Chargebacks and retrievals

Disclaimer: MultiCards® is not the author or responsible for the contents of the information in this article and it is only intended for your information. The information is an excerpt of freely available information on the internet.

What is a Chargeback?

As you know, customers or cardholders obtain credit cards from banks, which are referred to as the "issuing bank." A chargeback (also known as a reversal) is a form of customer protection provided by the issuing banks, which allows cardholders to file a complaint regarding fraudulent transactions on their statement. Once the cardholder files a dispute, the issuing bank makes an investigation into the complaint.
Once the transaction is proven to be indeed fraudulent, the bank will refund the original value to the cardholder. From the merchant's point of view, if you do not prove the transaction to be legitimate, the bank will take back the entire value of the transaction from your account, along with an additional fee. This chargeback fee will range from $0 to $100, depending on the merchant bank sponsoring your account. If the cardholder complaint is proven untrue, no refund is requested from the merchant, though additional processing fees may be charged. For obvious reasons, it is best for your business not to get involved with chargebacks. With situations like these, the merchant stands the risk of losing products or services that have already been sold, the payment, the fees incurred for payment processing, money for chargeback penalty, or even possible commissions for currency conversions. It is thus best to avoid chargebacks at all times. Also, note that merchant accounts receiving too many chargebacks can be labeled by credit card companies as fraudulent, and this can be potentially damaging to the image and the existence of your business. Know also that credit card issuing banks take chargebacks seriously, because they are at the most advantage. They don't only levy fees, but they can also hold merchant remittance up to three months to cover the fraud, or increase their commissions if they choose to label your account "risky."

By law the cardholder has two years to file a dispute. Your sales can be reversible for two years... That means saving documentation for two years... Most banks will have a policy against handling disputes that are more than six months old but if the cardholder pushes it they have two years to file a dispute.

Reasons for Chargeback

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.

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. 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 (e.g. when the cardholder receives an item different from what he expected), requested to get their money back but said credit was not posted to their account. In these situations, merchants are also held liable for the charges.

Item 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.

Technical Problems
Many 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.

These are the four main reasons for chargebacks. There are a few more detailed reasons, which can be attributed to situations such as faulty cards and human errors made during the payment process. These cases, however, may be beyond your control as a merchant.

The Chargeback Process

Retrieval Requests

Whenever there is a chargeback, there will be an accompanying retrieval request. A retrieval request procedure is initiated when a cardholder or a credit card institution disputes or questions a transaction. They usually require a copy of the sales draft. As a merchant, you probably know that it is your responsibility to keep sales drafts, not only for tax purposes, but for cases of dispute as well. In the case of Visa, merchants are required to keep sales drafts for a minimum of 3 years. For MasterCard, they generally require storage for only 180 days.
These requests usually accompany information such as the cardholder's account number, the date of the transaction, the reference number and the sale amount. Retrieval requests are very crucial. When it is requested, you are expected to reply to it with the required documents within the specified time given.
You are usually given ten days to provide a valid and legible copy of the transaction receipt or any related documentation which can prove that the transaction indeed happened. This can be in a form of a sales invoice, rental contract, and so on. The document must contain the cardholder's name, the card number,transaction date, the total transaction amount, transaction or authorization number, the merchant name and location, and the cardholder's signature if available.
When it comes to retrieval requests, timing is very important. If you fail to respond, or if you respond late, the chargeback requested will be granted to the cardholder and chargeback fees will be imposed on you. Unfortunately, there is no acceptable excuse or recourse available for merchants, in cases of failure to respond to retrieval requests.

What is Friendly Fraud?

From a merchant's point of view, there is nothing friendly or pleasing about friendly fraud. 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 without actually paying for it.
In the offline world, this is known simply as shoplifting or stealing, and perpetrators rightfully belong in jail if caught red-handed. However, this pattern ofbehaviour is tolerated on the Internet, thanks to chargebacks. So, how can you prevent the occurrence of friendly fraud chargebacks and avoid customers who only want take advantage of you?
First of all, here are four elements that you need to incorporate into your transactions, to minimize occurrences of chargebacks:

1. Address Verification. You should decline transactions without a matching billing address.
2. Security Code. Your customers must provide the card security code found at the back of their card .
3. Traceable Shipping Service. You should use only a shipping service with a tracking system in place, preferably one which requires a signature as receipt confirmation.

