A chargeback is charged to a merchant (or seller) when the customer
claims their card has been charged and the merchant has not delivered a
product or performed a service. The buyer asks the bank to remove
the charge from their credit card bill. The most common
explanations given by customers are that their card was stolen and used
fraudulently or that the seller failed to perform their side of the
agreement. Although sellers and credit card companies often work
together to resolve a dispute, the customer's credit card company
ultimately decides whether a charge is legitimate or not, and if the
charge is not found in the sellers favor, a chargeback fee is issued.
So not only do you NOT receive the money from the sale, an additional
fee is charged. These fees are used to recoup financial loss
incurred when processing such complaints.
Chargebacks can occur for a number of reasons including double-charges,
expired cards, bank errors, stolen cards, or customers simply not
agreeing that services or acceptable goods were rendered for the
purchase amount. Sometimes, if you receive too many chargebacks, your merchant account credit card processing company may discontinue
doing business with you because you have become too much of a liability
and expense to them. Once you have lost your merchant account you
are placed on Visa/Mastercards Terminated Merchant File lists. It
is very hard to acquire another merchant account for several years if
you are on this list. At this point you will probably want to
consider offshore merchant accounts.
Online retailers have long been observing common patterns
in online fraud. Here's some of the most common signs to
watch out for:
- Late night orders-Fraud increases late at night.
- Have order history, shipping and tracking information readily available to customers on your website.
- Send a follow-up email inquiring as to whether the purchase was satisfactory to the customer.
- Have a generous return policy, and encourage customers to contact
you with any problems. It is always better to resolve the
complaint between you and the customer rather than involving the credit
card companies, who will always err in favor of the credit card holder.
- Orders from certain countries can be suspect - this constantly
changes so keep up with e-commerce trade magazines to stay on top of
which countries to pay extra attention to.
Many merchants who use third party merchant account companies have run into problems because the
company name that appears on cardholder's monthly
statements is not the company name of
the site the cardholder made their purchase from. Make sure the customer knows what name
will appear on their credit card statement at the
end of the month.
- Ordering large amounts - thieves don't care how high the
bill is, since they don't intend to pay it!
- Physical address - Physical address must match the credit card
- ISP address-This must be in the same area as the record of
the customer's address.
- E-mail address-Names that have no apparent connection to customer's
name or include random characters could be attempts to mask identity.
- Free, Web-based, non-ISP e-mail addresses - some merchants are reporting that all of their fraudulent transactions are originating through these
addresses, as it is easy to conceal the user's identity. Tracking people who used a
free e-mail address is almost impossible, it's
much easier for them to get away then if they
used their Internet Service Provider (ISP) or
their own company web site e-mail address. To
check whether an e-mail address is a freebie or
not just take the part of the address after the
"@" symbol, add "www" to the
front of it and see what website it brings up.
- Repeated attempts on the same credit card number - In the early
days of the Internet, criminals obtained fraudulent credit card
numbers by using credit card generation software programs. A small merchant, for
example, had only 3-4 sales in a period - but 3,000 authorization
- Negative database - keeping a record of the e-mail address,
card number, and phone number of those who have initiated chargebacks
- Velocity checks - monitoring the number of times an individual
card is used in a week
- Credit limit - limiting the total amount one card can charge
without independent verification such as a personal email or phone call.
- If your business delivers products use a carrier
that requires a signature on delivery, and allows
you to have a copy of the signature. Retain these
for your records.
Post a warning message on your
order page. Be sure to mention that IP addresses are being logged.
IP addresses can come in handy when locating
people about fraudulent orders.
- Consider not accepting credit cards from the customer unless
full information is provided including the complete address and
- Create a negative database to identify high-risk transactions and block specific credit card numbers within your system.
- Submit your customer service telephone number to your credit card processor so it can be included with your merchant name on the customer's billing statement.
- Know your customer. Obtain your customer's telephone
number during a transaction and call to verify the order and
the telephone number given to you.
- Utilize CVC2 (MasterCard®) and CVV2 (Visa®).
These two numbers are the three unique digits on the back of
a MasterCard or Visa credit card. These are used in situations
where the card is not present, e.g., mail order, telephone order
and Internet credit card transactions.
- If a transaction is not made face to face, it is a good idea
to send a confirmation directly to the cardholder's address to
help identify the transaction when it appears on a billing statement.
Include the business name that will appear on the cardholder's
- Process refunds to your customers' accounts quickly, always
using the same card number from the original sale. Never give
a customer a refund by cash or check.
- Always make sure your customer has a clear understanding of the return procedure.
- Limit the number of users that have access to your merchantaccounts for credit card processing and make sure that they are
- Change your online merchant account password on a regular basis.
- An e-mail link for the consumer to contact you
directly for a dispute or chargeback rather than going to the issuing
- Be honest with what customers will receive. Don't oversell
your product and be careful not to exaggerate in your enthusiasm for
describing your goods or services. Be clear with what the
customer will receive for the given price.
Address Verification Service
Merchants who accept credit cards when the credit cards are not present do not have the ability to confirm the signature.
To protect themselves, they use the Address Verification Service (AVS).
This service remains useful, but is limited in the anonymous
environment of the Internet. AVS checks to ensure the address
entered on the order form matches the address to where the cardholder's
billing statements are mailed to. People ordering products and/or
services using a stolen card number will never use the real
cardholder's billing address, so this is your chance to stop the order
before it's too late. AVS only works with orders conducted in the US.
Failure to use AVS when processing credit card transactions will always
result in paying higher credit card processing fees.
There are, however, limitations inherent in AVS:
- AVS only works for U.S. addresses.
- More than 50 percent of the time, AVS data associated with
a credit card number is not available (NA), leaving merchants
to guess at whether a potential sale is a good risk.
- If the ZIP Code for a cardholder is entered into the database
as a five-digit number and the transaction information presents
a nine-digit ZIP Code, the AVS check reports failure on the ZIP
Code match. To protect against this, merchants should set up
their systems to include only five digits.
- There is even more potential for discrepancy in the way street
addresses are expressed. For example, AVS address information
for "110 First Street" should be submitted as "110" (AVS
address information includes the numeric portion of the street
address only), but consumers and banks frequently enter the street
address as 110 1ST Street. The AVS translates this as "1101" and
reports failure on the address match.
- AVS does not protect against thieves with knowledge of both
the credit card and billing address, as is the case with stolen
wallets, purses or phone scams.
- Strict adherence to AVS recommendations limits the merchant's
potential customer base. Since some merchants elect to ship only
when AVS returns a good match, many orders that may have been
legitimate are unnecessarily declined.