Understanding Chargebacks Through Real Life Examples

March 2019 marks the 15th anniversary of Fraud Prevention Month. This month we revisit chargebacks as they remain a hot topic on the list of questions we get from our merchants. We put together a few recent situations encountered by merchants to help you underline the importance of establishing effective processes in order to reduce the risk of getting a chargeback.

Looking at real-life examples allows you to put yourself in another merchant’s shoes and reflect upon what you could have done in a similar situation.

pizza---

Case 1

Merchant A is a pizza restaurant. This merchant rarely keys in transactions manually, because the majority of their customers either pay at the counter or use a wireless terminal with the delivery person.

One day, a client called in to place an order for a $100 worth of pizza. The client on the phone indicated that he would like to use his credit card to pay for the order that will be picked up by his friend. The merchant, who wanted to secure a $100 order, keyed the credit card number into the terminal manually and an hour later someone showed up and picked up the order.

Two months later an actual card owner checked her credit card statement and saw a $100 charge from a place she didn’t recognize. She immediately called her bank and filed a chargeback.

Who is liable for this charge?

Peugeot 3008 vehicles

Case 2

Merchant B is a car rental company. One day after a client returned his rental and left, an employee noticed a few damages. A careful assessment was conducted, and the merchant concluded that the total amount in damages comes up to $500. The merchant had the client’s credit card information on file, so he billed him in accordance with the signed rental agreement.

The client disagreed with the charge and contacted his bank to file a chargeback.

Who is liable for this charge?

Snowmobile

Case 3

Merchant C sells snowmobiles, parts, and related equipment. They rarely key in transactions manually because the majority of their customers pay for their purchases at the location.

One day a cashier was about to process a payment with a chip reader when the customer mentioned that the chip on his card was defective. The customer said that the only way for the transaction to go through is if the card is manually keyed in on the terminal. The card number was keyed in and the transaction turned out to be fraudulent.

Who is liable for this charge?

Wedding-1

Case 4

Merchant D is a wedding salon selling custom made wedding gowns. This merchant works with a demanding clientele. It often takes a client a few trips to the salon before the final design is finalized. The merchant requires a 30% deposit before they get to work.

One day the merchant was busy and forgot to process the deposit. When she realized her mistake, she called the customer and obtained the credit card information by phone. She then processed a pre-authorization for 30% of the total cost as per conversation she had with the client. Shortly after, the merchant placed a large supplies order for the dress.

A week later, the client started having second thoughts about the dress. Unable to get the merchant to refund a non-refundable deposit, the client called the bank claiming that she never authorized the transaction.

Who is liable for this charge?

Quiz

We presented these cases in a form of a quiz to our merchants and the average score we got (based on 379 quiz completions) was 58%. Interestingly enough, the key hint in all four scenarios was the fact that in every case the transaction was keyed in manually. We would like to remind everyone once again that keyed in transactions do not stand a chance should the cardholder chooses to file a chargeback.

At the end of the day, each of these scenarios resulted from the cardholder’s actions of contesting the charges, and the card networks regulations supporting the dispute. In the aftermath of the lost dispute, the merchant will have to resolve with their clients outside of the card networks’ framework, perhaps in court. The networks, processors or issuers are not the police. They do not possess the authority or jurisdiction to pursue a debt, domestically or internationally.

Your best practices are using your judgment, knowing the nature of your industry, providing proactive customer service, weighing pros and cons of sales, and most of all educating yourself and your employees.

Here is what should have been done in each case to reduce the risk of getting a chargeback:

Case 1

Tip: This transaction was keyed in manually. An employee who took the order should have informed the client that they would need to pay at the restaurant via the chip reader. This way the merchant would have avoided a fraudulent transaction.

Case 2

Tip: Failing to honor the rental agreement signed by the client and the merchant could result in a court dispute between the two parties involved. However, the card brand’s processing regulations has little to do with the agreement between the two parties. The network’s processing regulations clearly indicate that any addendum/delayed charges related to damage/theft/loss must be explicitly agreed to in writing by the cardholder, and the transaction must be conducted in a card present manner, meaning chip and pin/signature. The car should have been inspected right away and the client should have been charged on the spot.

Case 3

Tip: This transaction was keyed in manually. An employee should have asked the customer for a photo ID to make sure that the cardholder’s name and the signature on the card matched the one on the ID. He should have also checked the photo to make sure he was dealing with the owner of the ID.

Case 4

Tip: The merchant should have processed the transaction using a chip reader before placing the supplies order. The merchant also should have asked the client to sign an agreement specifying the terms and conditions of the sale, including the details of charging a deposit.

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