Chargebacks on Credit Cards

If you get too many chargebacks you can lose your merchant credit card account. But since you can get a chargeback through no fault of your own, you're not entirely in control of your own destiny. For example, the bank could issue a chargeback in error.

Here's a list of some of the reasons for chargebacks:

• unauthorized use of credit card
• no signature on the receipt
• processing error (for example, same charge processed twice)
• expired credit card
• customer disputes charges (for example, wrong merchandise delivered)

So what can you do? One thing you can do is to take a few precautions against the chargebacks. Here's how, first with procedural chargebacks and then with customer-initiated chargebacks.

Procedural chargebacks. Procedural chargebacks occur because you didn't follow all of the rules set by the bank. The first four items in the list above are examples of procedural chargebacks. You can reduce the frequency of these chargebacks by developing a routine that you (and your sales staff, if any) will always follow. For example, take the credit card from the customer, check the expiration date, run it through the electronic terminal, etc. Although you can never completely eliminate procedural chargebacks (how can you always know that the customer has proper authority to use the card?), you can reduce such chargebacks with a carefully planned routine.

You can reduce the chances that the cardholder does not have the proper authority by matching the signature on the credit card against the signature on the receipt. Only the person whose name and signature appear on the card has authority to use it. However, most merchants will accept a credit card used by the named owner's spouse, on the theory that spouses are responsible for each other's debts. Some will also accept a card used by the cardholder's minor child, under the theory that a parent is responsible for the minor's debts.

Phone orders, of course, pose a more serious problem. For phone orders, you should get the caller's home and work phone numbers, in addition to the information you would need to fill the order, such as name and address. If you intend to verify the information before you send your merchandise, then tell the customer that's what you're doing.

Customer-initiated chargebacks. Customer-initiated chargebacks occur when customers attempt to cancel the transaction for some reason, usually because the goods were damaged or because they claim the charges were excessive. A chargeback differs from a simple return of your merchandise because the credit card company is involved. In other words, the customer has complained not to you, but to the credit card company. If the customer complains directly to you, you can repay the customer without affecting your chargeback rate.

A good way to combat customer-initiated chargebacks is to have a generous return policy. If your policy is lenient, you may be able to limit your chargeback rate. You'll just have to weigh the benefits of a lower chargeback rate against the chances that some customers may abuse your lenient policy.

Adequate documentation. If you want to refute your customer's chargeback attempts, you'll need adequate documentation. Unfortunately, in some cases, you may not find out that your customer sought a chargeback until after the fact. Your bank is supposed to direct the dispute to you before a chargeback is initiated, but some banks don't follow the rules. If you find this happening, ask the bank to send the dispute to you first.

The documentation you need to rebut the claim will depend upon the reason your customer gives for the chargeback. If the reason is that the customer never purchased your goods, the best documentation you can have is the signed sales receipt. If the reason is that the goods were never delivered or were damaged, you need the receipt showing the method of shipment so you can trace it (and potentially collect from the shipping carrier).

You should keep all your records of sales. If you use the electronic terminal or the credit card software, the records will be kept for you automatically. If you don't, the best way to keep track is to develop a consistent approach to what you do with your records after the sale.

If you're desperate. It's a good idea to know what your chargeback rate is, as well as the chargeback rate limit set by the credit card company (it's usually about 1 percent of credit sales). If you're getting close to that limit on one of the credit cards you normally accept, you may want to consider asking some customers to pay their bill with one of the credit cards that isn't in danger.