News & Events

Understanding Chargebacks Through Real Life Examples (Part 2)

March 28 2017 | By Helen Baginska

March 2017 marks the 13th anniversary of Fraud Prevention Month. This month we revisit chargebacks as they remain a hot topic on the list of questions we get from our merchants. We put together a few recent situations encountered by our merchants to help you 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 is a small restaurant business in Florida. The company rarely keys in transactions manually, because the majority of their customers pay at the counter using chip and pin. One day a client called in to place an order for a $100 worth of food. The client also indicated that he would like to use his credit card to pay for the order and the merchant, who wanted to secure a large order, keyed the credit card number into the terminal manually. A client showed up, picked up the food and left.

Result: Two months later, the cardholder, who was living in Texas, checked his credit card statement and saw a $100 charge from the place he didn’t recognize. He called his bank and filed a chargeback. The merchant had nothing to show to prove that the transaction in question was legitimate, so the merchant ended up losing a $100 and the cost of the food.

Tip: An employee who took the order should have waited for the client to show up to pick up the order and only then processed a sale using chip and pin/signature. This way the merchant would have the proof that the cardholder actually participated in the transaction. 

Company B is a car rental company in Alberta. A client rented a car for 3 days. At the end of the third day he returned the vehicle back to the merchant, paid for the rental with his credit card using chip and pin and left.  After he left, the employee noticed the damages the car sustained while being used by the client. After a careful assessment, the merchant concluded that the damages come up to the amount of $500. The merchant had the client’s credit card information on file, so he billed the $500 in accordance with the signed rental agreement.

Result: The client disagreed with the charge and contacted his bank to contest the charge. The chargeback was filed and the merchant ended up having to cover repairs on a damaged vehicle himself.

Tip: Failing to honor the rental agreement signed by the client and the merchant could result in a court dispute between the two parties involved.  However, the card brand’s processing regulations has little to do with the agreement between the two parties. The networks’ processing regulations clearly indicate that any addendum/delayed charges related to damage/theft/loss must be explicitly agreed to in writing by the cardholder, and the transaction must be conducted in a card present manner, meaning chip and pin/signature. The car should have been inspected right away and the client should have been charged on the spot.

Company C is an ecommerce business that sells children’s toys online. One day a client placed an order using her credit card. The transaction was processed via a virtual terminal. The card number, the expiry date and a CVV (3 digit number on the back of the card) were keyed in the system by the client. The data was a match, so the product was shipped to the delivery address indicated by the client.

Result: It turned out that the client’s card data was compromised at some point prior to the transaction, and the client only noticed it a week later. The cardholder ended up filing a chargeback with their bank and getting the money back. The merchant tried to dispute the chargeback by presenting a proof that the data entered in the system was a match, but the client continued insisting that the transaction wasn’t authorized. The bank ended up ruling in client’s favor.

Tip: It is definitely one of the most difficult cases to dispute when it comes to card-not-present transactions. The only other verification step the merchant could have added is AVS, an address verification system, which validates the postal code of the cardholder to make sure it matches. But even with all pieces of the puzzle in place, if the card information was compromised, there is very little the merchant can do to prove that the transaction was legitimate. One of the things you could do is to assess your chargeback ratio and incorporate a potential cost of chargebacks into your pricing structure, just like big box stores do when it comes to theft costs.

At the end of the day, each of these scenarios resulted from the cardholder’s actions of contesting the charges, and the card networks regulations supporting the dispute. In the aftermath of the lost dispute, the merchant will have to resolve with their clients outside of the card networks’ framework, perhaps  in court. The networks, processors or issuers are not the police. They do not possess the authority or jurisdiction to pursue a debt, domestically or internationally.

Your best practices are using your judgement, knowing the nature of your industry, providing proactive customer service, weighing pros and cons of sales, and most of all educating yourself and your employees.

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