Chargebacks and how they can cost you your merchant account

A chargeback is a term used when a customer disputes a charge on their credit card with their card issuer and funds are then returned to the consumer. Specifically, it is the reversal of a prior outbound transfer of funds from a consumer’s bank account, line of credit, or credit card or debt card.

Here are some of the most common reasons why a charge back could occur.

  • Dissatisfied with Product or Service — customer claims they did not receive a product or received a product different than what was paid for.
  • Unknown Business Name — customer not recognizing a purchase, especially if the merchant name that appears on their bill differs from the actual name of the store.
  • Fraud — when a customer claims they did not authorize a purchase, or a purchase was made as a result of identity theft.
  • Error in Sale Amount — A clerical error, such as a customer being billed the wrong amount, double charged etc.

For most transactions, customers have 120 days to request a chargeback from the date of the sale, or when they discovered a problem with the product to dispute a charge. The bottom line is that whenever customers feel that they have been charged for something they shouldn’t have, they can file a dispute with their credit card issuer/bank which begins the chargeback process.

Once a chargeback is initiated, a merchant will receive notification from the issuing bank that gives a reason for the dispute. The entire chargeback process can sometimes take take more than two months to resolve — PayPal, for example, advises its merchants that the whole process can take up to 75 days.

During this time, the total sale amount from the disputed sale is reversed and withheld from the merchant’s account. Even if the dispute is for one item in an order with multiple items, the card issuer will still reverse the total sale amount and not just the amount of the individual item in question.

Once a customer has disputed a charge, a merchant’s acquiring bank will begin going through a specific procedure to resolve the chargeback. They will ask the merchant to provide proof of delivery and/or items to show that the merchant has satisfied the customers complaint. If the chargeback is due to fraudulent activity on the consumers credit card, then the merchant is normally forced to forfeit the sale. This is due to the merchant not verifying cardholder information when the sale was originally made. There is usually not much a merchant can do to win a claim for fraudulent use of the cardholders credit card.

If that wasn’t enough bad news, it might get even worse for some merchants. If a merchant receives too many chargebacks which they lose a majority of the time. Then  the merchant might be at risk of having their merchant account terminated by their processor. Once this happens, the merchant could be placed on the credit card processing industries Terminated Merchant File (TMF), which means that they may not be able to open another merchant account. Many merchants that find themselves in this situation attempt to apply for a merchant account elsewhere, only to discover that any attempt to apply for a merchant account elsewhere leads to being declined. This is due to being blacklisted on the TMF list. The TMD list is similar to a consumers credit report, which shows the merchants credibility in maintaining a good history of credit card processing with low chargebacks. At this point the only way to get approved for a new merchant account is to go with a high risk merchant account provider. Who’s credit card processing fees will be much higher. They also generally have application fees usually $500 to $1500 and might also require that you provide a security deposit.

Keep your chargebacks to a minimum and screen your customers for fraud if possible by verifying their identity. Basically, providing good customer service should keep your chargebacks to a minimum.

Source: Benny Fragomeli | Cardserv


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Benny Fragomeli

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