by: Jim Conley II

Merchant concern about online credit card fraud and chargebacks is rising at a significant rate. According to the 2001 Online Fraud Report, conducted by Mindwave Research, it revealed that, “41% of merchants say the issue of online credit card fraud is ‘very serious’ to their business.” As e-commerce continues to flourish the number of instances of credit card fraud and chargebacks will continue to mount higher. It should go without saying that the need to take certain measures to reduce and virtually eliminate chargebacks and fraud is certainly paramount.

Chargeback, the word that Internet merchants fear. A chargeback is what it’s called when a transaction is reversed. In other words, rather than adding money to your account it is deducted. Chargebacks can occur for a wide variety of reasons, such as double-charging, credit card expiration, bank error and customer disputes. If you get too many chargebacks against you, there is a possibility that you will lose your merchant account. Once you’ve lost your merchant account you are placed on the Visa/MasterCard Terminated Merchant File (TMF/MATCH list) for several years which all Merchant Account Providers have access to, and if they find you on the list they won’t reissue a merchant account to you. If you are one of those merchants who have lost their merchant account, there is still hope. Bank Card Law specializes in helping companies who’ve lost their merchant account because of excessive chargebacks.

Here are some ways you can greatly reduce the instances of chargebacks and fraud, even potentially eliminate the risk altogether:

#10 If the customer is present examine the card carefully

One common sense method to fight chargebacks is to examine the customer’s card.  Look at the expiration date and the signature panel for good measure.  If the card does not have a signature you are free to check the customer’s ID.  You may also request that the customer signs the card and if the customer refuses, you may decline to accept the customer’s credit card.

#9 Verify CVC2 and CVV2 Verification Numbers

This tactic alone can not only reduce instances of chargebacks by 26%, according to Visa, but also reduce any pass-through fees that may be charged when a credit card order is conducted. On the back of MasterCard, most Visa and Discover credit cards is a 3-digit security code located right after your credit card number. Requiring customers to give the 3-digit code acts as an additional verification measure. American Express cards also have a similar security code that is located on the front of the card right above the cardholder’s account number and is usually 4-digits long. Most online payment processors support entering the security codes when processing credit card orders. Check with your payment gateway provider (i.e. Verisign, Authorize.Net, ECHO Inc., etc) for details.

#8 Use Address Verification System (AVS)

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.

#7 Scrutinize orders from developing foreign countries

A large percentage of fraudulent Internet purchases are made from Indonesia, Russia, and other eastern block or developing countries. Accept orders from such countries at your own risk until a worldwide AVS system is developed.

#6 Let customers know what name will appear on statements

Many merchants who use 3rd Party Processing companies have run into problems because the company name that appears on cardholder’s monthly statements is usually the name of the 3rd party processing company and not the company name of the site the cardholder made their purchase from. This isn’t always the case, but in many cases it is. If you use a 3rd party processor, and even if you don’t, make sure the customer knows what name will appear on their credit card statement at the end of the month. This will help to reduce any confusion that might would otherwise occur.

#5 Handle suspicious orders accordingly

If an order seems suspicious the best way to handle the situation is to either call or e-mail the customer and attempt to verify that they placed the order. As a rule of thumb, if in doubt, check things out. It may be a good idea that if a customer makes an unusually large volume purchase from your site to follow-up with a verification call. This is where a system like VoiceStamps, previously mentioned above, can come in very handy.

#4 Watch out for orders using free e-mail addresses

Be wary of accepting orders from people who used a free e-mail address when ordering (i.e. Hotmail, Yahoo, etc.). 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 (i.e. joe@yahoo.com = www.yahoo.com).

#3 Signatures on delivery

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.

#2 Request fax copies of ID and credit card

You may want to request your customer to fax a copy of both sides of their credit card and driver’s license. This tactic usually works best in a B-to-B (business to business) sales environment. While this is not a defense under Visa or MasterCard rules, it is yet another way to deter fraud.

