Merchant Services: What’s a Chargeback?

A chargeback is a credit card processing term that refers to when a disputed or non-compliant transaction is returned by the card issuer to the processor, or merchant services provider. The provider usually charges the merchant a fee when this occurs, so it’s important to understand chargebacks and how to avoid them. 

Cardholders and card issuers can dispute transactions for many reasons, and one of the most common is credit card fraud. Any time a credit card is used to make a purchase, there’s potential for fraud. The risk is greatest in card-not-present transactions (online, mail order or telephone order), but even face-to-face transactions where both the card and cardholder are present are not foolproof. Fortunately, there are simple steps a merchant can take to lower the risk of fraud (and chargebacks) in all payment card transactions.

In card-present situations, the merchant is responsible for running the card through the cardreader to collect account data and getting the customer’s signature on the receipt. This applies regardless of how the credit card processing is performed: POS terminal, online, via a mobile device or wirelessly. Swiping the card and obtaining the authorized signature are your best line of defense against a chargeback that’s based on a fraudulent transaction.

Card-not-present transactions require some additional effort on the part of the merchant to ensure they are legitimate. One example is the use of AVS, or Address Verification Service, which checks the address provided by the customer with the address on file with the card issuer. AVS is applicable on domestic orders taken over the Internet, phone or by mail where the customer provides a shipping address.

Another important tool is the three-digit security code printed on the back of the card. Depending on the issuer, this is referred to as the CVV, CVC or CID. When this code is provided by the customer, it’s an indication that they are in physical possession of the card and not just using a stolen account number. Checking this code against the issuer’s records is one more way to reduce the risk of a chargeback down the road.

Additionally, there are some universal “red flags” that a card-not-present transaction may be fraudulent, including:

• Orders that are larger than usual for your business (fraudsters will often buy in bulk for resale)
• Orders for multiples of expensive items
• Orders where the shipping address is different from the billing address
• Orders that originate from or request shipment to a foreign country

Chargebacks can also be triggered by processing or authorization errors, so it’s important to complete transactions with valid authorization codes on the day they are issued. If a credit card transaction is declined, avoid a processing error by obtaining another form of payment from the customer — do not resubmit the transaction for approval!

As a merchant, it’s likely that you will be on the receiving end of a chargeback more than once during your career. Be aware of your rights, as well as those of your customers, and work with your merchant services provider to help keep chargebacks to a minimum. Merchant Express® representatives are standing by to answer your questions about chargebacks and how we can help you lower your risk.