Merchants, Know Your Rights About Chargebacks

While everyone talks about consumers’ rights for chargebacks and the need for banks to protect themselves from fraud, it seems like the merchants are the ones getting stuck with the bill.

It’s bad enough there are fraudsters trying to rip off merchants maliciously, but it’s worse with friendly fraud as customers lie about never receiving their products, or the order was screwed up, or it was damaged in transit. They complain to the banks, which not only takes the money back, they also charge merchants some extra fees for the privilege of doing so.

Then there are the customers who just plain forgot they ordered something, or can’t read the garbled mess on their credit card statements, and their first response is to dispute a charge they don’t recognize.

You wouldn’t know it, but merchants do have rights when it comes to fighting chargebacks, but you may not always be aware of them, so we’ll tell you about them. recently published an article that described your rights as a merchant, so whenever you get stuck with a dispute, refund request, or the dreaded chargeback, you can protect yourself and reduce the losses and penalties you get stuck with.

First of all, let’s get this out of the way: Yes, a lot of chargebacks are legitimate. The product was lost, damaged, or stolen. Yes, someone screwed up the order. Yes, someone did forget the pepperoni on a pepperoni-and-sausage-extra-cheese pizza.

Photo of a gavel and a round sound block. Merchants have certain rights when disputing chargebacks.

Most of these are problems that can be fixed through training and creating quality check processes to ensure your staff picks and packs the right orders, or includes all the items in an order. Other issues — like lost, stolen, and damaged shipments — are something to take up with the shipping provider, so make sure you insure any high-value orders.

But what about the rest of the chargebacks and disputes? How do you reduce those?

The credit card networks do have rules and regulations that are supposed to protect your business, but they may not always make it clear. Here are some things, according to the Business2Community article you can do or request to protect yourself.

1. Reason Codes

A reason code is something that gets attached to your chargeback notification, which tells you why the chargeback was issued. That code will tell you the kind of evidence you need to give to the issuing bank. It can also help you decide whether you should fight a dispute or not.

For example, disputing a $20 charge may end up costing you $25 in time and money, so it’s not worth it. On the other hand, a $3,000 chargeback may also cost you $25, so pick your battles carefully. Set a limit on when you will automatically give a refund because it’s not worth the battle.

This is also a good reminder to save as much information about every transaction. That includes emails about errors and your offer to try to fix it. If you promised someone a replacement item or offered to fix the problem, and they still issued a chargeback, share that with the bank. The bank could deny the chargeback completely in that case.

Most reason codes also require the customer must contact a merchant before they file a chargeback, so if you’re able to show that they never called, be sure to mention that as well.

2. Late delivery returns

If an item is delivered late (which is very likely, as ecommerce has increased sharply thanks to the pandemic and holiday shopping season) the customer has to return the merchandise before the chargeback is filed. This protects you from the delivery company’s mistake, and you can at least resell the item again.

However, beware of return fraud, which is on the rise. What some crooks will do is ask for a return label, and affix it to an envelope full of junk papers. The returns department will get it, scan it in (which shows the item as returned), and then send it to the mailroom or pass it off to someone else. They’ll open it, see it’s filled with junk, and pitch it without actually knowing what it is. The customer “returns” the item, gets the refund, and you’ve lost twice because you can’t even resell the item.

Train your staff on possible scams, and retool your process so all return items are confirmed before they’re approved. Also, if you have not received a returned item and are hit with a chargeback, be sure to share that information with the bank.

3. Purchase price only

Customers are allowed to request a chargeback for part of a payment and even ask for multiple partial chargebacks, but the amount can never be more than the original amount. (This might be something possible for restaurants to request when friendly fraudsters try to pull the “they forgot my french fries” scam; offer to refund the price of the fries, not the entire order.)

4. No cashback transactions

There are also no refunds on cashback from debit card transactions. We’d like to think that this sort of thing hasn’t been tried before, but you’re reading an article about how to prevent fraud, so. . . .

5. 15-day waiting period on returns

We’ve talked in the past about how refunds are preferable to chargebacks. A refund is only for the amount of the purchase, a chargeback is the amount of the purchase plus some extra fees and even a fine.

That’s why issuers must wait 15 calendar days from the time of a customer’s return to the time the bank will approve a chargeback. This gives you more time to grant a refund and avoid the chargeback fees. It’s not better per se, but it’s less painful.

Another note on returns: If a customer wants a chargeback because the item doesn’t fit, was damaged, or was too late, BE SURE TO REQUEST THE ITEM BE RETURNED.

Too many companies will go ahead and just let the customer keep the item, which only exacerbates the problem for everyone. This is also what encourages refund fraud. If nothing else, it shows whether a customer has a legitimate complaint or not. If they return the item, there was probably something wrong with it. If they don’t, it was likely a scam. And if they say that it was lost in transit, check with the shipping company to see if it was delivered and whether someone signed for it. Who knows? You might help the bank expose a scammer.

6. The right of representment process

YOU CAN CONTEST A CHARGEBACK! This is one of your most important rights as a merchant: You can fight any and all chargebacks. If nothing else, it shows that you’re possibly being defrauded. Just remember, you do need to respond formally and within a deadline.

It also helps if you work with a merchant services provider that has the tools to not only help you dispute chargebacks, but also has AI tools and other processes to help you head off fraud already.

To dispute a chargeback, submit a form on your merchant dashboard by the required deadline, and make sure you gather as much specific evidence as you can find, including all transaction records and communication with the customer. If you record calls, be sure you have a recording of any phone calls available.

Of course, it’s not always worth disputing every chargeback because it can take a lot of time and money. So, find your minimum transaction value — $25, for example — where you just grant a refund to anything below that amount.

7. Chargeback arbitration

If you do lose your dispute, the issuing bank will file a pre-arbitration chargeback, and you can choose to either accept the decision or appeal to the credit card network itself to review the case. If the credit card company decides in your favor, the chargeback is reversed and the money will be returned to your account.

But do a cost-benefit analysis first. It could cost you even more than the original transaction for you to go through with the process because it could cost you a whole lot more than you’re going to win back. Save this for high-value purchases.

Most importantly, you have the right to protect yourself. Work with a merchant services provider that can help you fend off fraudsters, both friendly and malicious. Use a third-party chargeback management solution like CB-Alert, which can reduce chargebacks by as much as 19%. Develop processes that reduce return fraud. Improve your quality control and customer service to reduce errors in the first place. Always try to communicate with your customers to see if you can fix a problem before you ever have to issue a refund or get hit with a chargeback. And then weigh your options and costs of fighting a chargeback in the first place.

To learn more about how you can reduce chargebacks, both legitimate and fraudulent, CB-Alert can help, Please visit the CB Alert website.

Photo credit: QuinceCreative (Pixabay, Creative Commons 0)

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