Credit Card Chargebacks

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Sunday, January 22, 2006

Credit Card Chargebacks - A worst Nightmare for Internet Merchants

Credit card chargebacks pose a significant threat for online internet merchants. Chargebacks can also be your nightmare. It can also shut down your business.

A Chargeback is nothing but reversal of credit card transaction. Reversal means you have to give back the original fee + transaction fee + penalty fee (or chargeback fee) + loss of your service/product. This is because credit card thieves enter somebody else credit card information (often stolen or hacked) when ordering your product. They will and they can successfully bypass the Fraud Screening System to order your product. This will cause a charge in real cardholders bank statment. The real card holder had not ordered any product/service will dispute the charge to his bank. His bank will contact the credit card company namely VISA, MASTERCARD, AMEX etc.. for reversal of transaction. As a vendor you can still fight against credit card companies, but it will cost you time, money and the credit card company will end up supporting their customer. Let us analyze John's scenario ...

John was a very happy man when his digital products was ordered by 5 customers in a single day each of $200. Days passed by and after 40 days, John received email from his third-party credit card processor saying that he received 3 chargebacks, reason FRAUD - CARD ABSENT ENVIRONEMENT. What a blow ! Just now received the money transferred to his bank account from the third party processor.

The losses are ...

1. Original fee: $200 x 3 = $600
2. Transaction fee : 5% of $200) x 3 = $303.
Penalty fee: $25 x 3 = $75
-----------------------------------------
TOTAL: $705
--------------------------------
Now this $705, John has to payback. Had he already shipped a tangible product, he has to forget the goods.


The thief successfully bypassed ...

1. Address Verification System AVS
2. CVC2/CVV2 CC Verification number.

The WORST of all....

1. The third party credit processor, suspended his account and he can no longer will be able to process credit cards. The reason given by third party credit card processor was TOO MANY REFUNDS AND CHARGEBACKS.

2. Because of suspension of his merchant account, his next month $1000 payout was blocked by cc processor and only will be paid after 180 days (6 months).

3. John's business was put on VISA/MASTERCARD TERMINATED MERCHANTS MATCH FILE (TMF/MATCH), which means he wont be able to apply for any other merchant account offered by other providers, atleast for several years. This is worst part of chargeback.
See the nightmare! Not just chargebacks, too many refunds can also lead to your suspension of merchant account.


Still more bad news

1. Address Verification System AVS will work only inside United States. No worldwide AVS been developed yet.

2. The current chargeback rate is 11%, which is NEVER low. It is IMPOSSIBLE to stop chargebacks.

Reasons of Chargeback

1. The card-holder had not placed his order. Possible use of fraud card.

2. Card-holder does not recognize the charge. This is often caused by third party merchant accounts. For example, the online vendor name does not appear on statement, rather the name of third pary credit card processor's name appears. This often makes them panic and they will dispute the charge. You can sucessfully tackle this problem, by informing the buyer that so and so name will appear on the card statement, before he orders your product.

3. If you dont give them refund, they will dispute for the reversal of transaction. Complete description and details of your products/services including refund policies must be accurate in your website.

4. Tangible goods not shipped before specified date.

5. Goods received are defective and the merchant not trustworthy to buyers.

Helpful Tips for Avoiding and Reducing Chargebacks.

From my experience as online seller, there are intuitive ways to get rid of chargebacks. I have always found some peculiar or bizarre credit card orders, that had some strange properties somekind or other. Remember the fight against chargebacks can only be faught by means of 'Intuitive probabalistic reasoning'.

Rule of Thumb:

1. Always refund the transaction, if you suspect the transaction is of fraudulent one. A refund would be a wise decision than getting charged back.
2. Never hesitate to get CREDIT CARD AUTHORISATION FORM signed by the customer, if you suspect.


1. A customer ordering large number of products at a single go. This would be more than in a normal scenario. Crooks with stolen credit cards will always have one thing in their mind : "To empty the money in the credit card". They are unaware the amount of money in their stolen card.

2. The shipping address will be different from the credit card address. Most often crooks want the goods delivered to some other anonymous country addresses that are other than card holders address. This is a VERY high risk. You might need to confirm with buyer regarding this and Merchants MUST obtain CREDIT CARD AUTHORISATION form signed by the card holder before you ship goods.

3. Repeated failure of card authorisation. Thieves since they dont know the exact credit card holders name and billing address, they will repeatedly try various kinds of combinations to bypass the fraud screening system.