The first two are important to minimize fraudulent transactions not made by the owner, while the third is important to refute an invalid chargeback. A more detailed explanation of these will be found in another chapter in this explanation.
For the meantime, let us look into the ways by which you can win a friendly fraud chargeback.

Truth be told, friendly fraud is one of the most difficult type of chargebacks to process. The way you need to respond will depend on what kind of claim your customer is making. Here are some of the common claims made, and how you can respond to them:
1. Customer insists that the item was never delivered and that he or she never received the product they paid for. In response to the retrieval request, provide a copy of the transaction receipt, with matching AVS and card code, a copy of the delivery receipt from the courier, or any communication from the customer that indicates that they indeed received said product.
2. Customer says that the item is not as described, or is not happy with the purchase. This is one of the weakest excuses for coming up with a chargeback. You should provide the same documents as mentioned above, along with your refund policy and a statement which clearly states that refunds are possible, as long as the merchandise is returned.
3. Customer insists that the item has been returned, yet the refund was never issued. In this case, you should ask the customer for proof of delivery to your return address. If the customer happened to return the merchandise after the period covered by your return policy, provide a copy of the policy.
4. Customer says that the order was cancelled but the merchandise was still shipped. In this case, you will need to specify, in your selling terms and conditions, that once an order is placed, cancellation is not possible once the item has been shipped. You should provide the delivery receipt, record of secure code, a copy of your return policy and a statement welcoming return of the merchandise if refund is requested.
5. You have already issued a chargeback to the cardholder, yet the customer disputes the charges. This may be the most frustrating for merchants. These are made by those who obviously have ill intent. You can opt to report these cases to your local police.

Most Frequently Asked Questions about Chargebacks

Know that chargeback is a complicated matter, and also that each case is different from another. Here are some of the most frequently asked questions on chargebacks. For more questions and information about the intricacies of chargebacks, you can best do a Google search for Chargebacks.

What do I do with a Chargeback Notification?
A chargeback notification simply tells you that your account has been debited for a particular transaction. It should display information about why such an amount was debited from your account. You should read the notice carefully and then decide whether it is correct. If it is not, you should immediately send the notification to the financial institution, along with your supporting documentation. If the issuing bank sees that your rebuttal is sufficient, the chargeback will be reserved and the amount will be credited back to your account.

What do I do with a retrieval request?
When you receive a retrieval request, immediately gather all of your supporting information related to the transaction being questioned, and then you can fax or send it to the credit card processor.

Why is the chargeback taken from my outstanding balance and not from my rollover reserve?
Remember that your reserve amount is set only for security purposes and to protect you, as merchant, from losses caused by chargebacks. A chargeback is usually taken out of your merchant account.

How will I know if the chargeback has already been deducted from my account?
You will usually be sent be a Notification of Chargeback as soon as the debit is sent by your bank. The debit of this amount from your merchant account will usually be the same day.

Why was there a chargeback issued to my buyer without a retrieval request
being sent to me?
Note that not all chargebacks require that the cardholder bank send a retrieval request before a chargeback is initiated. Chargebacks that are obviously deserved by the cardholder will be automatically issued without consulting you, mainly because no consultation is needed.

Will I be charged for these chargebacks? How much?
When the credit card institution initiates a chargeback, expect it to immediately be charged to your account. Typically, you should allot anywhere from $50 to $75 for every chargeback filed. This fee will cover all of the processing expenses. Reversing a chargeback in your favour, on the other hand, will not cost anything.

How many chargebacks am I allowed a month?
When it comes to chargebacks, there is a certain limit provided by the bank, which varies from one bank to another. The chargeback ratio is the ratio between the number of chargebacks to the number of transactions you have. The maximum ratio that a merchant should have is probably 1% or less. If you happen to go beyond this limit, there is a good chance that your merchant account will be closed.

How long does this entire process take?
The duration of the chargeback process depends on the reason why the chargeback was filed. It can last anywhere from a month to about six months.

What will happen after a chargeback?
Once a chargeback is filed, the amount to be reimbursed will be taken from your account, plus the processing and penalty fees. If you provide enough documentation to show that the customer did not deserve the chargeback, then the amount taken from your account will be reimbursed.