#1 Posting a warning message

Taking the time to post a warning message on your order page to those who may attempt to make a fraudulent order will greatly deter the number of instances of fraud. Be sure to mention that IP (Internet Protocol) addresses are being logged. IP addresses can come in handy when locating people about fraudulent orders.

Taking measures to deter and eliminate fraud and chargebacks from occurring are a necessity in order to operate a successful online business. Each day companies dedicated to risk management are developing solutions to provide merchants, like yourself, with extra protection because of the financial burdens chargebacks and fraud can bestow if ignored.

This article is to help Internet merchants to prevent credit card chargebacks. Many of these are common sense but they are often overlooked, and review never hurts.

Always use the AVS and CVV systems for online orders.
AVS is absolutely necessary, for online orders, and if available, CVV should always be used for online orders. These two methods combined greatly reduce the chance of a merchant accepting a fraudulent transaction.

Fully investigate any abnormally large orders or large orders requesting overnight shipping before shipping the product out.
Call the customer to verify their information. Don’t ship any product until you have spoken to the card holder, and verified their address and personal information.

If you see that a card had declined several times, verify the order by calling the purchaser before shipping any product.
Call the customer to verify their information. Don’t ship any product until you have spoken to the card holder, and verified their address and personal information.

Fully describe your refund and return policies on your website.
This may not prevent a chargeback, but it will help you fight a chargeback. With a clear refund and return policy on a website, it makes it hard for a customer to win a chargeback if they are going around your stated policies.

Provide accurate descriptions and images of your products on your website.
By providing accurate descriptions and images on your website, you can help prevent a chargeback due to a customer ordering the wrong product.

If your business name does not exactly match the name that appears on credit card transaction statements, make sure your customers are aware of this.
When a customer reads a credit card statement, if the name of a business does not sound familiar, then they may do a chargeback for an unauthorized charge. While, these charges are often won, it is still an inconvenience to the merchant, that can be avoided.

Be very cautious of any foreign orders, especially if originating from Nigeria, or Indonesia.
The majority of credit card fraud comes from these countries. While it is not a good practice to turn down orders, we don’t suggest accepting any order from these countries even if they call in for the order. A good policy is to accept only a money order, and then wait 9 – 10 days for the money order to clear the bank before sending out any product. Its not worth the risk.

Be cautious of any order with a foreign shipping address.
If it is a domestic order with a foreign shipping address, it is very likely to be a fraudulent transaction. We don’t suggest accepting any transaction that matches this type. Only ship to the card holders address, and investigate the order before shipping.

Only ship to the billing address, or verify the order if the shipping address is different for the billing address.
Most fraudulent transaction will have a different shipping address than the billing address. By only allowing shipping to the billing address, or verifying the order by calling the customer you can greatly reduce the chance of a processing a fraudulent transaction.

Do not process any order where a customer is willing to pay more for the item for no apparent reason, or for an expedited order process.
This is another very common sign of fraud. If the card is stolen, the buyer wants to get the product as fast as possible, and will pay more for the product or will pay more for expedited shipping. This will usually come in an offer such as “What if I pay you more for the product? Can you get it to me faster then?”. Or, the merchant offers to pay more than the advertised price. Why would anyone want to pay more than the listed price?

Internet Credit Card Fraud is on the rise, and online merchants have to protect themselves to avoid excessive charges due to chargeback’s and potentially being shut down. It takes a little extra effort on the merchant’s part, but in the end, the extra attention pays off.

One of the most common scams comes from foreign countries where a person will order with a stolen card, and have the products delivered to an American forwarding address. Once the products leave the country, there is little that a merchant can do to reclaim their lost goods. An unusually large order, or very uncommon products being ordered can usually classify these orders. Other signs are an incorrect billing address, or the customer wanting expedited shipping.