4. Never trust orders with free email addresses from YAHOO, HOTMAIL etc. These free email addresses are UNTRACEABLE and definitely these crooks want to hide using them.
Tip: There are so many free email providers in internet. how do you differentiate a free email address from paid email address? Answer. Its that simple. Just you will notice at bottom of a free email address, ads will be served. But in paid email addresses no ads will be served.


5. The IP Address of the order dont match credit card holders country. Say if somebody orders your goods from Indonesia using Credit card address listed as U.S.A then this is definite fraud case. Always include a separate application form on your website for the customer to fill up, especially if you are using third party merchant account. You can find out the I.P address country location here: http://www.geobytes.com/iplocator.htm.

6. Customer had typed with spelling mistakes or with small letters which would be something not normal.

7. Thieves claim that they dont have a credit card, and might convince you to use his friend's credit card. Although there are genuine shoppers but in that case you have to get CARD AUTHORISATION FORM signed by cardholder.

8. Talk to other merchants and discuss your experiences against credit card fraud. Join our forum and may be your experiences could help others. On the other hand, there will be somebody sharing their views with you as well.

9. Post a warning in your website, before a customer places their order like this..
" Credit card frauds are considered as felony under federal law. All the transaction information will be recorded. Fraudsters will be traced and prosecuted in case of fraudulent activity. Please do not use free email addresses like YAHOO, HOTMAIL etc.. as these addresses are untraceable. A free email address is your email address that you dont pay for. "
A warning sign will definitely cause some effect on the crooks. Neverthless, preventing sign is still a cure.


If you want to void a chargeback or get the chargeback reversed then it is mandatory to get card authorisation form completed and signed by card holder. This is the procedure recommended and advised by many credit card companies like Visa, Mastercard, Amex etc. Because even if you get a chargeback, we can fight with credit card companies for voiding chargeback. This is the only weapon of defense we have in our merchants side. The card holders signature on the form is the only way with us to fight chargeback against card holder and the credit card company. Never hesitate to get Card Authorisation Form signed from card holder, in case you suspect of transactions. It is always recommended that to get authorisation form signed by cardholder for any transaction worth $500 or more. Reversing the chargeback can be filed with the help of merchants account provider. Neverthless, still if you manage to reverse chargeback, still you have to lose chargeback fee + transaction fee. Paypal sellers are recommended to get credit card authorisation form duly signed by purchaser for any sale above $500 to effectively contain chargebacks.

Chargeback Time Frame

The card holder has 180 days from the 'date of purchase' to dispute and recover the money. Any guarantee, membership or subscription period purchased as part of the transaction may be added to the 180 day period. For example, goods with a 12 month guarantee (as stated on the web site), can be fully or partially charged back within 545 days of the "purchase date". This is because credit card companies like Mastercard, Visa etc. want to support their customers and not merchants. This is really hurting for every online seller.

Most of chargebacks come from developing and under-developed countries like ...

Bulgaria
Cameroon
Egypt
Indonesia
Iran
Israel
Lithuania
Malaysia
Morocco
Nigeria
Pakistan
Romania
Russia
Turkey
Vietnam
Yugoslavia
Ukraine
Serbia
Vietnam
Phillipines



Not all countries are listed. Dont be surprised nextime when you get a chargeback from Afghanistan. It is necessary to screen all the orders from developing/underdeveloped countries. Most of them could be thieves or crooks ordering your product. Countries like Indonesia, Malaysia, Morocco, Vietnam, Nigeria, Russian countries belong to the category of Very High Risk.

Paypal Chargebacks

Although accepting credit cards with paypal, may seem pretty easy with paypal, too many chargebacks will make paypal to close your account. Paypal is not a bank and not subject to banking regulations, they will have control of your money as they wish. It is recommended to go for merchant accounts in this case. An excellent site that tells about this http://www.paypalchargebacks.com

Useful Links

1. Report credit card fraud at www.ic3.gov
2. Lost your merchant account because of excessive chargebacks. Bank Card Law can help you.
3. Valuable information about merchant accounts:
http://www.merchantseek.com
4. Credit Card Chargeback Rights from Attorney general of CA state :
5. Chargeback Guide : Published by WorldPay.com
6.
ChargebackPrevention.com - Better advises and help on chargebacks.
7. Paypal Chargebacks -
PaypalChargebacks.com
8. PreventChargbacks.Info - Useful Information and Helpful tips.

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