News & Events

Understanding Chargebacks Through Real Life Examples

March 28 2016 | By Helen Baginska

This month we revisit chargebacks as they remain a hot topic on the list of questions Relationship Managers get from our merchants. We put together a few recent situations encountered by our merchants to underline the importance of establishing effective processes in order to reduce the risk of getting a chargeback.

Looking at real life examples allows you to put yourself in another merchant’s shoes and reflect upon what you could have done in a similar situation.

Company A sells snowmobiles, parts and related equipment. They rarely key in transactions manually as the majority of their customers pay for their purchases at the location. In Canada, EMV technology has been around for a while and merchants’ personnel are used to the chip+pin cards processed through the chip reader on the terminal.

On the day of the transaction, that later turned out to be fraudulent, the cashier was about to process the payment when the customer mentioned that the chip on his card was defective. The customer said that the only way the transaction would go through is to swipe the card’s magnetic stripe. The merchant didn’t want to lose a large sale and proceeded with swiping the card.  

Result: The transaction came back as a chargeback and the merchant lost both the money and the product.

Tip: An employee should have asked the customer for a photo ID to make sure that the cardholder’s name and the signature on the card matched the one on the ID. He should have also checked the photo to make sure he was dealing with the owner of the ID and made a copy of the ID and an imprint of the card to keep on the record if necessary.

Company B is in the tire business. They are mostly B2B and they’ve been regularly working with the same few trucking companies for many years. They have a great relationship with their clients and they developed mutual trust over the years. The majority of their transactions are keyed in manually over the phone and there are multiple employees that can place an order from the client’s side, as well as multiple corporate credit cards that could be used. 

On the day of the transaction, the merchant received a phone call from someone who claimed to be with the company they’ve been working with for a few years. The “client” placed a large order and provided the credit card information via phone. The transaction was processed and the “client” picked up the order.

Result: The transaction came back as a chargeback. The merchant was out of money, out of product and spent many hours working with the Police that was investigating the fraud case.

Tip: The merchant should have had a verification process in place with which she could have verified that the person who placed the order actually works for the company they claimed they were with. They should have obtained a detailed invoice signed by the client before allowing picking up the product.

Company C is selling custom made wedding dresses. This merchant works with demanding clientele and it often takes a client a few trips to the salon before the final version of the dress is accepted. The merchant requires a 30% deposit before they get to work and place the order for materials.

On the day of the transaction that ended up coming back as a chargeback, the merchant has been busy and forgot to process the card at the salon. When the merchant realized their mistake, they called the customer and obtained the credit card information by phone and processed a pre-authorization for 30% of the final price of the dress as per conversation she had with the client before. Shortly after processing a pre-auth, the merchant placed a large order for Swarovski Crystals for the dress. The client came to the salon a few more times to go over the details and then the client started having second thoughts about the dress design she previously approved. Long story short, the client claimed that she never authorized the transaction and the merchant had no paperwork to prove that the transaction was legitimate.

Result: The transaction came back as a chargeback and the merchant found herself with a custom made dress that she wasn’t able to resell and out of 30% deposit amount.

Tip: The merchant should have asked the client to sign an agreement specifying the terms and conditions of the sale, including the details of charging a deposit.  They should have processed the transaction using a chip reader.

It is essential to educate yourself and train your employees to recognize red flags to protect yourself from possible chargebacks. We've put together an informative QA for you to help explain chargebacks and how they could affect your business. Learn more.

 

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