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Merchant Education Can Reduce Chargeback Risk
By David H. Press

In today's market of low margins and improved customer service focused on customer retention, don't forget to take the time to ensure that the tools provided to merchants are properly set up and used in their operations. The old-day thinking of an installer hooking up a terminal and rushing to the next install and the salesperson ducking merchant calls in fear of a cancellation should be gone.

For non-retail merchants, it is especially important that the merchants know how to properly use the tools and systems that are provided. Often, when visiting a merchant location for a risk review or an internal process review, IBC has found that the merchant does not even know how to properly input information into the system.

We have observed employees (of merchants concerned about chargeback volume and having added AVS) not even entering the address into the system because they didn't know any better and they didn't "need it" to get an approval. We have visited merchants who had no system in place to process promised customer refunds.

Other merchant problems often encountered that lead to chargebacks include: not sending out merchandise, sending the wrong merchandise, taking orders for backlogged items and not being able to fulfill those orders, missing promised delivery dates and double billing.

The merchants should integrate their operational processes based on the system(s) provided and their particular type of business; their goals should be to reduce chargebacks and to be able to respond to retrieval requests and provide documentation to represent the chargebacks that do occur.

Merchants who send out products should be able to track the delivery and provide proof of delivery. Merchants' invoices or delivery advices should be in the proper format and should include refund policies and other disclosures.

A refund-tracking process should be initiated to ensure that refunds are promptly issued after being promised to the cardholder with special emphasis on the product return, if applicable. Card association rules allow merchants to require that the product be returned before issuing a credit, but disclosure in the proper format is required.

Return policies should be clearly indicated to the cardholder, including who is responsible for the cost of returning the product and how and to where it should be shipped.

The vast majority of a typical merchant's chargebacks are for only two or three different reason codes. The automated documentation provided by many processors is often incomplete, hard to understand, and does not give merchants a full understanding of their representment rights.

Working with merchants to have them understand how their chargebacks are occurring and showing them the proper steps to prevent and defend chargebacks can have a dramatic effect on the total number of chargebacks. Reducing a merchant's chargebacks reduces acquirer risk and potential acquirer fines from the card associations.

Both Visa and MasterCard have produced materials designed for merchant education that are available for free or for a nominal fee. These materials should be sent to merchants that have chargeback problems or to merchants based on their MCC, or their use of AVS or CVV2/CVC2, etc.

Chargeback reason code "cheat sheets" can be developed and distributed to merchants to show them what to provide for representments and what to do to protect them from each chargeback reason code they are encountering.

Determine what is causing each merchant's chargebacks. This can be done by the chargeback reason codes and from cardholder dispute letters submitted to the acquirer from the issuing banks for certain reason codes. Determine if there is a process change or if an additional tool such as AVS, CVV2/CVC2, Verified by Visa/MasterCard SecureCode, a fraud-detection service, etc. that could help the merchant lower his chargebacks.

Sometimes it can be the simple things. IBC had a retail merchant client who only used signage to indicate a "No Return Policy" in his stores but did not have proper disclosure on the sales draft. The merchant had a chargeback problem with the double "whammy" of not getting his goods back.

When the cardholders decided to return the merchandise for credit, the merchant refused to accept the merchandise and would point to a sign on the wall that cited the no-return policy, and the cardholders left the store with the merchandise. The cardholders then disputed the transactions, and the merchant got chargebacks for "Credit Not Processed" (Reason Code 85).

After the acquirer reprogrammed his terminals with " NO REFUND" printed on the sales draft, the number of chargebacks decreased and he was able to represent those chargebacks. We have observed the same problem for merchants who ship products to cardholders and the merchants' return policy was not properly disclosed.

Mail Order/Telephone Order and online merchants can provide high volumes and high margins to acquirers but increase risk exposure. It is important to make sure that a merchant's Web site is properly set up before you begin to process for the merchant. Remember, Visa rules require that a merchant's Web site contain all of the following information:

  • Complete description of the goods or services offered
  • Returned merchandise and refund policy
  • Customer service contact, including e-mail address and/or telephone number
  • Transaction currency (e.g., U.S. dollars, Canadian dollars)
  • Export or legal restrictions (if known)
  • Delivery policy
  • Consumer data privacy policy
  • Security method for the transmission of payment data

As we look at the various Web sites, it is apparent that many online merchant sites do not include all of these Visa requirements. Consideration should be given to setting up an online merchant with Verified by Visa/MasterCard SecureCode, AVS, CVV2/CVC2 and/or fraud-detection systems dependent on the product/service provided.

Then make sure that the merchant is given materials and training to properly process transactions, that a return policy is in place and that the merchant is able to generate the necessary documentation to represent chargebacks.

Taking the time to work with MO/TO and online merchants to get them properly set up and to educate them on how to protect themselves from chargebacks can go a long way toward customer satisfaction. Many merchants don't believe that their processor is providing them the support they need in dealing with chargebacks.

By being proactive and supporting the merchant through education and during the chargeback process, the acquirer also is reducing its own risk exposure.

It only makes sense to put the time in for a merchant who could either make you a lot of money or could cost you a lot of money because of chargeback losses and fines.

For more information, please contact David H. Press, Principal and President, Integrity Bankcard Consultants, Inc. by phoning 630-637-4010, or visiting or e-mailing

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