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The Green Sheet Online Edition

September 13, 2010 • Issue 10:09:01

Street SmartsSM

Riding the merchant chargeback learning curve

By Ken Musante
Eureka Payments LLC

If you're confused about card brand rules, imagine how merchants feel. Reviewing comments from a recent thread on GS Online's MLS Forum gave me an entirely new perspective on how perplexing card network rules are to merchants. The topic - chargebacks - initiated surprising responses.

Here are the questions I posted to start the discussion: What do merchants know about chargebacks? Does talking about chargebacks with a merchant help your sales efforts? What about from a residual standpoint? Do you all get interchange income back when a chargeback occurs?

I also wanted to know if all ISOs price chargebacks the same to merchants and to their own merchant level salespeople (MLSs); if merchants should dispute chargebacks if given the opportunity; and issues concerning credit reversals, including if erroneous credits generate chargebacks.

Take care

CARDPLAYER weighed in first. From his post, I gather he serves primarily card present merchants. "If the merchant and/or ISO is doing enough chargeback volume for these to be more than rounding errors in revenue and expense calculations, they have much bigger problems than they realize," he wrote. "The best merchants are the guys that have no idea what a chargeback is ... that means they don't get any."

My company serves both card-present and card-not-present merchants. Some card-not-present merchants have many more chargebacks. This may be a function of their processes but, all too often, cardholders take advantage of the chargeback rules. Merchants need to be on guard and employ enhanced fraud control measures such as cardholder verification value (CVV2 and CVC2) and, for Internet merchants, sometimes even Verified by Visa and MasterCard Secure Code.

CCGUY supported these comments when he said, "If you are dealing with MO/TO and non-card-present merchants, they need to be made aware of possible scams. ... We have had calls from merchants who tell us we got an order for this or that and [the cardholder] want[s] it shipped to some international destination.

While it has upset a few merchants who thought they were about to make the sale of a lifetime ... we explain to them that they are about to take the loss of a lifetime. Rule 1: If it is such a great sale, take the time to verify the address. Rule 2: Shipping out of the U.S. is usually not a good idea."

CCGUY further explained the difficulties in representing an international chargeback and the inequities in the chargeback rules for international transactions. The inequities exist because international orders do not support address verification service; typically longer chargeback time frames are involved; and it is more difficult to validate proof of delivery.

CCGUY also addressed the profit potential of managing merchants with chargebacks. He wrote, "Take a portfolio of 300 merchants. 25 chargebacks a month, which is not a lot, $25 each, cost $10 profit $15. 15 times 25 = $375 a month."


Industry attorney Paul Rianda, who goes by PRIANDA on the forum, shared his experience. He stated, "Many merchants have no idea they are liable for chargebacks. I get calls from merchants fairly often asking me to help them fight their chargeback liability under a merchant agreement.

"I had one merchant tell me he got a large order for TVs and thought he had died and gone to heaven. He sent the TVs to an address in Russia and was dumbfounded when six months later he got a huge chargeback. Believe it or not, many merchants call me with stories like that.

"Another issue I run into is that merchants are astounded that, if they deliver a product to the customer, the customer can charge back the transaction and keep the merchandise in some cases.

Many merchants think paying by credit card is almost like a guaranteed payment. They do not understand that if there is a chargeback and the customer keeps the merchandise, the merchant may have to sue the customer to get paid."

Paul's experiences demonstrate the value we can provide when working with a merchant by explaining how the chargeback rules work and how chargebacks can be minimized.

A few suggestions

BILLPIRTIE pointed out an inexpensive way to do this. "Visa has excellent guides for training merchants about fraud and accepting credit cards online," he wrote. "I cover guides with new merchants."

GMARTIN believes talking about chargebacks helps with sales. "It sets me apart from the rabble [who] just sell merchant services," he stated. "Discussing the risks involved in accepting credit cards helps build trust, which is required to gain and maintain a loyal merchant base.

Having the knowledge to help put procedures in place to minimize exposure is invaluable to a merchant. Helping them answer a dispute by reviewing and/or editing their response is very appreciated.

"Depending on the business type, we can recommend procedures to put in place, policies to utilize, etc. that can decrease a merchant's exposure. Things so simple as refund policies on receipts and/or websites, or getting the 800 customer service number to put on a MO/TO merchant's file, can go a long way."

WWW.PAYMENTLOGISTICS.COM agreed, stating, "When it's first brought up, it's common for a merchant to minimize the importance of chargeback management with comments like, 'I've been in business for 14 years and only had two chargebacks.'

"But, with some quick role-playing and real-life examples, it's easy to illustrate to the merchant just how easy it is to get defrauded. While a merchant might minimize the importance of chargeback management, most of them take getting scammed pretty seriously, and chargebacks can be a core component of getting scammed."

WWW.PAYMENTLOGISTICS.COM finds role playing is easy for MLSs to do. "Not only is it entertaining for the merchant, but you can see the proverbial light go off in their heads when they realize just how easy it would be for one of their unsuspecting clerks to be taken," he wrote. "And when they come to that realization, you've just been promoted as their chief merchant account expert."

In a separate but related post, WWW.PAYMENTLOGISTICS.COM quoted Visa Inc.'s operating regulations pertaining to credit reversals. "An acquirer may initiate a credit reversal only to correct inadvertent processing errors," he said. "The acquirer must process a credit reversal or a debit adjustment within 30 calendar days of the processing date of the initial credit transaction."

CLEARENT provided a deeper perspective on education: "The industry has a tendency to see this type of education as negative. 'It kills the sale to talk about bad things.' I say it positions the MLS and ISA as a trusted advisor, protecting the merchant's interests in the long and short term.

"We, as providers, need to make sure we don't overprice chargeback costs. We need to make sure we aren't looking at chargebacks as a profit center. It's simple: if we make a lot of money on chargebacks, it's likely the merchant will be turned off for excessive chargebacks."

Other considerations

Some other questions and answers regarding chargebacks include:

  • Interchange on chargebacks is paid back to the acquiring bank. Often, however, the merchant is not refunded the discount. Make sure your residuals reflect the interchange credit as well as the chargeback income.

  • Advance travel lodge merchants, car rental merchants, e-commerce merchants and other unique category merchants have specialized chargeback rules that can be found within Visa's regulations.

  • Check cards have the same chargeback rules as credit cards.

  • PIN debit cards have unique chargeback rules, but PIN debit transactions can be charged back.

None of us ever got dumber from additional or remedial training. Providing this information improves the impression we leave on our merchants. Our industry stands to gain by educating merchants. Basic information and the chargeback cycle can be found at http://usa.visa.com/merchants/operations/chargebacks_dispute_resolution/index.html#anchor_2.

I would like to thank Gary Martin from Vision Payment Solutions LLC for suggesting this topic. I am seeking additional input and topics. Please log on and join in.

When in doubt, sell something. end of article

Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at kenm@eurekapayments.com. For more information, visit www.eurekapayments.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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