Credit card chargebacks are a merchant's bane. A legitimate chargeback occurs when a customer disputes a charge made to their credit card, and the money is refunded back to their account. The card issuer then charges the refunded amount back to the original merchant, along with an additional penalty fee.
Chargebacks commonly occur when customer attempts to resolve the issue with the merchant have failed, and the customer contacts their financial institution or credit card company to retrieve their money. Once such a complaint has been made, it is standard procedure for the financial institution or credit card company to undertake a short investigation, with the money posted back to the cardholder's account once the process has been completed, provided, of course, that the cardholder's complaint is deemed legitimate.
Nobody wants to pay penalty fees, but a surfeit of chargebacks can ultimately result in the merchant losing their ability to accept credit card payments from one or more companies. Losing the ability to do business with American Express cardholders may be an embarrassment, as well as a potentially significant loss of revenue; lose Amex and Visa or MasterCard, and you may as well close up shop. With the increase in ecommerce, along with factors such as debit and check cards replacing many ATM cards for many consumers, the number of chargebacks is expected to increase. However, as in most cases, such penalties can be avoided, usually with relative ease.
A busy store is usually a happy store. However, posting great sales numbers does not count for much if a substantial number of those sales wind up being invalidated. Common reasons for chargebacks include charging a customer more than once for the same item or service, posting a charge to the wrong person's account, overcharging the customer, and failing to properly scrutinize the customer's card. Avoiding all of the above can be time consuming, especially in a brick and mortar situation where lines may grow long and customers get impatient. However, anything worth doing at all is worth doing well, to paraphrase the Earl of Chesterfield (who of course never had to deal with Discover Cards).
It may sound like Credit Card 101, but always examine the customer's card, even a long-standing one who's known to you. Look at the expiration date and the signature panel to ensure validity. If there is no signature, you should ask the customer to sign the card in your presence, and you may want to ask for additional I.D. to compare signatures. In addition, utilizing the three digit (MasterCard, Visa, Discover) and four digit (Amex) codes may be a good idea. These numbers, known as card verification numbers, or CVNs, appear after the credit card account number on the back of the card (newer MasterCard and Visa cards display the numbers in a separate panel to the right of the signature strip, to avoid overwriting the CVN when signing), or in the case of Amex, on the front of the card above the account number. Requesting this type of information is becoming more common with online and phone orders, as it virtually guarantees that the customer is in physical possession of the card, thus cutting down on fraud chargebacks. Visa has reported that this particular tactic can reduce chargebacks by as much as 30 percent.
Multiple ring-ups of the same item and overcharging for an item are problems that may never go away entirely, but again, taking care when ringing up an order can vastly reduce such instances.
Know with whom you're dealing.
This doesn't necessarily mean asking new customers what they think of the New Orleans Saints or universal healthcare (if you're curious or garrulous enough, go for it), but that one should ensure that the customer in a given transaction is indeed who he says he is. Again, this is becoming increasingly important, as more and more business is conducted in a non face-to-face manner.
According to ecommerce payment management company CyberSource's tenth annual survey of online fraud trends, fraud losses reached $3.3 billion in 2009, with fully 50 percent of those losses attributable to chargebacks. CyberSource actually found the total losses to fraud down last year, from 2008's $4 billion, but the 50 percent figure remained virtually the same. The survey also found that merchants are increasingly turning to automated chargeback management tools to lessen the effects of double charges and the like. In 2008, 20 percent of surveyed companies said they employed such tools, while in 2009 that number climbed to 49 percent. In addition to the identification practices mentioned above, merchants should employ a method of verifying customer addresses. An automated address verification system (AVS) can make sure the address entered on an order form matches that of the customer's billing address. Most people using stolen cards will not give out the actual cardholder's address, for obvious reasons.
Besides AVS, a variety of other chargeback management tools are available. CyberSource divides these into four categories: Validation services (including CVN, used by 77 percent of survey respondents, AVS at 76 percent, postal address validation services at 34 percent, and telephone number verification at 24 percent); proprietary data/customer history (including customer order history at 44 percent, order velocity monitoring at 35 percent, and customer website behavior analysis at 19 percent); purchase device training (Internet protocol, or IP, geolocation information); and multi-merchant data/purchase history (shared lists, 16 percent).
Obviously the larger a retailer's budget, the more affordable these solutions are. CyberSource reports that in 2009, 70 percent of merchants reported using three or more fraud detection tools for automated screening, with 4.7 tools being the average, while larger merchants dealing with higher order volumes (defined as those taking in over $25 million in online sales) reported using 7.3 such tools on average. Larger merchants also typically employ tools across all four of CyberSource's categories, while smaller merchants typically focus on validation services and proprietary data/customer history.
The ease of shopping online has encouraged customers to look beyond their own country's borders for attractive deals, but has also encouraged perpetrators of fraud. The CyberSource survey states that the rate of fraud associated with international orders is twice as high as that of domestic orders. Again, there is some improvement: international fraud cases fell from 2008's four percent to 2009's two percent, but CyberSource warns that those losses are still considerable, adding that merchants end up rejecting international orders three times more often than domestic ones. Just as the post office warns to be wary of packages from suspicious international senders, so too, should merchants use caution when processing international orders. Customers from nations like the U.K., France, Australia, and Japan are more likely to be legitimate than those from still emerging nations in Eastern Europe, Southeast Asia or Africa. Of course, fraud exists everywhere. Many developing nations do not yet have an AVS system in place, increasing the risk to merchants. Simply put, if you have doubts about the legitimacy of an order, it's probably best to decline the order with a courteously worded letter.
According to a recent survey by ClearCommerce, which provides fraud detection and payment processing solutions, the top 12 international sources for online fraud are Ukraine, Indonesia, Yugoslavia, Lithuania, Egypt, Romania, Bulgaria, Turkey, Russia, Pakistan, Malaysia and Israel. The same survey also showed that the 12 countries with the lowest fraud rates are Austria, New Zealand, Taiwan, Norway, Spain, Japan, Switzerland, South Africa, Hong Kong, the U.K., France and Australia.
Communication works both ways.
Requiring extra identification from customers, faxed copies of credit cards, or signatures upon delivery are all appropriate ways of cutting down on chargebacks, but companies should be willing to take on responsibility "at home" as well. In addition to making sure that goods and services are correctly priced and customer data is properly entered, merchants should clearly state what name will appear on a customer's bill. This may not be strictly necessary if your company is called ABC Clothing, and you bill as ABC Clothing, but if you bill using a different name (ABC Home Goods), or especially if you employ a third party processing company (XYZ Fulfillment), a customer may balk when seeing an unfamiliar name on his credit card bill. Usually, such misunderstandings can be easily cleared up, but why put yourself and your customers through an extra process?
It's also a good idea to post warning messages on your website's order page. Just as, "Beware of Dog" signs in a window or yard can deter criminals, so too, can strongly worded explanations of what may happen to those looking to commit fraud upon your business. Noting that your site collects IP (Internet Protocol) addresses, which can be used to trace back where an order physically came from, is a good deterrent.
Additional suggested online resources:
Federal Bureau of Investigation on Internet fraud: www.fbi.gov/majcases/fraud/internetschemes.htm
U.S. Department of Justice on Internet fraud: www.justice.gov/criminal/fraud/internet
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