A credit to the merchant for the transaction amount will be granted in that instance. In the event the documents do not provide a valid reason to reverse the decision, the chargeback department will try to contact the merchant for more information.

Fraud is an ever-present risk for online merchants. How can fraudulent chargebacks be minimized?

Visa and MasterCard provide comprehensive tools to help mitigate fraud. Appropriate preventive action can help reduce fraudulent transactions and potential customer disputes. Make use of these Visa tools and controls – some of which are explained below – to verify the legitimacy of the Visa cardholder and the card in every card-not-present transaction.

Address Verification Service (AVS)

Allows card-not-present merchants to check a cardholder’s billing address with the card Issuer. The merchant includes an AVS request as part of the authorization and receives a result code indicating whether the address given by the cardholder matches the address on file with the Issuer.

Card Code Verification (CVV2 – CVC2)

A three-digit number imprinted on the signature panel of Visa/MasterCard credit cards helps card-not-present merchants verify that the customer has a legitimate card in hand at the time of the order. The merchant asks the customer for the card code and then sends it to the card Issuer as part of the authorization request. The card Issuer checks the card code to determine its validity then sends a result back to the merchant along with the authorization.

Verified by Visa (VbV)

Enables an e-commerce merchant to validate a cardholder’s ownership of an account in real time during an online Visa card transaction. When the cardholder clicks “buy” at the checkout of a participating merchant, the merchant server recognizes the registered Visa card and the “Verified by Visa” screen automatically appears on the cardholder’s desktop. The cardholder enters a password to verify his or her identity and the Visa card. The Issuer then confirms the cardholder’s identity.

MasterCard SecureCode

Correctly entering your SecureCode during a purchase at a participating online store/retailer confirms that you are the authorized cardholder. If an incorrect SecureCode is entered, the purchase will not be completed.

If you have further questions regarding chargebacks, please feel free to contact e-onlinedata’s chargeback team.