How to Handle Disputed Credit Card Transactions

To fight a chargeback, you'll need to make a compelling case — but it might not be worth the effort.
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When confronted with a credit card dispute, collect sales receipts and invoices to support your case. (Photo: NCR Silver)

When customers are unhappy with a purchase they made at your store, they might not give you a chance to remedy the situation. Some go directly to their credit card company to dispute the charge.

“Per our research, only 14 percent of customers go to the merchant to try to resolve an unsatisfactory purchase. The rest go directly to their credit card company,” said Matthew Katz, CEO of Verifi, a company that helps merchants prevent chargebacks.

When the credit card company gets involved on a customer’s behalf, your business will probably be left on the hook for a refund. A January 2016 report from the Federal Reserve Bank of Kansas City’s Payments System Research department states that about 70 to 80 percent of chargebacks are resolved as merchant liability.

“A chargeback is a risk that most business owners don’t understand,” said Katz. “We see it time and time again that a business goes bankrupt because they can’t support the costs of chargebacks.”

You probably can’t avoid chargebacks, said Katz. “It could be one dispute every few years or hundreds of thousands a month,” he said. But they will happen. Here’s what small business owners need to know about fighting them.

Act quickly

As soon as a dispute is filed, funds are revoked from the merchant and returned to the customer. The credit issuer then notifies the store owner about the chargeback with a letter, email or alert in its online portal.

Katz said the most important thing is to act quickly. Most disputes require a response within two to four weeks.

“Be diligent. If you don’t understand the dispute, call your bank and ask questions,” said Katz. “Provide as much detail and info as possible, and send it back to your bank as soon as possible to get funds back.”

Matthew-Katz

“A chargeback is a risk that most business owners don’t understand. We see it time and time again that a business goes bankrupt because they can’t support the costs of chargebacks.” -Matthew Katz
(Photo: Matthew Katz)

Determine why there’s a dispute

Credit card companies require very little information from customers when they dispute transactions. “The entire onus for liability falls on the shoulders of businesses and merchants,” said Katz. Disputing a charge is very user-friendly for cardholders, he said, and they are not required to submit much information about their claim.

The first step is to determine why the cardholder is disputing the charge, said Katz. The most common reasons customers dispute is they don’t recognize the name of the merchant on their credit card statements. Other possible reasons for a chargeback include dissatisfaction with the price, product or shipping time.

“The notification will have a chargeback reason code associated with the dispute. Each code has a set of required documentation to prove the legitimacy of the charge,” said Katz.

Build a case

Gather the documents required by the issuing bank. A sales receipt or invoice is essential, said Katz.

You’ll also need to prove that the customer authorized the transaction. Merchants that swiped the card in person should dig up the original receipt signed by the customer and data from the card’s EMV chip, said Katz.

“Mobile merchants don’t have the cardholder’s signature, so they need to include information on the purchase, such as the time, date, billing address and shipping address,” said Katz. “In addition, include the IP address of the customer at the time of purchase.”

Any information you have on the customer will help you build a stronger case to reverse the chargeback. Katz said if you have a loyalty program, you can include data about the customer’s purchasing history in your response to the bank.

Finally, add details about your return policy to the dossier.

“Put together all the information that supports the case that the charge is valid in a clear and concisely written document to work with the credit card processor and banks.”

Once you submit your case, you’ll get a provisional credit back to your account. The issuing bank will present the information to the customer and ask if she remembers the charge and is satisfied with the information.

“At that point, the cardholder can let it go or say they still don’t agree with the charge, in which case the bank creates a second chargeback. The money comes back out of the merchant’s account,” said Katz.

When to throw in the towel

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It can be expensive to continue fighting a chargeback. If the customer continues to fight after you have submitted your case, call and ask why he or she is unhappy. (Photo: Andrii Kobryn/Shutterstock)

If the customer continues to fight the charge, the case goes into arbitration.

“It’s a system set up by each card brand,” said Katz. “Merchants present all compelling information, the credit card brand reviews it and makes a decision at their own discretion of who’s right and wrong.”

While there’s a chance you might win, battling a second chargeback is an expensive risk.

“The merchant pays a big fee, sometimes $500, when a case goes to arbitration. If you’re disputing a $200 purchase, as the business, it might not be worth it,” said Katz.

“The craziest part is that the cardholder still has the merchandise they bought, and their money back.”

The only thing left to do, said Katz, is to call the customer and find out why they were unhappy.

Related: How to Bake a Superior Customer Experience into Your Business

Consequences of chargebacks

Forced refunds are just the beginning of the ways chargebacks impact small businesses. Businesses with a high chargeback rate will face increased costs and scrutiny from credit card companies.

“Credit card companies can increase the fees they charge you or force you to put 20 percent of your total processing volume into a reserve account. They can also revoke your ability to accept credit and debit cards, which can devastate your business,” said Katz.

Evaluate your store from a customer’s perspective and use insights gained from chargeback investigations to improve the customer experience.

Preventing future chargebacks

“Transparency, visibility and communication with customers make a world of difference in reducing chargebacks,” said Katz. Here are his top tips for reducing chargebacks:

  • Choose a clear billing descriptor. “By rule, merchants have 23 characters or less to convey their business name on a credit card statement. We advise merchants keep it to under 18 characters.”
  • Offer top-notch customer service. Katz said a customer who deals with a rude employee during a return, or can’t reach anyone by phone, is more likely to file a dispute with her credit card company.
  • Make returns transparent. “Offer a clear and visible return policy so customers understand if there are time limits or restocking fees.”
  • Communicate frequently. “Send a thank-you email confirming the purchase. It should have all the ways customers can contact the business. Email the customer again when the item has shipped with details on when they will receive it.”
  • Ask for feedback. “Thirty days after the purchase, ask the customer how they liked it. Invite customers to get in touch.”

Related: Win More Business with Better Post-Purchase Emails

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