For any suspicious orders, we recommend calling the customer to verify their information, and possibly requiring a signature and copy of drivers license on the invoice. This can be easily accomplished through a fax machine, and while not the perfect solution, it will prevent the majority of fraudulent transactions. This is a small inconvenience to customers, but it is well worth the extra effort to prevent fraud. Many customers will be pleased that you are so adamant in preventing fraud, and will be happy to oblige. Security is your responsibility, and you are responsible for any fraudulent transaction that you process.

Chargebacks are potentially disastrous to your business. You’ll get charged a large fee for every chargeback, and if you get too many, your processing account will likely be closed altogether.

Either way, the result isn’t great and so the intelligent business owner constantly looks for ways to reduce refunds and chargebacks.

Here then are eight very real ways in which you can reduce chargebacks in your own business.

1) Offer Post-Sale Bonuses

Rather than providing everything straight after purchase, some smart marketers have recently been setting up a whole host of additional free bonuses, which their customers get one at a time over a period of several weeks.

This is an ideal technique as it means that your customers have a very good reason not to ask for a refund – after all they’ve got plenty more to gain over the coming weeks haven’t they?

This is easy to set up in terms of an autoresponder to which customers are automatically subscribed to, which sends out messages at regular intervals providing a link to the next bonus.

2) Be Open If You Use A Third Party Account

If you use a third party processing account such as Clickbank, 2CheckOut or CCNow then make it crystal clear that you do.

After all, one of the drawbacks of using a third party account is that your company name never appears on the customer’s credit card statement. So let them know that they’ll see a charge for $x from your processor.

That way it won’t be a surprise when their bill turns up, which leads to them initiating a chargeback because they’ve never heard of the company that’s charged them.

3) Be Available

Whenever anyone buys anything from you, provide your email address incase of any problems.

Better that a customer emails requesting a refund than initiates a chargeback because they can’t work out how to get hold of you.

4) Over Deliver On Your Promises

If your sales letter extols all sorts of lofty promises that simply aren’t matched by your product not only will you receive lots of refund requests, but you’re also actually breaking the law and could be taken to court for it.

So whilst I appreciate that your sales letter needs to create a feeling of “want” in your customers, you also need to be fair and honest.

In fact, providing additional, unannounced bonuses is a great way to over deliver. It’s happened to me a few times, and I still go “Wow!” when I actually end up getting more than I was expecting. And a customer that feels like this very rarely asks for a refund.

5) Offer A Lifetime Bonus

Imagine if there is some part of your product that customers will use for months or even years to come. One perfect example would be an online tool inside a membership site or a members-only discussion forum.

By requesting a refund they know they won’t *just* lose your ebook, they’ll also lose access to your special discussion forum, or online software, or article database etc. That way it’s a lot more painful to request a refund.

6) Keep Records

Keep records of customers and when they bought, the card they used etc. Then, if you *do* get any chargebacks at least you have some evidence.

7) Use Advanced Authorisation Processes

Some card processors just ask for a name, credit card number and expiry date.

However, some will ask for additional information such as the security numbers off the back of the signature strip, your address, the name printed on the card etc.

All this additional information, which is checked against the registered user of the card, will reduce fraudulent sales and so lessen your chances of chargebacks.

Be Likeable

It sounds simple, but if you’re likeable and helpful you’ll save yourself a lot of hassle. I bought a product not so long ago and it didn’t live up to the sales letter.

I emailed to request a refund and got a blunt reply telling me that there was nothing wrong with their sales letter or product and therefore there was no legitimate reason for me to have a refund.

Well, as there was, and I didn’t like being treated like a criminal, I just initiated a chargeback. I wonder if that company ever wondered why?

Be nice, be approachable. Be willing to help out if your customers have questions after purchase. And be willing to happily give a refund to any customer not 100% satisfied. Because it’s lots less trouble than dealing with chargebacks.

