Fraud And Chargebacks

The banks and card processors would like you to believe that they bear the brunt of credit card fraud in the online and offline worlds, but in reality, the people who really pay the cost are the merchants themselves.

This particularly true on the Internet, because no signature is required for a transaction to be accepted.

This page is included as a warning to potential merchants because often, they will be unaware of the real facts surrounding credit card fraud.

If somebody comes onto your web site and makes a purchase, the money gets transferred into your account.

However, if that customer disputes that the transaction is genuine, then the card processing company or bank will then charge back the transaction to the customer AND charge you and extra fee - usually $20-$35 - for the privilege.

Even if you can prove beyond reasonable doubt that the transaction is genuine, the final decision from the bank is STILL likely to fall in favour of the customer.

In fact, some merchant providers penalise their merchants even further if they dare to challenge the dispute.

It's a no-win situation for the merchant, but not for the card processors. They can't lose, because they refund the customer and make an excessive charge for "putting things right" along the way.

The basic rule of thumb is that if the cardholder wishes to not pay for something purchased on the Internet, they are going to have an excellent chance of not having to pay for it.

They can claim the goods were defective, misrepresented, the sale was fraudulent, etc.

The credit card companies have a vested interest in protecting the peace of mind and security of the card holder over the merchant.

The banks are usually most helpful in assisting their cardholders with the dispute process.

These cardholders are their customers. The merchant is the adversary and considered to always be in the wrong!

When you get a retrieval or chargeback request, you have about 10 days to supply a signed charge slip to your credit card processor who in turn supplies it to the cardholder's bank.

You will probably get charged something like $25 for each retrieval request and if you fight the retrieval request you should expect to incur more charges.

Of course as an Internet Merchant you will most likely not have a signed charge slip.

Your orders would typically be phoned in to you, emailed to you, transmitted through a secure credit card browser or faxed in. Emails are not considered signed charge slips even if you have a record of the email coming from an account belonging to the cardholder.

This means you will overwhelmingly lose the vast majority if not all of these retrieval requests because you have no piece of paper bearing the charge with the signature of the cardholder.

Bear in mind that if you are a new merchant and you get more than 1% of these you stand an excellent chance of having your merchant account closed.

So, if you do 100 credit card transactions a month and get more than one of these chargeback requests per month, you are in serious jeopardy of losing your merchant account and this applies even if you win these disputes which is most unlikely.

Even having a proof of delivery from the post office or a parcel carrier won't help.

The cardholder need only say that a delivery was in fact made. Some goods that he or she never ordered were sent and the cardholder unknowingly signed for them and then threw them out having no knowledge of them and didn't want them wasting space.

In the case of a delivery to a business address, it is likely that a person other than the cardholder would sign for the goods and this of course defeats the signed receipt process for the merchant.

If the cardholder claims they never ordered the goods there is no obligation whatsoever for the cardholder to retain the goods and/or return them.

Welcome to Credit Card Land!

The cardholder does not have to explain or provide any explanations as to how the merchant got their credit card information, and is under no compulsion to report the card stolen since it wasn't stolen.

Oh, if it is a stolen card or stolen card numbers you accepted, you still lose even though you got it authorized.

But what about disputes where there is
no question as to whether or not the
cardholder ordered the goods or services?

This is a process where the cardholder says, "okay I ordered the goods/services but I don't want to pay for them. They don't work, they weren't what was promised, the merchant cheated me", etc. There are numerous reasons they can use.

The first thing to remember is that if you get more than 1% or perhaps 2% of these and are a new merchant account you can expect to have your account terminated.

Some cardholders will call the merchant and say you better give me a credit or else I'll file a dispute and you know if you get too many of these you will lose your merchant account.

There are some really nasty people out there and it's a dead cert that you will meet one of them at some stage during time on the Internet.

A "Street Smart" merchant can sometimes win a chargeback dispute, but most don't win very many.

The dispute process is lengthy and wastes time. You have to put together a complete file with any and all documentation and send it in promptly.

The tendency is for the cardholder to win.

The credit card processor essentially represents you. They don't make any money defending you and see you as troublesome if you don't just lay down and give the cardholder a credit at the first sign of trouble, before it develops into a dispute.

Let's assume you win though. Guess what happens next?

The cardholder can go back to his bank and file a whole new dispute for a different reason and the process starts over again with a new twist the second time around.

Your processor can charge you $600 if you lose the dispute.

Rest assured you can't beat their system. It is entirely designed to protect the cardholder and not the merchant.

American Express agreements typically have a clause in them that automatically says you the merchant can lose any and all disputes relating to any Internet transactions, period.

By law the cardholder has two years to file a dispute. Think about that. Your sales can be reversible for two years. That means saving documentation for two years.

Of course, in reality, 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.

It's a hard life on the Internet and don't let anyone fool you into thinking otherwise.

If you intend to accept credit card payments online, please be very careful to read the parts concerning chargebacks and don't believe for one second that they won't happen to you, because the only merchants who don't get chargebacks are those who don't do any business.