Accepting credit cards as payment in your business transactions is a very promising concept. You can increase your revenue, your customer base and improve productivity. Getting a merchant account to be able to accept cards for payments adds convenience, cost-effectiveness and a gives the impression that your business is professionally run.
If you have already taken this big leap, you probably have experienced how confusing credit card processing can be. Though the entire process can, with time, get to be fairly easy to get around in, there is one important aspect about merchant accounts that you need to really understand - chargebacks.
What is a chargeback?
A chargeback is when the credit card company withdraws the money for a transaction from a merchant‘s account and deposits it in a consumer’s, following a dispute.Specifically, it is the reversal of a prior outbound transfer of funds from a consumer's bank account, line of credit, or credit card.
What leads to chargebacks?
As a merchant, you have to be fully aware of the most common reasons why merchants receive chargebacks. These are the circumstances that you also need to avoid at all costs. Note that most, if not all, chargebacks are initiated by cardholders. These are primarily due to inconsistencies in their credit card statements.
Unauthorized Use/Fraudulent Transactions
The most common cause for chargeback is fraudulent transactions. This happens when the credit card is used without the authorization and consent of the cardholder.Often, unauthorized transactions are fraudulent, but even more commonly they are the result of a family member using the card In cases like these, the merchant is held solely responsible.
Credit Not Processed
Another common type of chargeback occurs when the customer may have returned the merchandise to the merchant or cancelled a service that had been previously paid for requested to get their money back, but their credit was not processed back to their card. In such a case, the merchant is held liable for the charges.
Goods Not Received
This is one of the most commons reason for chargebacks today. This happens when the customer did not receive the item which they paid for by credit card. As in the previous situations, the merchant is charged accordingly.
Some chargeback requests are due to technical problems during the payment processes. Technical problems between the issuing bank and the merchant may lead to cardholders being charged twice for the same transaction (termed as duplicate processing). Problems with the authorization process can also lead to account being charged, even if the transaction was declined.
Authorization not obtained
There are multiple possibilities why that might occur. For example, the merchant may have attempted to override a declined authorization response (to “force” a transaction, in industry parlance). Alternatively, the merchant may have obtained a voice authorization or key-entered the transaction information, following a decline. This type of chargeback is often the result of multiple partial deposits made on account of a single authorization. As we will see shortly, these chargebacks can be prevented by following best processing practices.
This is only applicable to a specific set of merchants, these chargebacks are typically the result of transactions processed after the cardholder has cancelled — or claims to have done so — a subscription, membership or some other service, which is provided on an ongoing basis. These chargebacks may also result from installment transactions, but that occurs less frequently, as in such cases both the number and amount of all payments are pre-defined. Honoring cancellation requests and discontinuing payment plans immediately will help prevent these chargebacks, as will the use of clear billing descriptors.
Friendly fraud is an industry term which refers to a fraud which results from a customer making a purchase with his or her own credit card, receiving the merchandise and then filing for a chargeback. This involves dishonest people who would like to keep the merchandise/ consume the service without actually paying for it.
Links to more info:
Read the second part of the chargebacks trilogy.