Joe Q. Merchant, a successful e-commerce business owner, opens a letter from the Chargeback Department of his credit card processing company. ‘What’s this?’ he wonders, intuitively knowing that this can’t be good news. His suspicions are proven correct when he reads this retrieval request form where he must provide information about a particular transaction. While no specific reason is offered as to why this request has been initiated, Joe knows that he must comply to avoid a chargeback – where funds can be taken out of a merchant’s account due to a variety of reasons and placed back into a given customer’s account.

Joe ponders what went wrong with this particular transaction. Is it possible that a member of his staff accepted an invalid credit card (e.g., expired date)? Has there been a processing error (e.g., an input error has been committed where the wrong account has been charged)? These scenarios are very unlikely, Joe decides. In all probability, a customer has either disputed a) the validity of the transaction (i.e., whether the customer has authorized the transaction) or b) the quality of the service and/or product (i.e., the customer has voiced dissatisfaction and wants a refund).

According to guidelines set by Visa, Mastercard, American Express and Discover, Joe Q. Merchant must reply with written correspondence, providing all the requested information – in an expedient fashion – in an attempt to rebut any possible chargeback. (A Visa/Mastercard review committee will eventually render a decision as to the legitimacy of a chargeback.) But the retrieval request has indicated the date that this information must be received. If the merchant offers evidence of a transaction after this date, a chargeback will ensue and the merchant will automatically lose those hard-earned dollars that he/she may have already spent.

(One may think of the merchant’s response as a parking ticket. In legal matters, if a parking ticket is missing any necessary information, the ticket may be rendered invalid and the person who received the ticket – who may be guilty – can avoid penalties. Similarly, if the merchant provides an incomplete response, a customer will win the chargeback even if this customer is truly not entitled to these funds or may have even committed fraud!)

Online merchants, such as Joe, have more difficult obstacles to overcome than retail merchants in the resolution of chargebacks. After all, those who generally swipe credit cards have a transaction slip or receipt. If a card does not swipe through a credit card terminal, retail merchants must run the card through a manual imprinter to prove that the transaction was authorized. In contrast, those who run businesses online will not have such a physical receipt proving that the customer authorized the sale. This is why online transactions are categorized as ‘card not present’ or ‘customer not present.’

Every year, a myriad of chargebacks result when customers claim that they never received the merchandise. In such instances, it is imperative that the merchant has a proof of delivery notice, indicating the date with the customerÂ’s signature. If the signature on this notice belongs to another individual (e.g, neighbor) or even if the customer claims that he/she never signed for the item (signature is not clear), the merchant can lose the chargeback. It is always best that an online merchant use the Address Verification system (AVS) to ensure that the address listed on the customer’s credit card matches the billing address. Moreover, it is advisable to check for Visa’s CVV2 code or Mastercard’s CVC2 code – the three digits printed on credit cards near the signature panel in the back of the card – to help determine the validity of a sale. This aides the merchant in helping to identify a cardholder in a non-face-to-face transaction.

Of course, the merchant may then insist that the billing address and ship to address be the same to reduce the possibility for a chargeback. (As an added measure of proection – as a proactive maneuver – a merchant may fax a customer an order or invoice form and ask that the form be faxed back so that the customer’s signature may be on file. But this may be difficult to do when the merchant and staff are juggling many tasks simultaneously.)

In another scenario, if the customer has initiated a chargeback for non-delivery of goods, before 30 days has elapsed from the time that the transaction occurred, the merchant can respond that ample time for shipment was not provided – especially if he/she can submit the terms of agreement, indicating the delivery date. Here, the hackneyed expression, ‘An ounce of prevention is worth a pound of cure’ should prevail. If the merchant knows that delivery will be delayed, it is imperative to contact the customer should the customer derive the conclusion that the shipment was never made. Moreover, at least with phone orders (part of what is known as deferred and not real-time processing), the merchant may even decide to postpone charging the card until the delivery is near completion or completed.

The retrieval request/chargeback battle becomes even more complex if the customer claims that the product or service does not live up to the customer’s expectations. If this has occurred, Joe Q. Merchant needs to submit his refund policy and proof that the customer was made aware of such a policy.

