SOs and merchant clients have asked my company a lot of questions recently about Transaction Validity Chargebacks, which allow issuers to advise acquirers that transactions cannot be honored as presented because of an unresolved dispute between the cardholder and merchant.

Typically, these involve two scenarios: The merchant did not provide the goods or services as expected or paid for, or the merchant failed to take the action agreed upon by both the cardholder and merchant.

These types of chargebacks create big problems with Visa and MasterCard for merchants and ISO programs because Visa Reason Codes 30, 41, 53, 56, 85 and 90 are considered Consumer Dispute Chargeback Reason Codes.

The Visa High-Risk Chargeback Monitoring Program has only a one percent (1%) threshold ratio of Consumer Dispute Chargeback-to-Interchange volume. This threshold can be particularly burdensome to mail/telephone order, Web-based, service-oriented merchants, etc.

If a merchant has more than 50 transactions and 50 (rumored to soon be raised to 100) chargebacks and a one percent ratio of consumer dispute chargeback-to-interchange volume, the merchant is identified as a High Risk Chargeback Merchant. Visa sends a notification to the acquirer and begins assessing hefty penalties per chargeback, charging "review fees." The merchant may be disqualified from participating in the Visa Merchant Program.

MasterCard has a similar program, so it is very important for the Merchant Level Salesperson and/or ISO to take some time to educate the higher volume merchants likely to get Consumer Dispute Chargebacks on how to prevent them from occurring.

The best way to prevent these chargebacks is for the merchant to do what it promises to the customer. If a refund is promised, it should be given promptly to the customer by crediting the same credit card the customer used to make the charge. Merchants never should refund credit card transactions by check or crediting another card. Merchants that hold on to returns because of cash flow usually end up with a lot of Credit Not Processed chargebacks.

Many of the other Consumer Dispute Chargeback Reason Code chargebacks are really credit not processing-related. The customer wants to return the product because it was defective, or the salesman allegedly misrepresented the product or service. Giving prompt refunds, good customer service and follow-up can prevent most of these chargebacks from occurring.

Proper disclosure of a return policy can prevent chargebacks as well. By using language on an invoice such as "No Refunds or Cancellations" or "No Refunds," Visa and MasterCard will accept this as an enforceable limitation.

The refund policy should be on the invoice and not on an additional sheet of paper added to the package, etc. A mail-order merchant must include disclosure of its refund policy on the order form, invoice or contract.

The above wording, or something similar, must be legibly printed on all copies of the transaction receipt or invoice in letters approximately 0.25 inches high.

The merchant also can require, with proper disclosure, that the product be returned before credit can be given. Besides disclosure, the key is providing delivery instructions to the customer (including responsibility for shipping costs and shipping method).

This involves developing and following a process to track the goods expected to be returned for credit and the receipt of the goods and then promptly processing the refund. An e-commerce merchant Web site must communicate its refund policy to the cardholder during the order process and require the cardholder select a "click to accept" or other affirmative button to acknowledge the policy.

The terms and conditions of the purchase must be displayed:

• On the same screen view as the checkout screen used to present the total purchase amount, or
• Within the sequence of Web pages the cardholder accesses during the checkout process.

We see too many merchants who have not gotten support from their MLS or ISO and are forced to find a new processor every few months.

Working with merchants to educate them in understanding 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.

Furthermore, reducing a merchant's chargebacks reduces acquirer risk and potential acquirer fines from Visa and MasterCard.

The Visa Transaction Validity Chargeback Reason Codes with the corresponding MasterCard Reason Code (if applicable) include:

David H. Press is Principal and President of Integrity Bankcard Consultants, Inc. Phone him at 630-637-4010, e-mail him at dhp@integritybankcard.net or visit www.integritybankcard.net