Credit Card Chargebacks: What They Are, Why They Happen, and How to Avoid Them

Credit Card Chargebacks: What They Are, Why They Happen, and How to Avoid Them

If you clicked on this blog, it’s either because you have no idea what a credit card chargeback is, or because you’re looking for more ways to avoid them — they can be quite a pain in the you-know-what.

Card networks, banks and all other parties involved in the payment processing ecosystem are always working to mitigate fraud and loss. The chargeback process is one of those mitigations.

Many merchants, through no fault of their own, have no idea what a chargeback is, why they happen, what to do when they happen, how to avoid them and how Lightspeed Payments makes your life easier. This is exactly what you’ll learn today.

 

What’s a credit card chargeback?

A credit card chargeback — also known as a reversal — is when a customer disputes a charge (or many charges) on their credit card after purchasing goods or services from your business. The chargeback itself is a MasterCard, Visa, Discover or American Express transaction that reverses the original sale.

To make this extra easy to understand, we’re bringing back our shopper Sophie to show you how a chargeback can play out in real life. (Don’t remember her? Check out this blog, and then this blog for her shopping journey.)

For example

Sophie is on vacation in Florida walking to meet a friend. As she passes the storefront of a neighborhood jewelry store, a shiny necklace catches her eye. She’s a little strapped for time, so instead of going into the store, she takes out her phone to look it up on the store’s website.

She finds the necklace, adds it to her cart, selects free seven business day delivery, uses her credit card to check out, and goes on with her day.

Seven business days later, Sophie realizes she still hasn’t received her necklace. So she decides to reach out to the jewelry store by email. Another week goes by, and despite sending another email, still no response.

Disappointed, Sophie decides to call the bank that issued her credit card to tell them she never received her order despite many failed attempts to communicate with the jewelry store. The bank informs her that in order to retrieve her funds from the merchant, they must perform a chargeback.

 

Important: It’s the major credit card brands who administer the chargeback process. The banks and payment processors are required to abide by the rules the credit card companies mandate.

 

Why do credit card chargebacks happen?

Chargebacks were originally initiated as a means of providing consumer protection from fraud. Today, it can be for a few other reasons. Here are the most common:

  • Fraud: When a purchase was made on a credit card without the authorization or consent of the cardholder. This is the most common reason for a chargeback.
  • Merchandise not received: When the buyer never received their order (like in Sophie’s example).
  • Duplicate processing: When the buyer gets billed more than once for their order.
  • Credit not processed: When a buyer makes a return but doesn’t receive a refund.
  • Not as described: When the buyer claims the merchandise is damaged or defective, or what they received is a misrepresentation of the terms of the sale.

Chargebacks can have a negative impact on your business and can impact profitability, but luckily there are ways to reduce and avoid them. Most chargeback prevention practices start at the point of sale.

 

 

How can you avoid credit card chargebacks?

When the card is present (typically in-store):

  1. If the authorization request was declined, don’t repeat the authorization request. A non-authorized transaction can easily return as a chargeback.
  2. If you receive a referral message in response to the authorization call Lightspeed. When this happens, the card issuer typically wants more information about the cardholder. If you’re in the middle of a rush, simply ask the customer to use a different payment method.
  3. If you manually key-in an amount and credit card, retain an imprint of the card on the receipt. To be PCI compliant, you need to securely store sensitive information like this and destroy it when you no longer need it (typically 90 days after the transaction).
  4. Ensure cardholders are clearly aware of your return, refund or service cancellation policies, specifically for subscription-based companies. Ideally, these should be clearly visible and printed on your receipts. The cardholder should have no “reasonable grounds” to claim they did not know your policies.
  5. Always process credits in a timely fashion. If you need help with this, please contact our friendly Lightspeed support agents.
  6. If a product is back ordered or delivery is delayed, always advise your customer.
  7. Ship merchandise and deposit the authorization at the same time. If customers are charged for an item they have not received, they tend to be more prone to dispute it.
  8. Respond to requests to cancel recurring payments immediately.
  9. If your business sells high-value items, or you often have big orders, get a signed contract. Include your return, refund or cancellation policies in the contract. If possible, try to get a copy of your customer’s ID that matches the details on the credit card.
  10. Ensure your billing descriptor is easily recognizable by your customers. To do so, please contact Lightspeed support.
  11. Be wary of suspicious, potentially fraudulent transactions. Look out for these red flags:
    • Is the customer hesitating or avoiding giving you their personal information?
    • Are the billing and shipping address are different?
    • Is there pressure to ship the “urgent” order immediately?
    • If the order is out of the ordinary, trust your instincts and investigate further.

When the card isn’t present (typically online):

Transactions where the card isn’t present are inherently riskier because the buyer is not physically with you, which makes it challenging to verify their identity.

Chargebacks from customers who have a legitimate reason to be disgruntled can typically be resolved with open and fair communication. If you receive a legitimate chargeback, talking to the customer and finding a compromise should be your first response.

True fraud and friendly fraud, however, are more difficult to beat. True fraud is when a fraudster uses a card without the card owner’s knowledge. When the legitimate cardholder becomes aware of the transaction, they’ll ask for a chargeback and your business will suffer the loss — both the merchandise and the money.