If a product was purchased, the customer must return it before a chargeback can be initiated – at least if the customer used a Visa or Mastercard. (American Express seems to have more customer-friendly stipulations and does not require the product to be returned before a chargeback can transpire.) It is then up to the merchant how to proceed (i.e., to either grant or deny a refund). Disputes regarding a service fall in a very gray area. While it is mandatory that the customer attempt to work out an agreement with the merchant before attempting to charge back payment, such a conference may result in a stalemate. The almighty refund policy may help the merchant but if there are loopholes, the customer may very well be deemed victorious. And it should be clear that any ‘ties’ goes to the customer; if the merchant cannot provide conclusive evidence that services rendered were thorough and appropriate or if there exists reasonable doubt, Joe Q. Merchant will not only have lost time with the customer but his money. And if the customer asserts that services were not rendered at all, Joe needs to show evidence of his work to the processing bank or a contract that spells out that he intended to provide service on a future specified date. Again, any inconclusivity that Joe fulfilled his obligation or planned to will result in a thinner wallet for Joe.

Although Joe Q. Merchant was quick to dismiss the notion that a point-of-sale processing error transpired, he needs to realize that there exists the possibility for human error on any given transaction. What happens, for example, if a customer has inadvertently been billed twice for a product or service? What happens if a customer cancelled a recurring billing charge but was still assessed a charge? In business, attention to detail is a must. But if Joe or a member of his staff erred, a credit to the customer must be issued posthaste

Only time will tell if Joe Q. Merchant can prevent other chargebacks. But, of course, the best way to prevent chargebacks starts with Joe’s actions and not necessarily the customer’s actions. Are safeguards in place to prevent processing errors? For instance, on phone orders, do the merchants’ representatives ensure that every given digit, including the expiration date, is absolutely correct? Are orders confirmed by fax?; Are phone numbers checked with directory enquiries?; Are customers contacted back by phone to confirm the telephone number?

Internet orders need to be evaluated, too. Are fraud-preventative devices, such as the AVS and CVV2/CVC2 code employed? Was the customer’s address verified by calling the card issuing bank’s Voice Authorization Center? (Alternatively, the merchant can automatically decline any transaction where there is an AVS mismatch.) Is the refund policy easily accessible and observable on the website? Does a recognizable Doing Business As (DBA) name with a concomitant phone number appear on the customers’ statements? Are signed delivery receipts obtained?

Logic and intuition are powerful tools in preventing chargebacks, too. If Joe Q. Merchant has an uneasy feeling about a transaction (e.g., the customer is willing to pay additional fees for faster delivery for a high-ticket item, the customer has a domestic billing address but a foreign shipping address, etc), he needs to proceed with caution. High-ticket items are profitable but risky and Joe Q. Merchant must especially perform his due diligence with such transactions. (Please note that Joe should also contact his processing company if a transaction substantially goes over the processing limit for the highest ticket amount.)

A yellow light should also appear for any foreign order, particularly those that originate from certain problem countries like Singapore or Indonesia. Indeed, Joe needs to weigh the benefits vs. the potential cost of doing business outside the States.

Although chargebacks can raise their ugly head for any merchant, Joe Q. Merchant realizes that by taking a thorough, hands-on and cautious approach, he can substantially reduce or eliminate their occurrence. As an added measure of protection, Joe will conduct business ethically and responsibly and reach out towards his customers to ensure their satisfaction. He will, for example, describe products and/or services with accurate descriptions, provide a clear and fair return policy and establish dialogue, whenever possible, with the customer – either before, during or after a given transaction.

Advancing technology, to better identify customers (e.g., Verified by Visa or SecureCode provided by Mastercard), will serve to reduce fraud and/or limit chargebacks. But until technology catches up with the oft-unpredictable world of e-commerce chargebacks, Joe Q. Merchant can look towards one reliable stop-gap measure: himself.