What is the first thing I have to do when I receive a chargeback?
The best first step after receiving a chargeback is to contact your customer about their concerns. If both parties are amenable to coming to a mutually agreeable solution, then you would avoid going through the usual chargeback process.

Consider these tips to avoid potential Retrieval Requests and Chargebacks:

  1. Duplicate transactions
    Ensure that transactions/orders are only made once. Entering the same transaction more than once (by customers pressing the back button or clicking on the CheckOut button more than once), can result in "duplicate transaction" Chargebacks.

  2. Refund policy
    Your refund policy should be clearly visible on your website. Make it a requirement that customers read the policy before their order can be processed.

  3. Refund in a timely manner
    Failure to process credits in a timely manner can result in Chargebacks for "credit not issued." Also inform your customer on how long it will take before the refund will hit their account.

  4. Cancelling a rebilling
    If a customer requests cancellation of a recurring transaction which is billed periodically (monthly, quarterly, annually), always respond to the request and cancel the transaction immediately or as specified by the customer. As a customer service, advise the customer in writing that the service, subscription, or membership has been cancelled and state the effective date of the cancellation. Failure to respond to customer cancellation requests almost always leads to Chargebacks.

  5. Contact information
    Your contact details should be clearly visible on your website. Including a physical address and a telephone number, so not just an email address or contact form.

  6. Shipping policy
    Your shipping details should be clearly visible on your website. If your customer knows when they will receive their product they will not issue a Chargeback because they feel 'it has been too long' and they 'should have received the product by now'.

  7. Order status update
    Keep customers informed on the status of their order.

  8. Delay in shipping
    If the merchandise or service to be provided to the cardholder will be delayed, advise the cardholder in writing of the delay and the new expected delivery or service date.

  9. Out of stock
    If the merchandise ordered by the cardholder is out of stock and delivery will be delayed or this item is no longer available, advise the cardholder in writing and offer the cardholder the option of purchasing a similar item or canceling the transaction. Do not substitute another item unless the customer agrees to accept it. By giving the customer notice and the option to cancel, you may help avoid a customer dispute regarding the merchandise and a possible Chargeback.

  10. DBA on customers' statement
    Use a clear DBA (Doing Business As) name that customers will recognize. Vague corporate names that do not accurately describe what your company might do or sell will only confuse customers when they review their billing statements. An unrecognized DBA name on billing statements is one of the most common causes of Chargebacks. Inform your customers on your website what the billing name on their statement will be: "Please note: Our billing name on your statement will be: ..."

  11. Phone number on customers' statement
    Put your phone number on your customers' statements. If they do not recognize your DBA, they can call you to find out who you are and why you charged them.

  12. Responding to a Retrieval Request
    Always respond to a Retrieval request as quickly as possible. A limited amount of time is available to resolve a dispute. If you miss the window of opportunity to respond, you forfeit your ability to fight the Chargeback. If your processing bank has any more questions or requests, your quick response will ensure that they have enough time to get the relevant information from you.

  13. Customer satisfaction
    Some disputes are not the result of unauthorized credit card use. Rather, they start because the customer disputes the quality of the goods or services purchased. The best way to avoid this type of Chargeback is to work closely with the customer to establish a mutually satisfactory solution.

  14. Contact suspicious orders
    Call, fax or email any large or suspicious orders to ensure the order is legit. If you are unable to reach the customer, you might have intentionally been given incorrect contact information. Issue a refund to prevent a Chargeback by the credit card holder.

  15. High-ticket sales/Fast delivery
    Be suspicious of high-ticket sales requested to be sent next-day air or if a runner will be in to pick up the purchase at a later time. Be wary of orders for which the customer is willing to pay more for faster delivery.

  16. Verify the customer's address
    It is possible to verify the customer's name, address and phone number with the card-issuing bank. By calling the Voice Authorization Center for address verification, you can verify the address and also provide proof that you verified the address.

  17. Always get signed proof of delivery
    Be able to provide a shipping tracer log that shows that the customer received the shipped goods.

  18. Product information on website
    Provide accurate descriptions and images of your products on your website.

  19. Foreign orders
    Be very cautious of any foreign orders. Generally, orders from Asia, the Middle East, and most parts of Africa are considered high-risk.

  20. Different billing and shipping address
    Be wary of orders with domestic billing addresses and foreign shipping addresses. They are usually fraudulent.

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