How Do Chargebacks Affect My Merchant Account?

Merchant Warehouse |

November 25, 2010

A chargeback refers to a processed sales transaction that is disputed by a payment cardholder or their issuing bank. A chargeback actually occurs when a cardholder disputes an individual transaction or when proper bankcard acceptance and authorization procedures were not correctly followed. The final result of this is a credit card processor reversing a transaction and withdrawing the funds from the merchant’s bank account and depositing them back to the customer’s account.

If a merchant or business receives a chargeback, the deposit account of that merchant is debited for the amount. No merchant wants a chargeback and not just because they lose the sale. They have much more at stake. In addition to the chargeback, merchants may easily incur a fee if they have failed to follow proper credit card acceptance and authorization procedures the first time around.

Variety of Reasons

There are many reasons for chargebacks, which include the aforementioned cardholder dispute or an error in handling on the part of a merchant staff. A vast majority of the time, however, chargebacks happen because of fraudulent transactions, such as when a cardholder has not authorized the credit card use. At that point, the merchant is the only one responsible for the charges brought upon a customer.

Other reasons include product not being received, the customer not being satisfied with quality of the product, the customer not recognizing the merchant that charged their credit card and the customer not authorizing the charge to their card. Also, when a customer returns store merchandise in exchange for credit originally spent on a credit card, a dispute may arise over the proper amount of credit returned. In some cases, if the credit has not posted back to the account at all, the merchant must chargeback that credit to the customer to settle the matter.

The Customer’s Role

The fault can as easily fall upon the shoulders of the customer, such as when a cardholder’s banking institution at first approves the sales transaction but later returns the charge for insufficient funds; the closure of the customer’s account; or the freezing of the credit card for fraudulent or mistaken use, such as rapid, serial use by the cardholder. The information required of a credit card sale must match every record that the merchant sees, that the customer sees and that the banks and credit card companies also see. Anything out of “sync” here can abort a sale and, if not, will usually result in a chargeback.

For merchants, chargebacks are more than an inconvenience. They can easily cost that company significant time loss and lost profits. Chargebacks can frequently be due to merchant processing error, such as duplicate processing, when a customer is charged twice. Merchants should take the precautions to reduce the chance of receiving a chargeback notification in the course of their business. Merchants should never charge a credit cardholder before shipping any purchases. Never accept sales that are declined, and if so, do not attempt authorization a second time on such a declined sale.

The credit cardholder bank may collect a steep fee if a merchant fails to follow card acceptance and authorization procedures. Merchants should not accept sales that are not authorized for the correct amount of the sale, expired credit cards or accept a card before the effective date. Merchants should not deposit a sales draft more than once. For card-present sales, a merchant should never accept a sales draft without a cardholder signature and a verified authorization code. Common sense should also prevent any sales agent on your team from engaging in a suspicious transaction, like when the account number on magnetic stripe does not match the account number on the draft.

Managing Risk

Merchants should understand that they assume every responsibility for the identity of a credit cardholder for all online, fax, mail order and telephone order transaction. During a chargeback dispute, merchants should prepare and submit a written refutation within the time specified on the chargeback notification received.

Of course, a merchant should accept credit cards in which the cardholder account number is valid. A merchant should also authorize all sales; charge the cardholder for the correct amount; verify the math on sales drafts; and deposit the sales draft before the contractual time limit. Merchants should indeed credit the cardholder for legitimate returned merchandise or for a canceled order.

Merchants are essentially billed for individual chargebacks as they come up. Since many chargebacks are not the fault of the merchant and the process by which chargebacks are conducted is often complicated, the merchant may appeal such a dispute and if this appeal is upheld, a reversal of the chargeback will occur.

Sometimes, for merchants, the chargeback and associated fee may cause an overdraft or leave insufficient funds to cover a withdrawal or debit from the merchant account that initially received the chargeback. This scenario could drive checks that are pending to be returned due to insufficient funds available.

It is also important to note that MasterCard and Visa fine merchants and their merchant account providers that have too many chargebacks. Once a business experiences more then one percent of their sales as chargebacks, it is subject to fines up to $100,000 per month or more. This is because Visa and MasterCard don’t want to have merchants that are that much of a risk. Most merchant account providers do not want those accounts either, not only because of the potential fines they face but the potential loses they face in unrecovered chargebacks. In the end, a merchant with a number of chargebacks simply loses its merchant account and usually is unable to accept credit cards again. It is obviously of critical importance to manage chargebacks, returns and credits quickly and accurately.