Preventing Chargebacks

A chargeback is charged to a merchant (or seller) when the customer claims their card has been charged and the merchant has not delivered a product or performed a service.  The buyer asks the bank to remove the charge from their credit card bill.  The most common explanations given by customers are that their card was stolen and used fraudulently or that the seller failed to perform their side of the agreement.  Although sellers and credit card companies often work together to resolve a dispute, the customer's credit card company ultimately decides whether a charge is legitimate or not, and if the charge is not found in the sellers favor, a chargeback fee is issued. So not only do you NOT receive the money from the sale, an additional fee is charged.  These fees are used to recoup financial loss incurred when processing such complaints.

Chargebacks can occur for a number of reasons including double-charges, expired cards,  bank errors, stolen cards, or customers simply not agreeing that services or acceptable goods were rendered for the purchase amount.  Sometimes, if you receive too many chargebacks, your merchant account credit card processing company may discontinue doing business with you because you have become too much of a liability and expense to them.  Once you have lost your merchant account you are placed on Visa/Mastercards Terminated Merchant File lists.  It is very hard to acquire another merchant account for several years if you are on this list.  At this point you will probably want to consider offshore merchant accounts.  

Online retailers have long been observing common patterns in online fraud. Here's some of the most common signs to watch out for:

• Late night orders-Fraud increases late at night.
• Have order history, shipping and tracking information readily available to customers on your website.
• Send a follow-up email inquiring as to whether the purchase was satisfactory to the customer.
• Have a generous return policy, and encourage customers to contact you with any problems.  It is always better to resolve the complaint between you and the customer rather than involving the credit card companies, who will always err in favor of the credit card holder.  
• Orders from certain countries can be suspect - this constantly changes so keep up with e-commerce trade magazines to stay on top of which countries to pay extra attention to.
• Many merchants who use third party merchant account companies have run into problems because the company name that appears on cardholder's monthly statements is not the company name of the site the cardholder made their purchase from. Make sure the customer knows what name will appear on their credit card statement at the end of the month. 
• Ordering large amounts - thieves don't care how high the bill is, since they don't intend to pay it!
• Physical address - Physical address must match the credit card billing address.
• ISP address-This must be in the same area as the record of the customer's address.
• E-mail address-Names that have no apparent connection to customer's name or include random characters could be attempts to mask identity.
• Free, Web-based, non-ISP e-mail addresses  - some merchants are reporting that all of their fraudulent transactions are originating through these addresses, as it is easy to conceal the user's identity.  Tracking people who used a free e-mail address is almost impossible, it's much easier for them to get away then if they used their Internet Service Provider (ISP) or their own company web site e-mail address. To check whether an e-mail address is a freebie or not just take the part of the address after the "@" symbol, add "www" to the front of it and see what website it brings up.
• Repeated attempts on the same credit card number - In the early days of the Internet, criminals obtained fraudulent credit card numbers by using credit card generation software programs.  A small merchant, for example, had only 3-4 sales in a period - but 3,000 authorization attempts!
• Negative database - keeping a record of the e-mail address, card number, and phone number of those who have initiated chargebacks
• Velocity checks - monitoring the number of times an individual card is used in a week
• Credit limit - limiting the total amount one card can charge without independent verification such as a personal email or phone call.
• If your business delivers products use a carrier that requires a signature on delivery, and allows you to have a copy of the signature. Retain these for your records.
• Post a warning message on your order page.  Be sure to mention that IP addresses are being logged. IP addresses can come in handy when locating people about fraudulent orders.
• Consider not accepting credit cards from the customer unless full information is provided including the complete address and phone numbers.
• Create a negative database to identify high-risk transactions and block specific credit card numbers within your system.
• Submit your customer service telephone number to your credit card processor so it can be included with your merchant name on the customer's billing statement.
• Know your customer.  Obtain your customer's telephone number during a transaction and call to verify the order and the telephone number given to you. 
• Utilize CVC2 (MasterCard^®) and CVV2 (Visa^®). These two numbers are the three unique digits on the back of a MasterCard or Visa credit card. These are used in situations where the card is not present, e.g., mail order, telephone order and Internet credit card transactions.
• If a transaction is not made face to face, it is a good idea to send a confirmation directly to the cardholder's address to help identify the transaction when it appears on a billing statement. Include the business name that will appear on the cardholder's statement.
• Process refunds to your customers' accounts quickly, always using the same card number from the original sale. Never give a customer a refund by cash or check.
• Always make sure your customer has a clear understanding of the return procedure.
• Limit the number of users that have access to your merchantaccounts for credit card processing and make sure that they are trustworthy.
• Change your online merchant account password on a regular basis.
• An e-mail link for the consumer to contact you directly for a dispute or chargeback rather than going to the issuing bank.
• Be honest with what customers will receive.  Don't oversell your product and be careful not to exaggerate in your enthusiasm for describing your goods or services.  Be clear with what the customer will receive for the given price.

 
Address Verification Service

Merchants who accept credit cards when the credit cards are not present do not have the ability to confirm the signature. To protect themselves, they use the Address Verification Service (AVS). This service remains useful, but is limited in the anonymous environment of the Internet. AVS checks to ensure the address entered on the order form matches the address to where the cardholder's billing statements are mailed to. People ordering products and/or services using a stolen card number will never use the real cardholder's billing address, so this is your chance to stop the order before it's too late. AVS only works with orders conducted in the US. Failure to use AVS when processing credit card transactions will always result in paying higher credit card processing fees.

There are, however, limitations inherent in AVS:

• AVS only works for U.S. addresses. 
• More than 50 percent of the time, AVS data associated with a credit card number is not available (NA), leaving merchants to guess at whether a potential sale is a good risk.
• If the ZIP Code for a cardholder is entered into the database as a five-digit number and the transaction information presents a nine-digit ZIP Code, the AVS check reports failure on the ZIP Code match. To protect against this, merchants should set up their systems to include only five digits.
• There is even more potential for discrepancy in the way street addresses are expressed. For example, AVS address information for "110 First Street" should be submitted as "110" (AVS address information includes the numeric portion of the street address only), but consumers and banks frequently enter the street address as 110 1ST Street. The AVS translates this as "1101" and reports failure on the address match.
• AVS does not protect against thieves with knowledge of both the credit card and billing address, as is the case with stolen wallets, purses or phone scams.
• Strict adherence to AVS recommendations limits the merchant's potential customer base. Since some merchants elect to ship only when AVS returns a good match, many orders that may have been legitimate are unnecessarily declined.