Deflecting Payment Processing Chargebacks

Updated July 11, 2008

As unwelcome as they may be, most online business owners will tell you that chargebacks are simply a part of e-commerce reality. For whatever reason, sound or rash, customers can back-out on a purchase - and then the card issuers back-out of the transaction with a merchant chargeback. Compounding the problem, chargebacks resulting from fraudulent transactions further burden merchants already saddled with more stringent 'card-not-present' merchant account policies.

There's a lot a stake in the chargeback dilemma and, depending on what kind of online enterprise you operate, chargebacks can make serious waves for your business. Due to shipping and the logistics of card-not present transactions, online chargebacks are messier than their offline counterparts.

More problematic are those chargebacks stemming from fraudulent transactions and chargebacks coming from customers who claim they never received their merchandise (when they have) or placed orders in the first place (which they did). With the absence of a signature on card-not-present transactions - and credit card policies that generally side with the consumer - the merchant is required to cover the costs of the merchandise and pay a chargeback fee (a penalty for simply incurring a chargeback, legitimate claim or not).

Additionally, a merchant account provider may establish a variable chargeback rate for merchants. A chargeback rate equates to a percentage of your total monthly sales (held in a rolling reserve) and the specific percentage is usually determined by what kind of product or service you sell, as well as your chargeback history.
So what's an online business owner to do when faced with this kind of chargeback intimidation?

First, there are a number of proactive strategies to diminish the frequency of chargebacks and minimize their overall impact on your business.

The action begins even before you go online - when you choose a merchant account provider for your card-not-present account. Then, once your business is up and running, proactive risk management measures can decrease fraudulent orders.

Consider the following:

Choosing a reputable merchant account provider is your first objective. Many merchant account providers are known for providing poor customer service and then twisting the knife with limits, unwarranted penalties, and exorbitant fees. When choosing a provider, analyze how the chargeback policies work. Not every merchant account provider will hold a chargeback reserve - and different providers maintain moderate to insane chargeback fees.

Merchant Account Manifesto: Look beyond mere discount rates and read the small print! Pay a tenth of a percentage more for customer service, sound policy, and integrity.

Next, select a payment processing solution that provides extensive, state-of-the-art anti-fraud measures. SSL encryption protects consumer data (which gives your customers the security they demand), but you must also make sure that your credit card authorization involves effective verification procedures to protect your business from fraudulent orders. All authorizations should be run through anti-fraud systems like AVS (address verification) or optional CCV2 authorization.

Look for irregularities in orders inconsistent with typical, legitimate customer behavior and ordering logic. If an order looks suspicious, investigate for fraudulent activity.

Put the red flag on all 'hot-mail' varieties of delivery addresses. Scrutinize these and take extra precautions, even to the point of authenticating addresses and getting signed authorizations if need be. When in doubt about any transaction, verify addresses, phone numbers, and the ISP requirements for an email address.

For many companies, a disproportionate number of chargebacks can be traced to orders coming from abroad. Monitor your international orders, look for fraudulent trends and run suspect orders through special screening procedures. (Also, credit card companies may increase your chargeback rate if your international orders exceed a certain percentage of your total orders.)