Friendly fraud occurs when a legitimate customer abuses the chargeback process for their own gain. You can prevent this by keeping a record of your transactions to help you challenge chargebacks.

The best way to reduce card-not-present chargebacks is to identify suspicious transactions before they happen. Consider the following:

  1. Treat first-time customers with caution, especially if it’s a big order.
  2. Watch out for card testing. This is when fraudsters try using cards from various banks to see which ones work.
  3. Treat buyers who are overly concerned with shipping details with caution. Fraudsters commonly worry about shipping because they’re afraid the real cardholder will detect a fraudulent transaction on their card before the goods leave the warehouse.
  4. Multiple orders to the same shipping address, all using different cards. Always check for corresponding shipping and billing addresses as a rule.
  5. Be wary when the billing and shipping address don’t match. This might indicate that a fraudster has either shared a working card number with others, or that they’re shipping merchandise to several locations using a stolen card.
  6. Several orders with slightly different credit card numbers. A fraudster may have purchased a list of credit card numbers and is systematically testing them.
  7. Continuous order attempts with gradually decreasing value. Issuing banks have sophisticated fraud controls that decline suspicious transactions above a certain value. Multiple order attempts with decreasing values might indicate a fraudster trying to figure out what the issuing bank’s threshold is.
  8. If a customer has problems providing personal information, especially on phone orders, this should raise suspicion.
  9. Incorrect credit card expiry date. If a transaction is repeatedly declined because of incorrect card expiration dates, that could indicate that a fraudster is trying to guess. This is a clear indication that they do not have the original card in their possession. Same applies to CVV numbers.
  10. The use of deaf relay systems or other voice assistance services should be treated with caution. Sadly, these tools are commonly used by fraudsters to disguise their identity.
  11. The buyer is indifferent to high shipping prices. A fraudster is primarily concerned with shipping goods as fast as possible and trying to avoid detection. High shipping prices don’t deter them, because they’re not paying for them.
  12. International orders must always receive additional scrutiny. Fraudsters know that it’s almost impossible for law enforcement to catch them if they are outside the country where the purchase is made.
  13. In-store pickup can be a card-not-present fraud flag. Always check for valid ID that corresponds with the cardholder’s information before you fulfill the order pickup.

 

How does Lightspeed help with credit card chargeback disputes?

Each major card brand has a unique chargeback process. While chargebacks typically take between 30 and 90 days to get resolved, it can take up to 120 days in some cases. If you receive a chargeback, Lightspeed works with you to evaluate the situation and determine what evidence you need to resolve the situation.

Chargebacks are ultimately your responsibility, however, Lightspeed makes the chargeback process as pain-free as possible by dealing with the banks and processors on your behalf, and advising you on how to resolve the issue. Here’s what the chargeback process looks like when you use Lightspeed:

Day 1: The cardholder claims that a transaction at your business isn’t valid.

Day 2: Lightspeed pays for the chargeback and its associated fees on your behalf to the cardholder’s bank, and either withholds the chargeback amount from your next settlement or debits your account.

Lightspeed immediately contacts you by email and phone to advise you and ask whether or not you want to challenge the chargeback (chargebacks for any amount lower than $20 are often not worth challenging). If you decide to challenge the chargeback, Lightspeed advises you on which evidence you should provide. Our experts collect this evidence with your help and then send it to the cardholder’s bank for review.

  • For Visa, you have 30 calendar days* to provide evidence.
  • For Discover, you have 45 calendar days* to provide evidence.
  • For Amex, you have 20 calendar days* to provide evidence.
  • For MasterCard, you have 30 calendar days* to provide evidence.
  • If you don’t provide evidence within the prescribed time, the card networks will assume that you have accepted the chargeback. After this point, there is no recourse for you to appeal.

*These timeframes are likely to change over time.

Within the next 30 days: If the issuing bank (the cardholder’s bank) finds that the initial charge was legitimate, you will be given back the money for the transaction. If the issuing bank finds that the initial charge was not legitimate, you will not get back the money for the transaction.

 

Important: Regardless if you win or lose, chargeback fees are non-refundable. These fees are imposed by the cardholder’s bank in order to process the chargeback request.

What happens if you lose a credit card chargeback claim?

If you lose your chargeback claim, Lightspeed will advise you on the best course of action.

  • Sometimes an issuing bank will respond with pre-arbitration. This means you have the opportunity to appeal the decision on the chargeback. You will, however, need to provide additional evidence to support the transaction and prove that it was legitimate.
  • The card brands also offer arbitration as the final option. Arbitration is expensive (normally around $500 per transaction). Most businesses will not pursue arbitration as a final resolution. There are however times when it is required, especially for very large transactions.

 

Very important: There is a maximum amount of chargebacks you can reach. If more than 1% of your monthly processing volume results in chargebacks, card networks can take action against you. If your rate of chargebacks is deemed too high, you can be prevented from accepting credit cards as a form of payment.

 

Ooooof. That was a lot. You’re a real trooper for making it all the way through. Now, go and update your policies and inform your staff so they can be your eyes and ears when you’re not there.

 

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